I don’t usually write “top five reasons” type articles. You’ve seen them. Top five hacks for this, top five ways to do that. To me it sounds like so much click-bait. But people often ask what are the top things that I’ve learned about personal finance – what would I tell my kids as they move into adulthood? I’m still not going to title it as a top five list, but here are the most important habits I think people need to develop to be successful financially.
Live below your means
Might as well start with a biggie. No matter if you’re making $25,000 or $250,000, living on less than you bring home is one of the biggest keys to success. Why? The obvious answer is it frees up money for emergency savings, investing, and long-term goals like buying a house or starting a business. But more importantly, if you do this early in your life it becomes second nature; you don’t have to go through the pain of changing your habits later on. And it’s much more relaxing. You might not believe that – but when you’re napping on your yard sale couch you’ll sleep much better than if you’re in debt for the $3,000 couch your friend showed off on social media.
Start now
No one told me this when I graduated from college and started working. In fact, I was midway through my 20s before a co-worker gave me some advice I’ll never forget. He told me basically that I’d be an idiot if I didn’t save some money in the company stock plan. We could purchase shares at a 15% discount and could put any amount of money into the plan. No one had ever told me about stocks or investing. These were the days before every company had a 401k plan (and the educational material that goes with it). That piece of advice started me on the road to becoming financially educated. And yes, I still own the stock.
Starting now means you can take advantage of compound interest, often investing less for a higher return over time. Even if you can’t invest as much as you want, whatever you can invest now will help you achieve your goal.
Invest in yourself
Often these articles look only at ways to save money. And I too am a big believer in budgeting. But don’t forget the income side of the equation. If you are just starting out, spend some time developing mentoring relationships at work. Not only will they help you understand organizational dynamics, they will help you move up in the company. Be a sponge – listen to what people say, both good and bad. If you are lacking any specific skills, take some classes to improve them. When I returned to grad school, one of my first courses was public speaking. I was terrified of it and knew I needed to overcome my fears to be effective in the business world. Did you note the part about going back to school? My return was due to a change in career direction, but getting an MBA or other advanced degree may help you in the long run.
Automate
When I started working, it wasn’t as easy to have your paycheck deposited into three accounts or to pay bills online. Many of my current habits reflect that, especially my hand-written budget. However, people today can be relatively hands-off with their finances. After setting up a plan that works, it’s easy to let it run on its own. For example, if you want to save 10% of your income per paycheck, have that transferred before it hits your checking account. Consider paying recurring bills (car payment, mortgage, and utilities) automatically. Automating your finances and paying yourself first will help eliminate the problem of arriving at the end of the month without any money to invest.
Fully understand credit
When I received a credit card in college, I didn’t understand exactly how it worked. Basically I knew that I had to pay off the card each month or I’d pay interest. But cash advances, late payments, how minimum payments can turn into huge burdens – I had no idea. Fortunately I was so scared by having a loan that I only had a late fee once.
Whether a mortgage, credit card, or personal loan, take the time to read the paperwork. Yes, it’s boring. Yes, it’s legalese. But you’ll have no one to blame but yourself if you make a mistake. For instance, did you know that buying lottery tickets with your credit card is treated as a cash advance at some companies? If you didn’t and you buy them online, you’ll pay immediate interest for the privilege.
But credit goes beyond just the products. Learn about credit scoring, how the credit bureaus work, and what you can do to receive the best rates. Much of it’s common sense, but they throw some curve balls at you. For instance: if you have an old credit card that’s just collecting dust, should you close it? Answer: maybe. If you’ve had problems with credit in the past, then yes, it’s probably a good idea to close the account. However, if you can handle not maxing out a card with thousands available for spending, keeping it open can help your credit score in two ways – it lowers your utilization while also extending the age of your credit.
Keep learning
I was at the beach in 2019 (just after the world had reopened from COVID) reading a personal finance book. A little history – I’ve passed various stock broker exams, written about financial planning for decades, and always managed my family’s finances. Yet while I was reading that book I realized there was a lot I still didn’t know or hadn’t taken advantage of. I mentioned before that I started working when automation wasn’t so easy. I just never really looked into it – what I was doing worked, so why change? Similarly, what I learned in my 20s as a single adult wasn’t necessarily what I needed to be doing years later with a family. And let’s not even talk about retirement – taking decades of savings and turning them into a steady paycheck, while managing Social Security and Medicare? The education has just begun.
As you’re learning, don’t be afraid to ignore with what people present as fact. I’ve mentioned before that the 50/30/20 budget isn’t for me. That doesn’t mean it’s wrong, it’s just not right for me. Have the confidence to believe in what works for you.
Photo by John Arano