Tips from a very smart CFO

Ramit Sethi

I showed this site to my friend George Northup, the CFO now-CEO of AuctionDrop. He had a few more suggestions for things young investors should learn.

George’s general rules for good wealth building
Topics covered: Paying yourself first, dealing with raises and bonuses, controlling your lifestyle, and 401(k)s

Pay yourself first, always
George means that you should set up your budget knowing exactly how much you want to “pay yourself,” or put away somewhere for your future. Whether that money goes to savings, stocks, an emergency fund, or a retirement account, it should always be your first priority–pay yourself first, then play with the rest. That means if a new TV would require putting aside your savings-account budget for a few months, think twice.

Another benefit of paying yourself first is that it gives you a terrific incentive to find ways to make more money. If you’re paying yourself and you only have $50/month for disposable income, that’s a great kick in the ass to find other channels for making money (consulting? tutoring? Think outside the box).

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With every raise you receive, bank it, don’t increase your lifestyle
George is pretty smart. He’s saying that, if you have a lifestyle based on a budget of $40,000, and you get a $5,000 raise, don’t change your lifestyle! It’s so tempting to go get a new TV, car, house, whatever. But think of it in 2 ways: First, more expensive items require higher maintenance costs, so the amount you spend is likely to be more than just the actual price. Second, think in terms of opportunity cost: If you buy a $5,000 computer, that $5,000 is actually worth about

-$12,969 after 10 years (8% return–Is an 8% return good?)
-$50,313 after 30 years (8% return)

WOW. I’m not saying don’t ever spend money that comes your way, but it’s insane not to put a big chunk of it away.

With every bonus you receive, save it
Same idea. Don’t be stupid and blow it.

Control your lifestyle, don’t let it control you
I have a friend, 23 years old, who told me this recently: “Well, my job’s ok…actually, it kind of sucks. But I have car payments so I have to stay here for a while.”

I don’t ever want to be in that situation.

If you’re feeling awful about payments you have to make, or wondering how you’re going to make next month’s rent, remember that you can make choices to change things starting right now.

401(k)s and the advantages of matched savings
401(k)s are basically easy ways your company gives you to invest. You choose how much of your paycheck you want deducted and it goes straight into the 401(k). You can decide between all kinds of choices, like “aggressive” or “international focus” or “growth.” Your company will make it easy for you to understand the differences among all of them.

There’s one important thing about 401(k)s: Companies will often match some percentage of whatever you invest. For example, let’s say you make $50,000/year. If your company matches up to 5% of your salary, and you invest the full 5%, when you put in $2500, they will also kick in $2500, free.

Always max out your 401(k)! It is literally FREE MONEY. You could not expect a 100% return anywhere else.

Now what?

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  1. Tunde Famous

    I am a Nigerian i have N2000 and i want to generate it, i dont know the way to generate it. I will be very grateful if you teach me how to generate the money to becom as many as i want it to be.

    Thank you for your cooperation.

    Tunde Famous
    From: Abuja, Nigeria.

  2. Steve

    “Always max out your 401(k)! It is literally FREE MONEY. You could not expect a 100% return anywhere else. ”

    I believe you meant always contribute the percentage to max your company match.

    Yes–that’s what I meant. Thanks.


  3. Mitali Bahl

    I know my question is a bit different from the topic discussed here.
    A startup with limited budget should hire a CFO or a dedicated accounting team for financial decisions?