Getting Off To A Good Start
What you do now will have a huge impact on your finances later in life. If you want to be one of those lucky people who get to retire early in life, you need to take some steps to get there and you should take those steps ASAP. Most of those people did not get there by chance.
Here are some tips that can help.
1) Tackle Your Debt
If you are just graduating from college, you likely are swimming in debt. Student loans and credit card debt are the anchor that weighs down most recent grads. You need to tackle the problem instead of letting it linger or even grow.
First, you should address the credit card debt. Pick a debt reduction strategy such as the Debt Avalanche Method or Debt Snowball Method and work at it. You can not get out to a strong financial start if you are paying 20 percent interest on debt.
Once the credit card debt is paid, turn your focus to those student loans. The sooner that they are paid off, the sooner you can focus on investing. At the minimum, you should sign up for automatic payments which can cut your interest rate by a quarter percent. Then, start making extra payments.
Contributing an extra 200 dollars a month will likely not harm your quality of life much, but it can have a big impact on your loan term. If you have a 30,000 dollar loan for 10 years, it can cut roughly 4 years off of your loan term.
2) Start An Emergency Savings
Most Americans fail to save enough money. When an emergency happens (like the recent pandemic) they often find themselves in big trouble. You need to have at least 6 months worth of expenses in an emergency savings.
Here is what you need to do. First, open an online savings account. You want an account that is separate from your normal checking so that it can not be easily raided. Online accounts will give you access to your money but it usually takes 24 hours to get it. This is a nice cool down period. Online savings also pay at least 10 times more than local banks do.
Once you have your account set up, schedule automatic transfers from your checking to your savings. This should be done the morning you get paid so that you do not miss the money. Ideally, you should be saving 10 percent of your take home pay. If that sounds like a lot, work up to it slowly.
3) Create A Budget
With all of these payments to debt and savings, you are obviously going to need to make a budget. You need to account for every dollar that you spend so that you do not over spend on categories like food and entertainment.
Simply write out all of your monthly bills and include allotments for daily expenses like entertainment and food. Make sure that you include the extra payments that you will be making on your student loans and your contribution to your emergency savings.
Once you have your list of expenses, you can balance it against your take home pay.
4) Begin Investing
Once you have your emergency savings built, it is time to start saving for retirement. In your 20’s, it might seem unnecessary to start planning for retirement, but this is actually the most important time to do so.
The money that you invest right now will have 30 to 40 years to earn compound interest. If you simply put 10,000 dollars into an investment account now and this account earned a 5 percent return, you would have over 44,000 dollars in 30 years. That is the power of compound interest.
Of course, you will keep adding to the investment account so let’s contribute $500 a month for 30 years at a 5 percent return. That would give you over 400,000 dollars in 30 years and close to 800,000 dollars in 40 years.
5) Establish Your Credit
Your credit will have an impact on nearly every part of your life. It decides how much a loan will cost you, whether you can buy a home, your insurance rates and it could even help decide if you get a job you want.
Now is the time to establish it and maintain it. To do so, you need to know how credit works. These are the main factors that impact your score:
- On Time Payments
This makes up 35 percent of your score, so get those bills paid on time.
- Credit Utilization
You want to keep your credit card balances under 30% to be considered good and 10% to be considered great. This makes up 30 percent of your credit score.
- Length Of Credit
This is how long your accounts have been open. It represents 15 percent of your credit score, but there is nothing you can do to improve it. You will just have to wait.
- New Credit
This makes up another 10 percent of your score. You want to only open up new accounts if needed. Many new accounts could indicate credit problems.
- Credit Diversity
The final 10 percent comes from credit diversity or credit mix. You want to show that you can handle multiple forms of credit like revolving credit and installment loans.