Saving and investing are super important, but there are too many options to consider and there's too little time in the day.

In this article, I'm going to break down some fundamental ideas around personal finance that will help you make informed decisions with your hard-earned money!

First, I'll try and convince you that you really ought to be investing and that it's not hard to get started. Then I'll talk about the different options you have for saving cash and the different options you have for buying investments. And finally I'll give you my recommendations for how to allocate money as it comes in.

Buying power

The first concept to understand is what I call buying power. The idea is that your dollar actually becomes less "powerful" as time goes on due to inflation.

Your great grandfather could have bought like 30 candy bars for a dollar, but nowadays you'd be lucky to afford a singlular Milk Dud for that same dollar. So if he buried that dollar in a treasure chest and you dug it up today, we could say that it's a lot less powerful because it used to be able to buy a ton of chocolate and now it can't.

That's why buying power is so important. If you've got 10 bucks in your wallet, you have 10 times more money than ol gramps had, but he could afford 30 top-tier candy bars while you and your $10 can barely afford to go halfsies on a bag of sour patch watermelons at the movies.

The exact amount of money that you have is far less important than the buying power that you possess.

Due to inflation, your buying power is constantly decreasing. Even though your bank account still says the same number as yesterday, the amount of stuff that you can actually buy has decreased by a small amount.

Preserving your buying power

By burying that dollar and letting it sit for decades, your great grandfather let his buying power fade away to almost nothing. So that begs the question--is there some way that great grandpappy could have passed that buying power down to you undiminished? In other words, what would he need to do with that dollar if he wanted to make sure that you'd still be able to buy at least 30 full-size chocolate bars today?

What if--instead of burying his dollar--he bought the 30 candy bars and he buried those for you? You'd be way better off! Instead of having $1 which would only buy like 4 Skittles, you'd have 30 whole candy bars that you could turn around and sell for heap of cash at today's prices.

This is the foundation of investing. Dollars get less powerful over time, but lots of other things get more expensive as time goes on. In fact, most things get more expensive over time (that's inflation), so we'd be better off holding on to just about anything other than dollars.

Okay, quick recap!

• Holding on to excess cash is not great. 1 dollar used to = 30 candy bars, now 1 dollar = 1 candy bar.
• One neat idea is to buy some stuff that you can sell back later. 30 candy bars used to be worth 30 candy bars, now 30 candy bars are still worth 30 candy bars. Ground breaking stuff!

Cash

Now, I'm not saying that you should empty your bank accounts, of course. It's necessary to have some cash on hand to pay bills and in case of emergency. In fact, at any given time your savings can be broken down into 2 categories:

1. Some amount of cash for bills and emergencies
2. Some amount of "stuff" that you bought to protect your buying power (aka investments)

Later we'll talk about how much cash to keep on-hand and which stuff to buy, but first we need to talk about what to do with your dollars when you can't protect them by buying stuff.

Banks

Banks love lending people money--they make a killing on the interest payments--but they don't have infinite cash to lend out. So here's where we come in. Banks will actually take a loan from you (at a low interest rate) and then lend your money to someone else at a much higher rate. It's a win-win, but definitely more of a win for the bank (we'll cover that in a bit).

So how do you loan money to the bank? Just deposit money into any bank account, of course!

Checking accounts

One option for lending money to a bank is to put your money in a checking account. Unfortunately, since money goes in and out of checking accounts so regularly, banks can't really count on that money being there when they need to make a big loan, so they don't really pay you much--if anything--for putting your money here.

Savings accounts

The next popular option that banks offer is a savings account. Savings accounts are generally more stable from the bank's perspective. They limit the number of transactions that you can make per month so they can count on the money being there when they need it.

Because of that, they're often willing to pay you a larger portion of their profits.

Certicates of deposit

The final popular banking option is called a certificate of deposit or "CD" for short. If checking accounts are the most flexible, CD's are the least flexible. You have to promise not to touch your money at all for a certain period of time, but in return the bank will give you the biggest portion of their profits.

Cash summary

You can lend your money to a bank in order to collect some free interest, but the bank can reduce the amount they're paying you whenever they want, so high interest rates often don't last very long.

In order to make the most money through banking, you trade flexibility (how often you're allowed to touch your money) for higher profits.

Money should never sit in a checking account for long because it won't make any money. Money should flow in to this account and back out without sitting around for too long.

Savings accounts (especially "high yield" savings accounts) are great for keeping some cash handy for an emergency or for an upcoming big purchase, but the profits typically aren't much to write home about. There will certainly be periods of time where savings accounts have an attractive interest rate, but it's not the best place to leave your money for the long term.

Certificates of deposit are the best option with regard to profit, but you have to pay a fee for early withdrawal and the interest rates are typically eclipsed by other investment options due to tax advantages which we'll talk about in the next section!

