As I mentioned on my About page, I received sound financial advice from my parents. I had a middle class upbringing but we never had too much money to spend. My parents didn’t use a budget; instead, they always tried to save a certain percentage of their salary. My dad lost his job in his 50’s and has lived on his savings ever since. Today, I see a lot of people clueless about their money. They blame the system or they blame the government. Any discussion on the economy and finances will invariably lead to statements that the President is at fault.
We fail to notice what we did wrong as individuals. The sooner we figure it out, the better our future will be. One of the ‘sooner’ days will be when you start making your own decisions, in your late teens or early 20s. Earlier, I mentioned teaching kids about money and using garage sales to teach your kids about money, but those are only few basic lessons that parents could impart on their kids. What will a young adult possibly do when he/she has to start making independent financial decisions?
You are out of college and saved money from your student loans or paid off your student loans. Now that you’ve started earning a salary and have to make the biggest financial decisions on your own, keep these things in mind.
1. Never buy things you cannot pay for immediately. When you first get your hands on a credit card, it will be very difficult to control your impulses. Good things you see your friends using will tempt you to buy, but try to be content. You can eventually buy the good things in life when you accumulate enough to pay it upfront and in full. This includes vacation travel as well; you’ll have plenty of time later when you have saved sufficient money. Use your credit cards wisely and pay off the entire balance each month. If you cannot pay off the balance, don’t use the credit card.
2. Learn to budget your spending. Budgeting is the single most effective way to control spending and save more money. When you’re on your own, you need to build an emergency fund very quickly that will meet your immediate needs for cash in personal or family emergencies. Provisions for emergency cash should be set aside each month in your budget. Set a target savings amount for each pay check, have it auto-invested in an interest-paying investment. For the rest of the money, plan your spending in such a way that your needs and aspirations are accounted for.
3. Start saving for retirement. It’s never too early to start saving for retirement. Have you heard of the term ‘financial independence’? You can achieve financial independence when you can sustain your living without the need to work to earn money. Your job is a modern form of slavery – the quicker you get out of slavery, the faster you will achieve freedom. You can’t retire early unless you have sufficient income-earning assets, which can only be acquired sooner by starting sooner. Start investing in your employer’s 401(k) plan and automate a payment to IRA accounts from every paycheck. Check this calculation as to how saving one hour of your daily wage can make you a millionaire.
4. Start saving for life events. Stop impressing your girlfriend or boyfriend, don’t shower them with pricey gifts or dinners. You probably dont need a brand new car and a big house to live in. Until you have family and kids, you must live frugally to save for big occasions such as marriage, child birth, kids’ education, etc. It is generally a good practice to have separate accounts for each such future life event and set aside money from each paycheck. Also, it is important that you get over the student loan debt (if you have any) as soon as possible.
5. Be a valuable employee.. Nothing increases your earning potential more than your hard work and increasing value to your employer. Wherever you work and whatever you do, unless you go up in the corporate hierarchy, your salary will not go up. With saving money alone you can only increase your savings to a limited extent. Switch jobs to maximize income, or apply for internal postings within your job to go up the ladder, as sometime an incompetent boss can ruin your career along with his/her own.
6. Build your credit as fast and strong as possible. It only took me just 6 years to reach a 800 credit score, it’s not so hard. A good credit score has a lot of advantage associated with it, such as thousands of dollars in savings when you pay relatively lower interest on a car loan or mortgage, greater access to loans, and lower rates on insurance.
7. Be prepared for financial disaster – have insurance. Insure your life, health, auto and home as soon as possible. Things going wrong that requires money to amend, like accidents, illness, fire or flood can wipe out your entire savings. Safeguard your money by insuring against unforeseen events. Gone are the days when you fell ill and the entire neighborhood came to your aid. In this economy, you have to help yourself.
8. File your taxes diligently. You are still too young to know all the intricacies of taxes. I am a novice myself, but it doesn’t take more than an elementary knowledge of tax law to file your tax returns. It is better to learn those basic tax rules before your first paycheck arrives. Never be late in filing tax return! If necessary, get help from someone older in your family.
9. Never stop learning. We live and work in a world that is constantly changing. If you stop learning, you will soon fall behind. Learn new skills, a new language, or take vocational or online courses. Only learning will keep you ahead of your coworkers. Learning not only helps us do things in efficient ways but also motivates and stimulates you to continue to work. Nowadays, everybody works hard – it’s the level of skill that differentiates. Read books regularly, take classes and trainings, read my blog regularly and learn newer things. Be careful in what you are learning and from whom. The wrong advice can have a miserable impact on your life and others who will be dependent on you in the future.
10. Be an entrepreneur if you can. This is the last piece of advice I can give you. I grew up in an environment where taking on a job and supporting family members were my first and foremost responsibilities. I couldn’t take risk of having something on my own. Our economy needs more and more entrepreneurship for job creation and growth of the economy. This is the most opportune time of your life as you are independent and no one depends on your income other than you.
I am sure you will find tons of material with advice to young adults on internet, but I do not want my readers to go elsewhere to find the help they need. All the best for your future life.