Personal Finance 101

401(k)/403(b)

You should invest in your employer-sponsored retirement plan (401(k) or 403(b)) to get the company match. In the rest of the document, I will use 401(k) as an example, but almost all of the ideas apply to 403(b) as well.
There can be up to 3 buckets in a company's 401(k) plan: pre-tax, Roth, and after-tax. The pre-tax and Roth 401k buckets share a employee contribution limit of 18K in 2017. (The company match is always in pre-tax bucket.) The total contribution limit across all buckets is $54K in 2017, which is set by IRS each year.
If you make after-tax 401(k) contributions, immediately convert them to Roth 401(k), or Roth IRA in so-called Mega Backdoor Roth IRA. (If your company is using Vanguard as the 401(k) recordkeeper, here are simple instructions for converting after-tax 401(k) to your Roth IRA using just the Vanguard website.) I prefer Roth IRA because it is much more flexible than Roth 401(k).
Pre-tax 401(k) vs. Roth 401(k) is tax-neutral assuming your marginal tax rate stays the same when contributing and withdrawing, but Roth contributions effectively allow you save more. Whether or not to contribute to Roth 401k depends on many factors including your tax bracket. Holding both Roth and pre-tax assets is also a form of tax diversification.

IRA

IRA refers to Individual Retirement Account that is not sponsored by your employer. It provides you another way to build a separate retirement portfolio using traditional IRA or Roth IRA. It is trivial to open an IRA account at Vanguard or any other major mutual fund companies. When you hit 70 years of age, your traditional IRAs are subject to RMDs (required minimum distributions), but not your Roth IRAs. Slightly different situation for 401(k), and technically all sources (pre-tax, Roth) are subject to RMDs. However, in practice, you can roll the Roth 401(k) into your Roth IRA as soon as you leave your current company, so that part of your 401k will not be subject to RMDs.
You can still make Roth IRA contributions even if your income exceeds the Roth IRA eligibility limits, using what is known as the backdoor Roth IRA. First you make a non-deductible contribution to a traditional IRA (remember to file form 8606 on your tax return), and then immediately convert it to a Roth IRA. You do pay taxes on earnings. But if you convert very soon, the earning/loss will be trivial.
Caution: watch the pro-rata rules when converting traditional IRA to Roth IRA. Basically if you have pre-tax traditional/rollover IRA balances anywhere, part of your conversion becomes taxable. You have several options if you run into this situation:

1. You can rollover those IRA to your company's 401(k). I think this is the best option.
2. If option 1 is not possible, you can choose to convert all of them to Roth IRA in one shot, and pay tax on all of them in one year.
3. If #2 is causing too much tax burden to you, you can still choose to convert the newly contributed traditional IRA (along with some of the existing IRA if you plan to convert them over a longer period of time anyway). You pay tax on a pro-rata fashion: i.e., a fraction of the conversion becomes taxable. This page explains how to figure out the taxable amount.

Also note that the procedure and limits here are completely independent from the mega backdoor Roth IRA mentioned above. So you can go ahead and do both. If you use both methods, you can save a lot of money in Roth IRA each year.

Saving For College

Use this calculator to estimate how much you need to save for your kid(s). The most popular way to save for college is to use a 529 plan. If your state (e.g., California) does not provide tax break for 529 contribution, you are free to choose plans from any other states.
If you do not have enough money to fully fund a 529 plan AND a Roth IRA, I think it is better to fully fund a Roth IRA first, then the 529 plan. The main reason is that Roth IRA is much more flexible than a 529 plan. See some discussions on this topic:

1. http://www.nerdwallet.com/blog/investing/2013/roth-ira-vs-529-plan-best-college-savings/
2. http://www.cnbc.com/id/101323957

As discussed in previous sections, you can use both the Mega-Backdoor Roth and Backdoor Roth (or through direct contribution to Roth IRA if your income is below the threshold). You can accumulate a big chunk of money over the years into your Roth IRA. It could be used to cover college costs.
Here is the order of Roth IRA distributions:

1. Regular contributions.
2. Conversion and rollover contributions, on a first-in-first-out basis (generally, total conversions and rollovers from the earliest year first). Take these conversion and rollover contributions into account as follows:
   1. Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the
   2. Nontaxable portion.
3. Earnings on contributions.

Retirement Planning

The ultimate purpose of financial planning is to meet your life goals in financial terms. Decide what year you want to retire ("full" retirement age is 67 here in the US), and then determine how much you will need to save per year from now until then. Retirement planning has two phases: accumulation and distribution. During your working years, you must accumulate a lot of wealth by investing. Vanguard has a pretty good retirement calculator to determine whether you are in good shape for retirement. Alternatively you can use this spreadsheet to plan your retirement. One rule of thumb is that you need to amass an asset about 25x of your planned yearly expense in retirement. E.g., if your plan to spend $80,000 each year in retirement, you need to save up to 25 * 80,000 = $2M before retirement.
The distribution phase is where you convert your capital into an income. Arguably this is more complicated than mere accumulation, because you need to maintain a healty balance between spending and yet enough growth to be sustainable for many years to come. A few years before retirement, you have to start building an income flow. This probably means shifting into (individual) bonds with a definite maturity date, or nominal bonds (CDs), or TIPS bonds, or muni bonds. Also your portfolio will have both an income portion and growth portion. You still need stocks during retirement, because retirement lasts a long time and you need to compensate for inflation.
Do not take social security too early -- wait until you are 70 (but couples have more options). Realize that waiting to take social security until you are 70 is equivalent buying an annuity, but the rate of return is very, very generous and is more than any annuity you can buy on the market. Get your social security statement online, once or twice per year, from here.

