Note: The following post is not financial advice. It is for informational purposes based on independent research.

Money is easy to spend and difficult to acquire. After learning more about personal finances though, I found it easier to get ahead of money problems, and start planning instead of reacting. And I mean that in an empowering way: that anyone can pursue financial freedom.

Here’s a overview of a few basic concepts and some specific investment options related to personal finances. I’ll try to cite another source for some of the topics, in case you want to look more into it. But if you only look into one other source, here’s my personal favorite book on personal finance and a quote from it:

Income

To start off, you can't talk about personal finance without talking about income. It's important in capitalist-style societies to be aware of, frankly, how to make a living wage without causing harm to your wellbeing. Unfortunately, the free market is designed to squeeze every dollar out of workers in order to make a profit. What that means is some jobs just aren't capable of sustaining a person's basic needs, let alone financial independence.

With that said, it’s surprising how little it takes to start building towards financial freedom, and that’s because of compounding interest. This just means that investing small early can have a greater impact than investing large amounts later as described in this article.

Inflation

Inflation is the general increase in prices, which decreases the purchasing value of money. This feels kind of abstract to most people, since it is a very slow process that’s difficult to track, but it’s important to understand in the context of personal finance especially.

In the US, inflation tends to be around 2-3% per year. This means that the cost of living is continuously increasing, therefore any cash you have (or money in a low-interest bearing account) is decreasing in value. In order to keep up with inflation, the money can be invested in various ways described below.

Debt

Banks and other creditors allow you to borrow money from them with the expectation that you will pay them back (usually with interest). The interest compounds (like I mentioned above), but in this case it works against you. The way I like to think about debt is that it's a tool to pay for something that I'm almost certain will pay back the same value. One example would be student loans for a high value degree, which could provide more job opportunities.

The reason I want to be certain that the debt will provide value is because debt allows you to purchase something immediately that you can’t afford yet (usually). It’s like borrowing from your future self. At least in the US, debt is easily accessible and can build up quickly. This is the kind of thing we see on those financial reality TV shows because at a certain point, the debt becomes unmanageable.

One way to evaluate whether a debt is worthwhile or not is to look at the interest rate:

• For example, a student loan interest rate of 3% would be about equal to inflation, so the money you will pay in interest will be theoretically equal to value lost from inflation. So this loan seems generally good if you need it.
• An example of an obviously bad debt to hold on to would be credit card debt. The interest rate varies widely, but I see 20% or more often. I can’t think of anything that would be worth buying at this rate, you would lose 17% compared to inflation and generally retail investors don’t make more than 10% on average from investments. So assuming the money was invested, you’d still lose 7% (compounding negatively).

Another way to evaluate debt is by considering the non-monetary value you get from whatever you pay for (a house, higher education, etc.)

Index Funds

As outlined in J.L. Collins book, since the availability of low cost total market index funds, you can start multiplying your money, passively, with as little money as you want to invest. The main points that he makes for using total market index funds over any other investment:

1. It's fully diversified. Many other investment options have more concentrated risk because it's only part of one market sector or location. When starting in real estate, your property is tied to one location and type. Gold is tied to the perceived value of the resource. A total market index fund follows the overall value of market as a whole, including other common investments.
2. You probably won't beat the returns from the market consistently enough for it to be worth your time. With the constant influx of information about anything going on, it's unlikely for the average person to have an insight about an investment that hasn't been factored into the price already. This is really important and also difficult to accept, because our society idolizes the ultra wealthy (tech CEOs, athletes, politicians).
3. It's passive. As a buy and hold investor, all you need is to budget a consistent investment amount and set up an automated investment. Other common investments pushed on social media are not really passive, they involve some form of management, sales, etc. This is a huge factor to consider because time is limited, and I wouldn’t want to waste it managing an investment if it doesn’t return an equivalent gain.

I’m mentioning this investment first because it is now the standard to compare everything else to, about 8-10% average yearly returns. If your investment isn’t beating this, or you spend significant time managing it, then it might be time to consider index funds.

