Grasping an understanding of personal finance at a young age might be the best chance a person has to eventually reach some semblance of success in life. Yes, it’s boring and tedious, but you know what makes the world go ‘round, and it isn’t love. There’s a good chance you will be financially clueless when you graduate high school – since personal finance isn’t a required subject – and prepare to strike out in the world on your own. If you’re lucky there was a parent, grandparent, or gruff uncle who gave you a good book on the topic and badgered you into reading it. For the rest of you, there’s this article you’re about to read. Pay attention! It’s more important than you think.
Delay That Gratification
Too many people get themselves into serious financial trouble because they lack self control. What’s the sense in delaying gratification when you can whip a credit card out and buy almost anything you want? That’s how people end up paying interest on a box of cereal 10 years after purchase. Don’t laugh. It happens. The only way you should allow yourself to put everyday items on a credit card is if you pay the entire bill every month. Let it slip once, and roll over into the second month, and the credit card company has you right where they want you.
Manage Your Own Money
There are always plenty of other people who will be glad to (mis)manage your money for you. Learn to do it yourself and you’re ahead of the game. This means you must be able to balance your checkbook, pay your bills, and look after your own investments. None of this is rocket science, despite what professional financial planners would have you believe. Any time you pay someone else a commission to do something you could easily do yourself, there’s a good chance some of your hard-earned money is slipping into their pocket. Well-intentioned or not, trust no one but yourself with the keys to your personal treasury.
Track Your Money
Radio host and popular financial expert, Dave Ramsey, suggests that you should know where every dollar you earn goes. Guess what this means? You need a budget. A personal budget alerts you when expenses exceed income. It also lets you know that you’re spending nearly one hundred dollars a month on frothy morning drinks from Starbucks. Imagine if you put even half that amount into a safe mutual fund for the rest of your life? There’s a good chance you’d be a millionaire by the time you retire. A budget lets you know what you can afford and where you can tighten it up a little.
Create an Emergency Fund
Another piece of Ramsey’s advice to young people is to create a $1,000 emergency fund before anything else. After that, work towards a fund that holds enough to pay all your living expenses for six months. The “baby” fund insures your life doesn’t explode the next time you have a surprise medical or auto repair bill. It’s the bare minimum meant to keep on surviving. By the time you have created a “full” emergency fund you’ll be able to withstand more long term issues like losing a job or having to care for a sick relative. Consider the monthly expense of building an emergency fund non-negotiable.
Build a Credit History
While living a life constructed completely on credit spending is not a good idea, the reality of today’s world is that you can’t even rent a hotel room or car without having a credit card. Larger purchases like a house or new car require good personal credit. Considering the reality that it’s hard to build credit when no one will give you credit, younger people might have to go a non-traditional route. Making your payments on time every month will eventually build the credit you need to function in the modern world.
Save for Retirement Now
It’s amazing how little you have to put regularly into an interest-bearing investment in order to retire wealthy. The miracle of compounding interest is your greatest ally in wealth creation. The younger you are when you learn this lesson, the better. Even $50 dollars a month invested over a 40-50 year working career – with just modest annual rates – will turn you into Scrooge McDuck swimming in piles of money by the time you’re ready to buy that RV and wheel off into the wild blue yonder. A tax-deferred company retirement plan, or even an individual IRA should be your secret weapons.
The last thing we’d like to talk to you about is taxes and health insurance. You simply must understand taxes and how big of a bite it will take from your salary, depending upon where you live. For example, a $35,000 job in New York state will only yield about $26,000 in annual salary – or a little over $2,000 a month. It’s critical to understand the concept of marginal tax rates when it comes to evaluating salary increases and possible relocation.
As far as health insurance, we’ll make this one fast. You absolutely cannot risk to go another day without it. With medical costs now completely out of control, a single car wreck or broken bone could result in a bill several thousand dollars in size? This can derail your finances in the blink of an eye. You may be young but we’re pretty sure you’re not invincible. Whatever you have to pay, whatever you have to do – get health insurance now.