When I graduated from college, I didn’t know a thing about money. It’s amazing looking back. There I was with a college degree, and I knew nothing about basic personal finance. I knew nothing about budgeting, investing, retirement planning, or most importantly, the danger of getting yourself in debt. And my ignorance about money cost me.
Below are five principles I wish I had known and followed early on. They are simple, but valuable. If you apply them, you’ll be well on your way to a prosperous future.
1. STAY OUT OF DEBT
As you enter the workforce and start your career, many financial institutions are ready to offer you credit. From auto loans to credit cards, you will be courted. You’ll be amazed how quick and easy it is to obtain credit.
Utilizing credit is not a bad thing. But acquiring so much debt that you can’t pay it off is. And it’s far too easy to fall into that hole. Money can be tight when you’re starting your career. You may feel the need to use credit cards to purchase things like furniture and other household items. You may use a credit card for an occasional dinner out. At first, it may not seem like a big deal because the monthly payments start out low. But if you don’t pay your credit card in full each month, the balance grows, interest is charged, and the monthly payments get larger. Then, more and more of your income goes toward just keeping up with the monthly payments. The next thing you know, you’re bringing out the credit card for everyday necessities, because after you pay your bills there’s nothing left. So the debt continues to grow.
2. PAY OFF YOUR DEBT AS FAST AS YOU CAN
Many of you have student loans. You may already have a credit card balance. If you have any debt, whatever it may be, make it a priority to pay it off. Pay more than the minimum due. Get a second job. You might even consider moving in with your parents for a short period. The sooner you get out of debt, the better. The monthly payments, interest, and fees are money taken away from building your financial future. Being in debt is like having a black cloud hovering over you, affecting your spirit and emotional wellbeing.
3. BUILD AN EMERGENCY FUND
You should set aside enough money to cover three to six months of your living expenses. Keep it in a savings account and do not invest it. Don’t worry about the return. That is not the purpose of this money. This money is to be used only for an emergency. It will be there if you lose your job, have unexpected auto repairs, medical bills, or any other urgent expense. It is critical to have money available for an emergency so you don’t have to borrow to get through.
As you advance through life and your income and expenses increase, you should add to your emergency fund accordingly. Always keep this in place. It will be even more important as you take on more responsibilities.
4. LIVE BELOW YOUR MEANS
This is essential to your financial wellbeing and prosperity. It’s also common sense. If you don’t live by this principle, you’ll never accumulate wealth. Even worse, you can fall into debt more easily. The key to success here is to create and live by a budget. It’s simple to create but not always so easy to follow.
Start by listing all sources of income. For most, this is just earnings from your job but be sure to include everything. Then add up all your expenses. Categorize them between fixed and variable. Fixed expenses are what you expect to pay each month that does not change. Rent or mortgage, insurance premiums, cell phone bills, and loan payments are examples of fixed expenses. Variable expenses are what you can control. Dining out, travel and entertainment, food, and clothing are variable expenses.
Subtract your expenses from your income. Hopefully what you come up with is a positive number. If not, you need to make changes right away or you’re heading towards serious financial problems. To turn things around, you need to either increase your income, reduce your expenses, or a combination of the two. The best place to start is cutting back on your variable expenses.
If after you subtract your expenses from your income, you have money left over, you are in good position. This is your discretionary income. This is money available for spending, saving, and investing.
5. SAVE AND INVEST WISLEY
Time is your most valuable asset. Particularly when it comes to investing. The sooner you start a savings and investing plan, the sooner your money can grow. Ask any older adult and I’m sure they’ll tell you they wish they had started saving and investing much earlier in their life.
Start now by saving a percentage of every paycheck. Do it consistently over time. Think of it like it’s a bill, except you’re paying yourself. If your employer offers a 401(k) take advantage of it. It is a great way to save money for retirement. It will grow tax deferred and your employer may make a matching contribution.
When investing your money, be prudent and follow sound investing principles. For example, make sure you have a suitable asset allocation. That is the right mix of stocks, bonds, and cash. And make sure your investments are diversified. Simply stated, don’t put all your eggs in one basket.
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