How to Be Smart with Your Money

Illustrations by DaVidRo

If you’re just starting out—and starting from square one—Stanford’s Mind over Money learning modules have the essentials on managing your finances, from basic budgeting to understanding housing expenses to paying off credit card debt. But when you’re ready to think beyond next month’s rent, here’s some expert advice.

“I find that most personal finance advice focuses on saying no: No, you can’t buy lattes. No, you can’t go on vacation. No, you can’t buy anything!” says Ramit Sethi, ’04, MA ’05, author of the New York Times bestseller I Will Teach You to Be Rich. A life without vacation and lattes? “What kind of life is that?” Sethi asked.

Personal finance, the work of building financial literacy, establishing financial independence and setting financial goals, typically favors cost-cutting above all else, no matter individual circumstances or life tracks. Sethi, CEO of a company with the same name as his booksays that the word rich is up for interpretation, and defining for yourself what it means to be rich can help set your personal finance goals. In college, he started studying personal finance and combining what he was learning about human behavior through his work at the Persuasive Technology Lab (now the Behavior Design Lab) and his social psychology and science, technology and society classes. “After I learned about money myself, I tried teaching my friends in the dining halls about money,” Sethi says. “That wasn’t very successful. After a year and a half, I switched approaches, started a blog, and from there, things took off.”

‘Nobody expects you to be able to max out your accounts, have the perfect asset allocation, and be able to spend enough to live a rich life on Day One.’

There’s no one-size-fits-all financial plan, but Sethi’s advice is the same for everyone no matter their income: Identify what you have to spend on, figure out what you want to spend on, and put some amount of money into savings and retirement accounts as early as possible. “So many of us feel anxious, frustrated and overwhelmed with money. We say things like, ‘I need to try harder’ or ‘I know I spend too much,’” Sethi says. “But do we ‘try harder’ to brush our teeth every morning? No! We built a habit long ago, and now it’s part of our daily routine.”

Additionally, Sethi says, you don’t have to deny yourself pleasures today in the name of saving for later. Once you have some amount of discretionary income (and when that happens will be highly variable based on individual loans, the need to support family and more), it’s possible to do both. Here are five ways to strengthen your personal finance skills.

A colorful Illustration of a path up a tall mountain with a dollar bill arrow at the top.

Use early jobs to build your career and earning potential.

Being able to cover your expenses is crucial, but the jobs you take early in your career are likely to contribute more to your future than to your bank account. These opportunities build human capital, which can be far more advantageous in building work skills, forming important work relationships and building a professional portfolio. “Picking a career path is impossible. You never know what’s going to happen, how life is going to change,” says Greg Rosston, MA ’86, PhD ’94, director of the public policy program at Stanford’s Institute for Economic Policy Research. To the extent possible, focus less on salary and more on finding opportunities that meet your career goals and allow you to improve your skills in the real world. Showing what you can do will help you get the jobs you really want down the road.

A colorful illustration of a dollar bill elephant balancing on top of a ball.

Aim for financial stability.

Financial stability is the ability to pay for the basics—rent, groceries, paying down debt—without stress. Don’t assume that a friend who makes more than you is more financially stable. And be careful when comparing your spending and saving goals. Sethi says if you ask five people what a fulfilled life looks like, you’ll get five answers—and five budgets. It can be easy to fall into the trap of thinking, “Once I make a certain amount, I’ll be happy.” (Or secure. Or able to save up.) Whatever your financial goals, you’ll need to prioritize your spending. And to do that, you have to figure out what’s important to you based on your circumstances. “I like to start by asking, what is your rich life?” Sethi says. “I want to hear specifics. When you say travel, I want to know where. When you say going out with friends, I want to know which bar and which concert.” Wanting to travel first-class with friends requires a different budget than going out to a casual dinner with them once a month. “The specifics matter.”

A colorful illustration of a hand holding a car and a dollar bill house.

Be able to cover an emergency.

Another part of becoming financially stable is building an emergency fund. “I like to target six months of expenses, though this might take some time—even years—to build up,” Sethi says. And that’s OK. What matters is that you’re working toward establishing a safety net for yourself. You can accelerate that safety net by identifying your own life goals, which Sethi says is “about spending extravagantly on the things you love and cutting costs mercilessly on the things you don’t.” Small things add up. Find an area where you don’t mind cutting back. If you find yourself eating lunch at your desk every day, maybe you’ll decide the cost of buying that meal isn’t worth it. Paper-bagging it four days a week can save you about $1,000 in a year—which you can then pour into covering other expenses, paying off debt or building your emergency fund.

A colorful illustration a scale with dollar bill chicken on the con side and a dollar bill camel on the pro side.

Make it a habit to do a cost-benefit analysis.

Rosston teaches students in his public policy and personal finance class to weigh the costs and benefits of their financial choices. Whether at the governmental and policy level or in consideration of your own savings account, we make subtle cost-benefit decisions every day. If you become more structured about asking the questions, you’ll get better at answering them. “How do you think about all the different implications of cost for any number of things in life?” Rosston says. For instance, if you’re considering buying a car primarily to commute a short distance to work, add up the ancillary costs—registration fees, fuel, maintenance and insurance. Then take any other personal priorities into consideration—like the environmental costs of driving alone versus ride-sharing—before making your decision. Whichever way you go, you’ll have thought through a fuller picture of the true costs of your choice.

A colorful illustration of a bandaid in the shape of a medical symbol and a dollar bill heart next to it.

Get health insurance. 

If you’re self-employed, working multiple part-time jobs or doing gig work, there’s a good chance you need to buy your own health insurance. Rosston recommends making this a financial priority. “There are medical bankruptcy issues—people worry that if they get hit by a car they’ll have to pay for an emergency room visit out of their own pocket,” he says. If you live in California, anyone can buy insurance through Covered California. And individuals with lower incomes may also be eligible for Medi-Cal. If your state doesn’t have its own health-care marketplace, federal coverage might work for you. Rosston notes that some people may choose to forgo coverage, but says that the cost-benefit analysis of potential fees without insurance outweigh the short-term savings.

A colorful illustration of a calendar in 2066.

Start planning for retirement now, like today. 

Retirement may seem far away, but how you prepare for your nonworking years at the beginning of your career can save you heartache down the line. In your early working years, you may not have money to save after you’ve accounted for monthly expenses. But once you can, Sethi recommends prioritizing with the “Ladder of Personal Finance,” working your way up as high as you can given the amount of money you’re able to set aside. Your first priority should be to deposit up to the maximum annual amount in a 401(k) or similar tax-deferred retirement account, if your company provides one. Next on the ladder, establish a Roth IRA and contribute up to the maximum annual amount. Finally, open a regular, taxable investment account and contribute what you can. All that being said, “personal finance is gradual,” Sethi says. “Nobody expects you to be able to max out your accounts, have the perfect asset allocation, and be able to spend enough to live a rich life on Day One.” Establishing these habits early on, though, is important. If you’re unsure of how much money to put toward the future, he recommends saving and investing at least 20 percent of your gross income. But depositing any amount into these accounts is a good place to start. “One of the most powerful forces in the world is compounding interest,” says Rosston. Future you says thanks.


Ray Levy Uyeda is a freelance writer based in Vallejo, Calif. Email her at stanford.magazine@stanford.edu