I ended up making a graphing tool to show different projections based on investment types. Here's one showing the potential returns from index funds over 30 years, investing $10,000 per year. You can see the total value shows $1.6M at the end, with an overwhelming $1.3M from compounded interest (appreciation and dividends):

Real Estate

This is a special category that has varying degrees of success depending on the country or specific location. For example, In the US, a big factor in the constant increase in property value is the zoning regulations that prevent more housing from being created, causing an artificial limit in supply. I don’t mean to harp on this ethical impact specifically, since all investments mentioned here have an ethical component, but it’s worth mentioning since this investment could give you direct control over someone’s living situation, for better or worse. Besides that, the US also has favorable tax benefits and loan terms for property owners.

• Potential for appreciation: Real estate can increase in value over time, providing additional return when sold or opportunities to add leverage on the property.
• Rental income: Property owners can generate income by renting out their properties.
• Tax benefits: Real estate investments often come with various tax deductions and advantages.
• Leverage: You can use borrowed capital (mortgages) to potentially increase your returns.
• Inflation hedge: Real estate values and rents tend to increase with inflation, protecting your purchasing power.
• Control: Unlike some other investments, you have more direct control over your real estate assets.

However, it's important to note that real estate investing also comes with risks and responsibilities, such as property management, market fluctuations, and potential for property value depreciation.

This kind of investment gets very complicated to plan because there are so many variables to consider, including differences per property like loan terms. Here's one tool I looked at to check some of the general numbers, ending up with these:

• 20% Down Payment, 6% Interest Rate, 30 Year Loan, 4% Closing Costs
• 2% Yearly Appreciation
• 10% Yearly Rent Income (Based on property value)
• 2.7% Yearly costs besides Mortgage (These costs could increase to manage more properties)

The chart shows an impressive $2.5M, but it's a slow start, requiring 8 years of saving for the first property, and catching up to the index fund returns after 15 years.

Day Trading/Options

Pro: Potential for very fast returns, it's tempting knowing that people have made millions in a matter of minutes.

Con: Debatably equivalent to gambling, there are too many unknown factors that impact stock prices in the short term. Since we only have a limited amount of money, it's much more likely to lose money than gain anything considering these gambling fallacies:

• The Gambler's Fallacy: The belief that past events influence future outcomes in random processes. For example, thinking that after a series of losses, a win is "due." Which will lead someone to keep trading until nothing is left.
• Hot Hand Fallacy: The belief that a person who has experienced success with a random event has a greater chance of further success in additional attempts. Leading someone to make larger trades when they get more money, which could also lose money more quickly.
• Illusion of Control: Overestimating one's ability to control outcomes in games of chance. There are countless unknown factors that influence stock prices in the short term.
• Survivor's bias: You only hear stories of people who succeeded in trading, not the people who failed.

This chart is a bit silly, since I just made a random yearly return value between -100% and +103% to kind of simulate someone with a slight edge on the average doing a simple strategy like vertical spreads (which is like a double or nothing bet). But it's helpful to look at the returns compared to the investment put in. Even though the total value in this account is positive, the actual return ended up being negative.

Life Insurance

This is an interesting category because insurance isn't really an investment, but it gets mentioned in the same vein often because in certain situations, the return on investment is very high. Obviously, the catch is that you need to pass away to get the return.

For example, a term life insurance plan for a healthy young adult might be $500 per year and cover $250,000, so if you passed in the first year, the ROI would be 50,000%. Most people live to their 70s though, so that's the catch, insurance companies calculate these plan terms so that they will profit off of them most of the time. After a term life insurance plan ends, let's say after 10 years, you'd have spent $5,000 and received nothing.

But that doesn't mean it's useless, if you'll notice from the investments above, there is a period of time in the beginning where there's a risk of passing on expenses that your family or dependents will need to pay for. So insurance can be used to close the gap on that difference. Once the gap in those expenses is covered or when your insurance rates increase for various reasons (age, health conditions, etc ), then it might be time to reevaluate how much value it provides.

Ok, one more silly chart, showing the immediate (illiquid) investment value, and the steady drop in return from the payments made.

The final thing I'll mention here is just that the quickest way to financial independence is to reduce expenses. It would be a waste of time if you end up a millionare, but only want to live a peaceful life in a remote cabin. Find the life you want, and build a plan to get there, no more, no less.