Unorthodox Financial Advice

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Unorthodox Financial Advice

Several people suggested that I write a Beginner’s Guide to Personal Finance, similar to the other guides in my Beginner’s Guide series. But unlike other topics like fitness and languages, the field of personal finance is well-trodden, and there exist mountains of content aimed at beginners, most of which is pretty good.

However, there are several points that I think the popular wisdom about personal finance either gets wrong or doesn’t emphasize enough, so instead of reinventing the wheel, I thought I would post a guide that only includes these.

Note: if you are just getting into personal finance, this isn’t yet the guide for you. I recommend basic overviews that will show you the nuts and bolts of index fund investing, budgeting, and basic frugality, like the r/personalfinance wiki or the book Your Money or Your Life by Vicki Robin.

Table of Contents

Calculate the Value of Your Time

Debt:

Don’t Pay Off More Than The Minimums On Your Student Loans

Use Leverage to Invest in Index Funds

Arbitrage and Side Hustles:

Credit Card and Bank Bonus Churning

Exploit Inefficient Markets Early

Catastrophic Health Plans, HSAs, and Cash

Kill Your Emergency Fund

Tax Considerations:

Traditional Is Better Than Roth For Almost Anyone

In a Low-Income Year, Roll Your Old 401K Into a Roth IRA

Tax Loss Harvesting

Calculate the Value of Your Time

This is probably the least unorthodox of all the advice I’m about to give, but for some reason, other personal finance resources fail to emphasize it, despite the fact that knowing what your time is worth at any given moment is the most important concept in personal finance.

Without this knowledge:

you can’t accept a job, because you don’t know if the salary is worth the amount of hours you’ll be working

you can’t start a side hustle, because you don’t know if it’s worth your free time for what you might make

you can’t make decisions about what products to buy, because you might waste more time finding the perfect price than the money you could earn with that time

Sure, most people have a rough idea of what their time is worth, but at the margins, there’s plenty of room for errors. Consider the following XKCD comic:

Know anyone like this? Hey, there’s no shame. We’ve all done it at one point or another. Using heuristics to calculate the value of your time on the fly is difficult work, and sometimes our brain gets the better of us. So let’s make it easier. Visit the following calculator: Clearer Thinking — What is your time really worth to you? After you have your value, store it somewhere you can reference it easily, and update it once a year, or whenever your life situation changes substantially. (e.g. you get a new job).

Debt

Many personal finance guides speak only in binaries: debt is bad, and you should get rid of it right away. The real truth is that low-interest debt is good and high-interest debt is bad. If you don’t have any debt, it might actually make sense to borrow money to invest, and you should only pay debt off when you can’t leverage it to make more money for yourself. Thus:

Don’t Pay Off More Than The Minimums On Your Student Loans

When I graduated from college, I constantly overheard chatter from my fellow graduates about how excited they were to get jobs so they could pay off their student loans. From an emotional perspective, I suppose I understand: the feeling that you owe someone money can be soul-crushing. But as soon as you get over this feeling, the soon you’re on the road to making money.

Reason 1: If the interest rate on your student loans is lower than the rate you’d make if you invested the difference, you are losing money by paying them back. I’ll use myself as an example. I graduated college in 2009 with around $30K in debt at just over a 6% average interest rate. I paid only the minimums for my ten year loan term. Instead of paying the rest back, I invested it in index funds. The S&P 500 averaged 12% during that period, meaning I got around a net 6% return on money that was essentially just gifted to me for going to college. Did I get especially lucky? Absolutely! The market could have gone down, and I could have lost money. But the S&P 500 has averaged about 8% on average every year since it’s inception, so I’ll take that bet any day.

Reason 2: By deferring your loans, you are allowing yourself time to max out your tax-advantaged accounts. As soon as you graduate from college, you should set up an IRA, a 401(K), and an HSA (assuming your employer offers the latter two). As of 2021, the yearly contribution limit for these accounts totals to $29,000. If you don’t hit this limit every year, it disappears – you can’t go back in time later in life and contribute for past years. If paying off your loans interferes with your ability to max out these accounts, you shouldn’t pay...