A Student’s Guide to Personal Finance:
Knowing Your Way Around Financial Town

By Noah Collazo

“Invest in your 401(k)!”

“Buy Bitcoin!”

“Earn passive income!”

There’s a good chance you have heard statements like these from family members, friends, or “financial gurus” on Instagram or LinkedIn. You probably have heard you can invest your money and earn a return, but you might be unsure on how to do so. The idea of seeing your money grow is exciting, but the question you are asking yourself is “Where do I even start!?” This guide will break down the basics of investing into simple definitions and action steps that anyone can use to get started. By the end of this article, you will know your way around Financial Town and will know how to find what you are looking for to reach your financial goals!

The Gas Station: Eliminate High-interest Debt

Imagine your investing journey is like a shopping trip to a few different stores. You get in the car and start it only to find out you are almost out of gas! Before your trip you are going to have to make a detour to the gas station. Short-term, high interest debt, such as credit card balances and consumer loans, should be paid off as quickly as possible. Just like a trip to the gas station, paying off debt can be mundane and expensive, but is an essential first step to investing.

Consider this: the median interest rate on credit cards in June 2025 is over 23%! While paying off debt may seem like an expense more than an investment, the ultra-high interest rates will compound against you if you let them. Because of this, by paying off the high-interest debt you are essentially making an investment with a return equal to the interest rate of our credit cards or loans. But what do you do after you have taken care of this high-interest debt, or if you never had it to begin with? Well then, you can consider your car full of gas! You are almost ready to head to the stores, but first, you should probably make sure your spare tire is full of air…

The Spare Tire: Check Your Emergency Fund

Obviously, no one plans or hopes for one of their tires to pop and go flat while they are driving. Sometimes there is an unexpected nail or sharp rock that causes a tire to go flat, which is why it is common for vehicles to be equipped with a spare. The personal finance equivalent of a spare tire is an emergency fund.

An emergency fund is simply an account with savings that will cover 3 to 6 months of expenses in case of an unexpected financial crisis. Some examples of these types of crises include loss of a job, medical emergencies, car accidents, or home damage from natural disasters. Your financial margin (money left over after paying your monthly expenses) should first be put towards high-interest debt, then to building up an emergency fund. Once your emergency fund is established, you can say your spare tire is full of air, and you are ready to head to the Investing Stores!

The Shopping List: Understand Your Goals

It is normal before making a trip to the grocery store to prepare a shopping list of all the things we intend to buy. Similarly, you should have a list of your personal financial goals that will determine how you save and invest. Goals can be short-term (1-5 years), medium-term (5-10 years) or long-term (10+ years). Some examples of short-term goals include saving for a car, vacation, or wedding. 5-10 year goals might include buying a house or starting a business. Retirement is the most important long-term goal to plan for (yes, even in your twenties!), but there are other long-term goals, such as buying rental properties and funding your children’s college that you can begin saving for now. You likely will not have all your goals figured out now, and that’s okay! You can start with just a few goals of each type and grow your list over time as you make decisions on what to save for. Once the shopping list is ready, you can head to the stores and start investing!

The Corner Store: What on Earth is a 401(k)?

Many times, new graduates will start their first full-time jobs and find out their employer offers a 401(k) plan, but they do not understand how it works. A 401(k) is a retirement plan provided by an employer to its employees. Employees can defer a portion of their paycheck to be contributed to the plan, where it can then be invested in various funds. Think of the 401(k) plan like your shopping basket. It is not an investment itself, but a vehicle that is used to hold different investments of your choosing.

Because the plan is offered by the employer, the investment options are limited to the ones the plan provides. Like a small corner store, the 401(k) allows you to choose from a variety of options, but those options are limited to a smaller selection. An important thing to note about 401(k) plans, is that many employers will match a certain percent of your contribution as an incentive to participate in the plan. It is worth finding out if your employer offers a match as it is essentially free money! Lastly, because the 401(k) is intended for retirement, money withdrawn before age 59½ is subject to a 10% penalty. When you contribute to the plan, do so with money that you can commit to saving for retirement!

The Superstores: IRAs and Brokerage Accounts

If the 401(k) is a convenience store with the freedom to choose from limited options, think of investing in individual retirement accounts (IRAs) and taxable brokerage accounts like shopping at a superstore! These types of accounts are your shopping carts; they are vehicles that can carry countless investment options: individual stocks, bonds, mutual funds, ETFs, and more.