Investing

Okay, so by now you know that you don't want to hold on to too much cash because it loses power over time and that there aren't many good options for making money by lending it out. So, let's buy some stuff!

As we discussed earlier, we can preserve (or even grow) our buying power in the long term by buying stuff that is getting more expensive over time. This can truly be anything. You could buy gold or chocolate or real estate. Anything that seems to be going up in value over time at least as fast as inflation. But the most common investment that people tend to make is stocks.

When you buy a stock, you are basically buying a little piece of a business. This is a very popular option because businesses have an advantage over something like gold or chocolate or even real estate: there are real people working as hard as they can to make their businesses more valuable over time.

Gold and chocolate might get more expensive over time due to inflation but it's a very passive increase. Businesses have people actively trying to make them as valuable as possible. So, if you invest in chocolate then you sell it later, you might maintain the same buying power over a long period of time (which is a massive improvement over losing your buying power), but if you invest in a successful business, your buying power has a chance to actually increase over time.

Choosing stocks

Some people like to watch the stock market, research companies, and to pick individual businesses. But this guide is for folks who don't have time for that or who are otherwise uninterested in the practice.

Instead, you can give your money to an investor who will pick stocks for you and take a little bit of your profits in return. You can decide how much risk you're willing to take but investors will typically spread your money across a large number of businesses so that if one fails, it won't be a big deal.

There are even apps (I use Betterment) that will invest your money for you (sometimes called robo investors). These apps make investing as simple as choosing an amount of money and specifying high/medium/low risk.

Tax advantages

Now here's where things start to get kinda crazy. There are loads of different investment accounts that you can use and it can be pretty daunting. The main thing to understand is that they're all doing the same thing behind the scenes--they all invest your money into the same stocks--they just have different perks which mostly have to do with taxes.

When you ask someone where they think they spend the most money in a year, they'll usually say it's their mortgage or their car or maybe starbucks. But the true answer is almost always taxes.

Taxes account for ~20-40% of all of the money that we spend. That's an insane amount of money, but we typically think of these as inevitable and we rarely look for opportunities to reduce them.

The cool thing is that we're gonna invest our money in the stock market either way, so we might as well pick one of the accounts that gives us tax advantages.

Gains

If we're gonna start to take advantage of tax breaks, we need to understand where these taxes are coming from.

There are 2 sources of taxes that we're concerned with:

1. Tax on our income / paycheck before we invest the money
2. Tax on our profits when we withdraw our money (gains)

Income tax is likely familiar to all of us. If you get paychecks, you'll typically see that taxes have already been taken out by your employer and that tax money never even hits your bank account.

Gains tax is specific to investing. If you buy a stock for $100 and that business crushes it and now it's worth $150, you can sell it and get your initial $100 back plus $50 in gains. But the government is gonna see those gains and they're gonna want a cut, so when tax season comes along you're gonna have to pay ~20-40% of that $50 as if it's income.

Keep in mind that the gains are only taxed when you actually sell the stock. That's called "realizing" the gains. So you don't really have to worry about these taxes until it's time to cash out.

And with that said, here's the first tax tip for investing: if you wait 1 year between when you buy the stock and when you sell the stock, the gains are considered "long term gains" and they get taxed at a much much lower rate.

That's great news for a set-it-and-forget-it investor!

Traditional vs Roth

Okay, so we keep saying "tax advantages," but what are we actually talking about? Well, it turns out that there are 2 types of tax advantages, Traditional and Roth, and they match up exactly with the 2 types of taxes that we talked about in the last section.

• Traditional = no income tax
• Roth = no gains tax

In order to get these advantages, you have to make a really big tradeoff: you have to agree not to touch the money until you're 55 years old (otherwise there's a penalty fee).

So, unfortunately, you can't just go putting all of your money into these accounts in order to skip all your taxes. You'll need to keep some money handy for bills and there are also yearly limits on how much money you can put into these accounts because they're so powerful.

The Traditional tax advantage is that you don't have to pay taxes on your income if it goes into the investment account. So let's say your paycheck is $100 but then $25 usually comes out for taxes and only $75 goes to your bank account. If you invest in a Traditional tax advantage account, you can just not pay the $25 in taxes and put the full $100 into your investments.

This can't be overstated: you straight up don't have to pay taxes on the money that you're investing. That's 20-40% more money invested which will grow your buying power like crazy.

The Roth tax advantage is that you don't have to pay any taxes on your gains. So if your paycheck is $100 again and $25 comes out for taxes, you can only invest $75. So you don't get to put any bonus money into the account, but as that investment grows over time with inflation and successful businesses, you won't have to pay any taxes when you cash out.

So which one is better? Well, no one knows. It depends on tax rates when you deposit the money and theoretical tax rates when you withdraw the money which are impossible to predict. A good bet is to split your money across both types of accounts.