Hopefully you’ve all finished filing your taxes, but while your mind is still on money I thought I’d go over a few basic money tips that everyone in their 20s should know.
1. Invest in your retirement
(Photo credit: The U.S. National Archives)
It might seem like you’re too young to be thinking about your retirement but now’s the time you should start putting away money. Every month that you don’t put money away for retirement is like another month you’re stealing from an older version of yourself (a version that is too old to go out and work an extra shift like you can). Set up a plan that takes $100 out of your paycheck each month. If you invest in a plan that has an annual interest rate of 7% that $100 will be worth $800 by the time you retire. What would you have spent that $100 on today? Drinks, clothes, concert? What would you spend that $800 on when you’re 79? Medicine, food, clothing? Once you get comfortable putting aside $100 a month, make a goal of doubling that amount each year.
It’s never going to be easier to be poor. You’re young, you can get away with eating rice and beans every night, you can wear crappy clothes, you can live in a crappy apartment. As you get older, and maybe start a family, the expenses are going to rise. So the next time you consider buying $12 martinis or $100 jeans, think of that feeble, sweet version of yourself, and give him/her the money instead.
I use Vanguard to invest in a Roth IRA because the fees are some of the lowest in the industry and they have good research. Read this if the different IRAs confuse you. If your office matches your investment, you need to invest the maximum amount. That’s free money and you’d be stupid not to take it!
The general rule for investing is when you’re young pick high risk stocks and bonds. In your forties, switch to moderate risk, and switch to low risk investments 10 years before you plan to retire. You can use Bankrate’s calculator to figure out how much you need to put aside to reach your retirement goal.
There are only two excuses for not investing in your retirement: You’re flat broke, or you want to invest that money in career development. The latter is an excellent reason because it will help you make more money in the long run. Just make sure you up your monthly retirement payments when you start making more money.
2. Start building your credit score now
Factors contributing to someone’s credit score, for Credit score (United States). (Photo credit: Wikipedia)
If you ever plan to buy something expensive in the future, start building your credit score now. Here’s what I didn’t know about credit scores: it’s not a measurement of how good you are at saving and spending responsibly, it’s a measurement of how good you are at handling debt. I was using a debit card for years because I didn’t want to get in the habit of spending money I didn’t have, and then I learned that I didn’t have a credit score.
You really want to keep your score above 750. You can use CreditKarma to find out your score for free. I wouldn’t pay to find out my score even if they have catchy songs in their commercials.
Here’s why it’s so important to keep your score high. Let’s say you want to take out a mortgage for $200k. If your credit score is higher than 750, you could get an interest rate of 3.08%. If your score is 630 you might get an interest rate of 4.67%. That might not seem like a big difference, but that higher interest rate will add $70k to your overall payments. It can mean a monthly payment of $852 or $1,034. You can go to My FICO to see other scenarios.
English: Suze Orman addressing a Senate Committee. (Photo credit: Wikipedia)
Always pay at least the minimum balance on your credit card. Putting the utility bills and phone contract under your name will help your score, but again you have to pay everything on time. The more credit cards the better, but this can be tricky. It’s harder to keep track of all those balances, and also if they close one of those cards down because you’re not using it, it will end up hurting your score. Also the more times they check your score the more it hurts it, so make sure that if you’re applying for something, you’re guaranteed to get it. Auto loans and student loans help too. Basically if you can pay off a debt in little chunks and meet every deadline your credit score will be good. Read anything by Suze Orman if you want more info.
3. Don’t spend money to save
This seems like a no-brainer, but I fall into this trap all the time. I just spent hundreds of dollars at the container store to organize our storage closet. After everything had its perfect compartmentalized space, I realized that those drawers were filled with junk that I didn’t need. I would have been far better off going through everything first and donating what I didn’t need.
Another time, I was looking to buy a bookcase because our books wouldn’t fit in the three bookshelves we already have. And then I had the brilliant idea of actually looking through all the books we have and getting rid of the ones I didn’t treasure dearly. Now someone else gets to read that Jodi Picoult book I hated, and I don’t have to spend money to keep it in a new bookshelf.
If you’re spending money on a storage unit, or organizers, or on a larger apartment to house all of your stuff, really start to consider if you need all that. If you itemize everything on a receipt, and donate it to the Salvation Army you can get a tax write-off and then you’ll really be saving money.
4. Nothing is free
Sprint Nextel logo (Photo credit: Wikipedia)
I’m always surprised when people expect a free phone for a long-term contract. One of my friend was signing up for sprint at the same time I got Virgin Mobile. She didn’t want to do virgin mobile because she would have to pay $300 for the phone and with Sprint it would be free. This was two years ago. On the Sprint plan she’s paying $60 a month for unlimited text and data. I pay $30 for the same plan (and Virgin uses the exact same service so it’s the same quality). That free phone ended up costing her $1,440 for service over 2 years. Sure I had to pay $300 upfront, but I’ve only paid $720 for the same service. Even when you include the price of the phone, I still saved $420.
When you are offered something free, always do the calculations first. Oftentimes it makes sense to pay up front.
I know all this money talk doesn’t seem to line up with the values of the HeSo project, but it truly does. I see money as the one thing that gives you security and freedom at the same time. Being in denial about your finances causes shame, self-doubt and fear, and if it gets bad enough, you will eventually become dependent on someone else. The sooner you gain control over your money the sooner you will gain control of your life! Making a budget helps you decide what’s really important to you.