Like 401(k) plans, IRAs are designed to save for retirement, so they carry the same 10% early withdrawal penalty before age 59½. However, since IRAs are individually directed, anyone can open one and choose from the vast selection of available securities. Taxable (also called non-qualified) brokerage accounts also offer a vast selection of investment options. These accounts are flexible and can be used to accomplish short, medium, and long-term goals since they are not subject to an early withdrawal penalty. However, they do not come with the same tax advantages as retirement accounts. The differences will be discussed in the next section.

Carts and Baskets: Which Accounts are Right for Me?

You now understand your accounts are like shopping baskets and carts, vehicles that hold the investments you put in them, and you know some of the differences between them. The next question you might ask is how to know which ones to choose. Since your money is limited, you must decide how much to allocate towards the different types of accounts. Alongside your list of goals, understanding contribution limits and taxation of the accounts will help in making those decisions. Both 401(k) and IRA accounts are available in two types: Traditional and Roth. The difference between the two comes with how they are taxed.

Traditional retirement accounts are tax-deferred meaning you will not pay taxes on the money you contribute until you withdraw it in the future. Because the taxes are deferred, contributions to Traditional retirement accounts reduce your current taxable income.

Roth accounts are after-tax, meaning contributions are taxed in the year they are made; all future growth and withdrawals are tax-free. Roth accounts can be beneficial for those who believe they will be in a higher tax bracket in retirement than they are currently. Because Roth accounts are after-tax, only the earnings are subject to early withdrawal penalties, not the original contributions.

It is also important to consider the maximum limits you can contribute to these accounts. For 401(k) plans the maximum amount that can be contributed in 2025 is $23,500. For IRA’s, the limit is $7,000. These amounts apply to both Traditional and Roth contributions.

Money invested in a non-qualified (taxable) brokerage account is taxed yearly on the gains, dividends, and interest earned from the investments. If you hold onto an investment for at least a year, you will pay a capital gains tax on the investments once they are sold for a profit.

Using each of these vehicles, you can set up an investing plan to help reach your goals.

The Goods: What Can You Fill Your Cart With?

No one goes to the store, grabs a shopping cart, and just pushes it around admiring it. You have to fill your cart with items! In this case, you are shopping for investment assets, also called securities. The following is a list of securities you can add to your investment accounts.

• Individual Stocks: Ownership of full or partial shares in a particular company. The performance of the company will determine if the share price rises or falls. When sold for a higher price than purchased for, a profit can be earned. Stocks may also pay a reoccurring dividend.
• Bonds: Essentially a loan made to the Government or a corporation that is repaid at a set maturity date. The bond pays interest until maturity and can also be sold for a gain if the value increases beyond the purchase price.
• Mutual funds/Exchange Traded Funds: These are groups of stocks or bonds that you can invest in all at once. Funds may carry hundreds of individual securities inside of them, so when you invest in them, you are partially investing in all the companies that make up the fund. Many mutual funds or ETF’s track a certain index, such as the S&P 500 (500 largest U.S. companies) or sector, such as technology, energy, healthcare, or finance. Faith-based mutual funds and ETFs are available for investors who want to avoid companies whose products or services go against biblical values, while investing in companies that promote human flourishing

The Plan: Risk and Allocation

Because the returns on stocks are based on the companies’ performance, there is inherent risk that comes with investing. When share prices rise, your accounts will grow in value; when they fall, you lose money. How you build your investment portfolio will depend on your risk tolerance and the time horizon for your goals. Long-term goals, such as retirement allow for more risk, since there is more time for the money to grow.

Diversification is also an important part of mitigating risk. If you allocate all your money to a single stock or sector, your investments will only grow if that particular company or sector performs well. Mutual funds and ETFs are inherently diversified since they provide shares of hundreds of companies at once. Government bonds are considered among the safest investments and become a larger part of many portfolios as investors approach retirement.

The Trip Home: Wrapping Up

Getting started with investing can seem scary or confusing at first. Hopefully this guide showed you investing can be as easy as a trip to your favorite stores! If you have any questions about investing or are looking for a trusted advisor to help manage your investment portfolio, Beacon Wealth Consultants would love to help! Feel free to reach out via phone or email to see how Beacon can help you reach your financial goals.

Noah Collazo is a senior at Liberty University studying Financial Planning. He also serves as a peer financial coach.