Unfortunately, personal finance has not yet become a required subject in high school or college, so you might have some questions about managing your money when you're out in the real world for the first time.
To help you get started, below are 6 important things to understand about money if you want to live a comfortable and prosperous life.
If you're lucky, your parents taught you this skill when you were a kid. If not, keep in mind that the sooner you learn the fine art of delaying gratification, the sooner you'll find it easy to keep your finances in order. Although you can effortlessly purchase an item on credit the minute you want it, it's better to wait until you've actually saved up the money. Do you really want to pay interest on a pair of jeans or a box of cereal?
If you make a habit of putting all your purchases on credit cards, regardless of whether you can pay your bill in full at the end of the month, you might still be paying for those items in 10 years. If you want to keep your credit cards for the convenience factor or the rewards they offer, make sure to always pay your balance in full when the bill arrives, and don't carry more cards than you can keep track of.
Control Your Own Financial Future
If you don't learn to manage your own money, other people will find ways to (mis)manage it for you. Some of these people may be ill-intention ed, Others may be well-meaning, but may not know what they're doing, like Grandma Betty who really wants you to buy a house even though you can only afford a treacherous adjustable-rate mortgage.
Instead of relying on others for advice, take charge and read a few basic books on personal finance. Once you're armed with personal finance knowledge, don't let anyone catch you off guard - whether it's a significant other that slowly siphons your bank account or friends who want you to go out and blow tons of money with them every weekend. Understanding how money works is the first step toward making your money work for you.
Know Where Your Money Goes
Once you've gone through a few personal finance books, you'll realize how important it is to make sure your expenses aren't exceeding your income. The best way to do this is by budgeting. Once you see how your morning java adds up over the course of a month, you'll realize that making small, manageable changes in your everyday expenses can have just as big of an impact on your financial situation as getting a raise.
In addition, keeping your recurring monthly expenses as low as possible will also save you big bucks over time. If you don't waste your money on a posh apartment now, you might be able to afford a nice condo or a house before you know it.
Start an Emergency Fund
One of personal finance's oft-repeated mantras is "pay yourself first." No matter how much you owe in student loans or credit card debt, and no matter how low your salary may seem, it's wise to find some amount - any amount - of money in your budget to save in an emergency fund every month.
Having money in savings to use for emergencies can really keep you out of trouble financially and help you sleep better at night. Also, if you get into the habit of saving money and treating it as a non-negotiable monthly "expense," pretty soon you'll have more than just emergency money saved up: you'll have retirement money, vacation money and even money for a home down payment.
Don't just sock away this money under your mattress; put it in a high-interest online savings account, a certificate of deposit or a money market account. Otherwise, inflation will erode the value of your savings.
Start Saving for Retirement
Just as you headed off to kindergarten with your parents' hope to prepare you for success in a world that seemed eons away, you need to prepare for your retirement well in advance. Because of the way compound interest works, the sooner you start saving, the less principal you'll have to invest to end up with the amount you need to retire and the sooner you'll be able to call working an "option" rather than a "necessity."
Company-sponsored retirement plans are a particularly great choice because you get to put in pre-tax dollars and the contribution limits tend to be high (much more than you can contribute to an individual retirement plan). Also, companies will often match part of your contribution, which is like getting free money.
There are several good reasons why young people should consider a Roth IRA. Let’s start with taxes.
Most younger folks are earning less now than they will be when their careers progress, so they are probably in a lower tax bracket now than they will be later in their careers. So the benefit is paying taxes now at a lower rate and being able to make tax free withdrawals in retirement when their tax rate may be higher.
Another factor to consider is the unknown – we simply cannot predict what taxes will look like when we retire. Many people speculate that taxes will rise, and a Roth IRA provides a hedge against future tax rates because they offer tax-exempt withdrawals.
There are a couple of other benefits as well, including being able to make penalty-free early withdrawals under certain circumstances and no minimum distribution requirement, which is found with Traditional IRAs.
Guard Your Wealth
If you want to make sure that all of your hard-earned money doesn't vanish, you'll need to take steps to protect it. If you rent, get renter's insurance to protect the contents of your place from events like burglary or fire. Disability-income insurance protects your greatest asset - the ability to earn an income - by providing you with a steady income if you ever become unable to work for an extended period of time due to illness or injury.
You'll also want to protect your money from taxes, which is easy to do with a retirement account, and inflation, which you can do by making sure that all of your money is earning interest through vehicles like high-interest savings accounts, stocks, bonds, and mutual funds.
The Bottom Line
Remember, you don't need any fancy degrees or special background to become an expert at managing your finances. If you use these 6 financial rules for your life, you can be as personally prosperous as you wish.
If you have questions about this months topic or would like to start planning for your retirement, please call IIS Financial Services and ask for your advisor or schedule a 30 minute call or email us and we would love to help you.