Saturday, June 30, 2018

Eight money matters everyone should grasp by age 30


When I was 26 years old I had a late payment on an account. I moved and forgot to notify my one credit card. When they called me the next month to ask me about my payment, I was mortified, but the bank rep was very nice, believing me and updating my address on the
Image: Drop the label movement.
spot. Yet a couple of years later, when I applied for a loan, that one late payment was loud and clear on my report, and I remember thinking how something so little such as forgetting a move notification could still be pointing an accusing finger at you so many years later. Since then I’ve never been late with a bill payment.

I’ve learnt many other things since then –and let me be clear that it’s not because of my age but because of my credit union work, haha! - and since I know that many of you, our readers, have not long ago finished college and/or are starting on new jobs, I’d like to share the small but big things that are key to know about your own money, because they will help you keep a healthy financial state.

Making a budget
Many people are under the wrong impression that your budget consists of deciding how much you spend on stuff; and they are, to some degree, correct. But a proper budget means knowing what you make, and what is the wisest way to spend it; it’s got some science to it. Here are the benefits of knowing what your budget looks like:

  • It tells you, right away, if you’re overspending on something: 
  • It helps you identify ways to save; 
  • It teaches you frugality. Let me be clear, frugality isn’t stinginess. Being frugal means learning how to save on some things so that you can use what you saved on other things that you want. After all, saving without enjoying it is a very sad thing. 
Since it’s the end of the month, it’s the perfect time for you to set out about making your budget exercise. Here’s the article that will help you get started, and here the article that will help you map out your budget with all the data in hand.

Saving
Image: Sharon McCutcheon.
Grandparents always say to save 10% of your take-home pay. It’s hard, but they’re right, and if you don’t have a savings account, do it soon. If you can’t set aside 10% of your pay, let me suggest what I did to start my own savings when I was dirt poor (that was when I worked at a bank): at the end of the month –or the end of your pay cycle if you get paid bimonthly- that money that is still sitting in your account from this month’s salary? Move that to savings. And ask the credit union or your financial institution to please not link that account to your card.

I know it sounds like a small thing, but little by little that money will grow and soon you’ll see how at the end of each pay cycle moving that little bit of money off will feel good and make you proud.

Once you have one month’s salary saved up, if you can, move it to a separate account that you are going to keep as an “emergency fund” (this is where credit unions come in handy, they don’t charge you extra for a small savings account). It’s best if you can grow this account to be the equivalent of three months of salary so that if you lose your job you have a buffer to tide you over.

The key to saving: planning how to spend it
Once you have an emergency fund set aside, it’s time to start making bigger plans with the
Image: Adolfo Felix.
rest of the money you’re saving. Like I said, saving should have a good purpose and, while I don’t advocate stopping saving for other long term plans, it’s good to find a balance between being safe with your money and living nicely. You can create a vacation fund to travel abroad, or you can use the extra money to pay down those small debts you have here and there. Maybe you can do both. The point is to plan, and to follow through. Because the more you set out to do and actually accomplish with your money, the better you will feel about yourself.

One's credit report
Everyone should know their credit history because it shows you your chances of getting loans in the future; if you have a properly running budget and are managing your money better, your credit history and score will improve over time. You can obtain your credit report for free once a year from any of the three major credit bureaus. Also, there are free credit monitoring services that help you watch out for identity theft.

If your credit history is brief and rather thin and what you seek is to establish credit, here’s a blog article where I explained how to do it. And, if you have a decent credit report but want to build a superb one, yep, I also wrote an article about that.

Retirement plans
Image: Heidi Sandstrom.
You must be thinking “is she serious…?” I get it, you’re 50 years away from retirement and there’s plenty of time. That’s true. It’s also true that the sooner you work on your retirement, the better you will retire.

Find out if your employer offers a 401(k) plan and if they do, figure out a way to set into it a small portion of your salary, no matter how little, in that fund. Having a good budget will be a great help in that. Retirement plans are a great investment because employers usually make a “matching gift” of an additional percentage of whatever amount you can set to your plan.

Keeping a proper portfolio isn’t hard either; it’s a matter of diversifying properly. Investments in these types of retirement plans are usually divided into three types:

  • Cash or liquid funds: your money gets invested in money market funds and complex common savings certificates. They provide very low yields (profit, that is) but are close to having no risk to you; 
  • Bonds; that’s usually government bonds, which also have low yields but are very safe; 
  • Capital or equity; this refers to stocks in which you invest via mutual funds. In a normal investment portfolio you’ll find various types of capital funds in specific industries like biotech, IT, agriculture, specific markets (like emerging market funds, or Asian) or with specific types of companies (large corporations, environmental funds), and they each have different types of risks and returns. Because of the associated risk, these are the most volatile types of investments but, of course, they offer the greatest chance to make a profit in the long run. 
Financial experts say that the younger you are the greater risks you can afford to take, because short term losses will be offset by long-term gains. Conversely, the closer people are to retirement, the safer their investment choices become in order to avoid losses that they won’t have time to overcome. Contact the person who manages the 401(k) to get advice and keep in mind that you can always change your future investment allocations to adjust your risk level, and even empty an existing allocated fund and move the balance to something else (although you should always find out beforehand what the cost to do that is, as transfer fees might be higher than the benefit of the transfer).

And if your company doesn’t offer this type of retirement fund, you can contact the credit
Image: code mml.
union or your bank to ask about retirement savings accounts, which allow you to save little by little and offer tax benefits on the deposited amounts.

The proper use of borrowed funds
One thing I learnt from my aunt Eleanor –who is an honest-to-goodness hippie, but also happens to be an economist- is that you should never borrow money to finance your lifestyle. Meaning that loans should only be taken out for investments.

What does that mean? For example, that using your credit card to buy everyday items is a bad idea because you are paying interest to live.

On the other hand, if you’ve finished paying off your student debt and are considering studying something new, an online course or a specialty field of study that will help you get a better-paying job, then getting a loan to finance those studies is a good investment in your future.

Buying a home: a good investment?
We’ve all heard it, that owning a home is a great investment. It’s true that in the long term they profit a nice profit but that’s the catch: if you buy a house to live in and sell off later on, calculate a possible increase in value and compare it to the loan interest plus closing costs because usually unless you stay in the house at least 5 years you’ll lose money on that
Image: Jonny Caspari.
resale.

And my last bit of advice: live your life
In the age of social media it’s hard not to look at yourself when you see the pictures that your friends post online of their travels and the things you would like to be doing as well.

Many of us tend to draw comparisons and it can lead to depression; for others, it can lead to start trying to lead a lifestyle that, as I mentioned earlier, they can’t afford. That’s why you should always remember two things: people only post images of the good stuff, never the bad; and second, it’s your life, your money, and your future. Use them well and they will take care for you, and ignore the temptation to prove anything to others.

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