Estate Planning

A regular will, as known as last will, is a must-have for those who have dependent children. In the will you would specify your children's guardian(s) as well as property manager(s) in case all your children's parent(s) pass away. A living will, also called a directive to physicians or advance directive, is a document that lets people state their wishes for end-of-life medical care, in case they become unable to communicate their decisions. For example, you can leave the decision-making to a specific member of your family.
A living trust is a good way to avoid probate. In general, the need to establish a living trust increases with your age and degradation of your health.

Asset Allocation

In this section, I will discuss how to allocate your assets in your investment portfolio. Your overall portfolio consists of all accounts that you own, including 401(k), Roth IRA, taxable brokerage account, etc.

Basics

There are two basic asset classes: stock and bond. In general, stock has higher expected return but also higher volatility. See table below:

	Stock	Bond
Average Annual Return	10.2%	5.5%
Worst Year	-43.1%	-8.1%
Best Year	54.2%	32.6%

The most important factor that impacts your portfolio's volatility-adjusted return is the percentage allocation between these two. The older and the more volatility averse you are, the more bond you should hold. So defining a target asset allocation that you are comfortable with is most important decision you need to make. For example, one rule of thumb is that the stock allocation should be around 120 - your age. By this rule, so if you are 30, your portfolio should contains 90% stock and 10% bond.
Generally speaking, your portfolio should only contains stock funds and bond funds. Broad index funds are better because they are more diversified. Add a small-cap index fund if you want a small-cap tilt. Use index funds, not actively-managed funds. Markets are efficient, and so after expenses, most active managers actually come out behind a passive index.
Over time, your portfolio might be out-of-balance due to varying performance of asset classes. In this case, you can reset it to the target by buying under-performing asset either through new investment, or from selling over-performing asset in an exchange. If you exchange assets in a taxable account, you would have to pay tax if there is capital gains when selling over-performing assets. In this situation, you should avoid triggering too much short-term capital gains, instead, you should wait until you hold the assets for mone than one year so that the gains will become long-term. One rule of thumb is that you should only rebalance every 18-24 months in a taxable account to avoid accidentally triggering short-term capital gains. Another strategy is limit the exchanges in tax-advantaged accounts instead of taxable accounts.
A Target Retirement (TR) fund is a multi-fund portfolio that the fund manager automatically rebalances for you. If you do use a TR fund, read the prospectus, and make sure you understand its glide path. If you do not like the glide path, either use a different TR fund, use a Life Strategy fund (which uses a fixed asset allocation), or buy the individual funds and make your own glide path.

Tax Efficiency

Tax efficiency is very important for asset allocation. Here is a list of asset classes and their tax efficiency:

Tax Efficiency	Asset Class
Efficient	Stock index funds Tax-managed stock funds Muni-bonds, which are only suitable for taxable accounts.
Moderately Inefficient	Active stock funds Total-market bond funds
Very Inefficient	High-turnover active funds Real estate or REIT funds High-yield corporate bonds

We can classify investment accounts based on their tax treatment as:

1. Tax-deferred accounts, such as pre-tax 401k, traditional/rollover IRA,
2. Tax-free accounts, such as Roth 401k, Roth IRA, 529, etc.
3. Taxable accounts, such as your regular investment accounts.

Generally speaking, you can put tax-efficient assets anywhere, but you should only hold tax-inefficient assets in your tax-deferred or tax-free accounts. Note that money in a tax-free account is worth more than the same amount in a tax-deferred account. E.g., if you estimate your marginal tax rate (federal + state) in retirement at 25%, $1 of Roth 401k/Roth IRA corresponds to $1.33 of pre-tax 401k. So ideally you should put assets that grow the fastest in tax-free accounts.
The Target Retirement or Life Strategy funds are not appropriate for a taxable account because they usually have a big chunk of assets allocated to common bonds. Use them in your 401k or IRAs only.
International funds may have tax already paid to foreign governments and putting them in a taxable account may allow you to claim foreign tax credit which is also a factor to consider.
See this page for more details.

Asset Allocation Resources

Here are a few links about asset allocation vs. asset location vs. asset dedication:

1. http://www.bogleheads.org/wiki/Asset_allocation
2. http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

Here are a few sample "naive" portfolios for tax-deferred/tax-free accounts:

• http://www.bogleheads.org/wiki/Lazy_portfolios
• http://bogleheadswiki.pbworks.com/w/page/8005370/Core%20Four%20Portfolio

Other Topics

Credit Report

Get your free credit report from each of the 3 bureaus, staggered at 4-month intervals. Create a calendar event to remind you. Use this site only: https://www.annualcreditreport.com/index.action. Get your actual FICO score from myfico.com (but wait for a 20% sale): http://www.myfico.com.

House And Mortgage

Buy a house or rent? This calculator is very useful:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html If you have a mortgage, please read my little article about why you should not rush to pay it off.

Life Insurance

Buy termed life insurance. You should almost NEVER buy a whole life or permanent life insurance, or other varieties of it, including universal life insurance, variable life insurance, etc:
http://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/

References

Some personal finance ideas, in condensed form: http://www.thesimpledollar.com/onepage/ Bogleheads, a community of Do-It-Yourself investors:

• http://www.bogleheads.org/wiki/
• https://www.bogleheads.org/forum/faq.php

Books

1. The Bogleheads' Guide To Investing, by T. Larimore, M. Lindauer, M. LeBoeuf.
2. The Random Walk Guide To Investing, by Burton G. Malkiel.
3. The Only Investment Guide You'll Ever Need, by Andrew Tobias.