How Young People Can Avoid Financial Ruin
As a father of five, I have experienced first-hand the joys and pains of watching my kids grow up and learn to manage their money. For some of them it was hard, but they limited borrowed from the Bank of Dad. They stood on their own and learned how to manage their money. For a associate of them, the Bank of Dad has been the lender of last resort with free interest rates and easy repayment terms. It can be tough to learn how to manage your money, but here are ten rules that will make it easier not to borrow from Mom and Dad, or dig yourself into a financial hole that you have to struggle to get out of.
Personal money management might not be something you learned from Mom and Dad. It is also not a required subject in high school or college, so you might not have a clue about how to manage your money the first time you are out on our own. If you think that understanding personal finance is way above your head, think again. All it takes to get started on the right path is the willingness to do a little reading-you don’t already need to be particularly good at math! To help you get started, let’s take a look at ten rules to understand about money if you want to live a comfortable and thriving life.
1. Avoid the temptation of credit cards.
Learn to delay gratification with easy money. If you’re lucky, your parents taught you to save your money for what you want, instead of charge it. While it is easy to buy on credit, it’s better to wait until you’ve truly saved up the money. If you charge $1,000 on your credit card and then make the minimum payments, you will nevertheless be paying on that debt three years later. If you want to keep your credit cards for the convenience or the rewards they offer, be sure to pay the balance in complete when the bill arrives. Don’t carry more cards than you can keep track of. It would be best to limit yourself to one credit card and a debit card that has rewards similar to what you get with a credit card. American consumers have racked up billions of dollars in credit card debt. This is one area of your life in which you don’t want to follow the herd.
2. Don’t put your financial future in someone else’s hands.
Instead of relying on others for advice, take charge and read a few books on personal money management. Understanding how money works is the first step toward making your money work for you. Once you are prepared to manage your money, do it! Don’t listen to the advice of friends, unless you are fully informed and can trust their advice. Don’t let anyone catch you off guard! If your friends want you to go out and blow lots of money on parties every weekend, you are likely to find that when you aren’t spending money, they’ll move on to the next party leaving you without your money or those friends. If that is the case, invest in a better class of friends.
3. Pay attention to where your money goes. Create a budget and stick to it.
The only way to know how much money you have to use is to keep track of your spending. Once you do that, you’ll realize how important it is to make sure your expenses aren’t exceeding your income. That method creating a budget and sticking to it. Once you see how you realize how much that stop at Starbucks is costing you, you can cut back on unneeded expenses. The effect of making small, manageable changes in your expenses can be just like getting a raise. In addition, keeping your recurring monthly expenses as low as possible will also save you big bucks over time. There are only two ways to save money, reduce your expenses or increase your income. If you don’t waste your money now, you will be able to provide the things that are really important to you in the future.
4. Start an emergency fund.
This might be rule number one “pay yourself first”. No matter how much you owe and no matter how low your salary, it’s wise to put some amount of money from your budget into an emergency fund every month. Start with five percent, increase it to 10% and you will be on the way to protecting yourself from a financial meltdown in the event of an emergency.
Having money in savings to use for emergencies can really keep you out of financial trouble and get you into the habit of saving money. If you treat the “pay yourself first” concept as non-negotiable, pretty soon you’ll have more than just emergency money saved up-you’ll also have money for a vacation or a semester oversea.
Don’t make that emergency fund an envelope in your desk drawer. It is too easy to get to and use. Put your emergency fund into an online savings account (for a higher interest rate) or a money market account. Otherwise, inflation could erode the value of your savings.
5. Start saving for retirement as soon as you can.
You need to prepare for your retirement well in improvement. You can truly have a comfortable retirement by starting an Individual Retirement Account when you are in your early 20s. Saving just $2,000 a year for five or six years now and then letting the laws of compound interest put your money to work for you. Don’t touch that $10-12,000 you’ve saved in an IRA, and at retirement, it could be worth hundreds of thousands of dollars. The longer you wait to start funding a retirement account the more you’ll have to save.
Company-sponsored retirement plans like a 401(k) fund is a great choice because you get to put in pre-tax dollars and the contribution limits tend to be higher than an IRA. If your company offers matching contribution, it is like getting free money.
6. Get a grip on taxes.
It’s important for you to understand how income taxes work before you get your first paycheck. When a company offers you a job, you need to know how to calculate whether the salary offered will provide you with enough money after taxes to meet your financial goals when you are starting out, like perhaps a new car, your first home, or other expenses. There are plenty of online calculators to help make this easy. To determine how much your deductions like payroll taxes will be, go to a site like PaycheckCity.com. These calculators help you figure out your take home pay. Just provide your gross pay, answer a few other questions, and in a flash you will know how much goes to taxes and how much you’ll be left with.
Also, you’ll be better off in the long run if you learn to prepare your annual tax return yourself, as there is plenty of bad tax advice and misinformation floating around out there. Use free tax filing software from the free-filing alliance. The Free File Alliance is a coalition of 20 tax software preparation companies that work with the IRS to provide free tax filing to people who have an modificated gross income of less than $52,000.
7. Take care of your health.
If meeting monthly health insurance premiums seems impossible, what will you do if you a visit to the emergency room? If you’re uninsured, don’t wait another day to apply for health insurance. You can save money by getting quotes from different insurance providers to find the lowest rates. If necessary, get a policy for at the minimum major medical expenses. If you are in college, the health center at your college might be able to provide care for less meaningful health problems like getting a flu shot, an annual physical, or treatment of a minor illness. Your parents’ health coverage only extends to you if you are under 18 or are a complete-time student. Be sure you update the records at your parents’ insurance company if you are in college, so your coverage does not get dropped.
Also, take steps now to keep yourself healthy, like eating fruits and vegetables, maintaining a healthy weight, exercising, not smoking, not consuming alcohol in excess, and driving defensively.
8. Get the right insurance.
If you want to make sure all your hard-earned money doesn’t disappear, you’ll need to take steps to protect it. If you rent, get renter’s insurance to protect the contents of your place. Disability insurance can usually be part of your benefits at work and protects at the minimum some income if you ever become unable to work for an extended period of time due to illness or injury.
9. Get specialized Advice.
If you want help with managing money, consider a fee-only financial planner over a commission-based financial planner or insurance agent. A fee-only financial adviser will provide objective advice that’s in your best interest; while a commission-based financial advisor only earns money when you buy investments from his or her company.
10. Beat back Inflation.
You’ll want to protect your money from the effects of inflation. If you don’t save at the minimum some money, every year you will have a little less due to the effects of inflation eating away at your spending strength. You can make sure your savings and investment dollars are earning the best interest rate by creating an investment pyramid with products like high-interest savings accounts, money market funds, and CDs as the base; and stocks, bonds, and mutual funds as the middle tier; followed by investments that are considered more risky like options and currencies at the peak. If the base is the largest amount of your savings, then investing a small amount in higher risk products allows you to take a risk without risking all of your money.
Creating Financial Security
Remember, you don’t need a special background or special training to become an expert at managing your own money. Just take the time to get a firm foundation at the start and the rest will be much easier.