Hey everybody, so sorry for the extended absence- I’ve recently switched clients at work and between that and looking for an apartment in Syracuse, I have had a ton on my plate. Man, being an adult is much less fun than it looked when we were kids, right?
Which brings me to the point of this latest post- money. It makes the world go round, everyone’s gotta have it, and it doesn’t grow on trees (sadly). And even though you can’t take it with you, it’s still important to build a foundational knowledge about how smarter financial choices in your 20s directly affects your future.
I don’t know about anyone else, but personal finance was not something that was ever taught in my middle school or high school. As a result, I feel like many people are confused as to what exactly goes into it, and how it differs from simply “save, save save”. It’s different than budgeting specifically, because while penny-pinching is a supporting actor in the journey to better fiscal habits, it’s not the only thing that impacts your financial health.
Check out some of the most important cornerstones:
Open up the right accounts.
Don’t laugh- but I didn’t even have a savings account until a year ago. After about four years of living paycheck to paycheck, I finally felt comfortable putting a chunk of money into a savings account with my local bank, and have been steadily funneling money in ever since.
I will say though that you definitely don’t need to have hundreds of dollars to open a savings account (though it’s important to do some shopping around, since some banks charge a monthly fee if you have less than a set amount in the account). It gets said a lot, but making smaller, more regular deposits is better than struggling to make hefty deposits. I try to put about $100 in with every paycheck, and if I have a surplus left over after grocery shopping, I stick that right on in there as well. Check around for savings accounts with decent interest rates- and if you’re into it, there are even accounts that help by rounding up everyday purchases to the nearest dollar, and depositing the excess for you.
Lastly, I think it’s incredibly important to start saving for retirement in your early 20s, since the sooner you start saving, the more time your money has to grow- but you need to keep adding to your 401k or IRA account steadily as you work. I’m lucky enough to work for a company that offers to match my annual contributions ( I will be eligible for this in January), which means that my savings potential is doubled!
Diversify your credit landscape….
So, there are 3 different types of credit: revolving credit (a credit card), installment credit (a student loan, mortgage or car loan), and open credit (charge card). While most people won’t ever have a charge card, the majority of us have at least a credit card or student loan sitting on our credit report.
I’m fortunate enough to have hopped on the student credit card bandwagon at age 18, and have so far been reasonably conservative with it. At the same time, all of my federal loans from my undergrad are in my name- meaning that I’ve maintained two different types of credit responsibly for over four years. When I went to go get my car last year, I was able to get locked into a favorable interest rate due to my positive credit history. While I am actively looking to pay off the installment loan on my car well before the end of the financing term, I don’t think it’s necessary (I just personally don’t like having a chunk of my monthly capital tied up in a depreciating asset), as long as payments are being made and you’re keeping an eye on pesky revolving credit card balances.
…But don’t overdo it!
Every time you go into a store, they ask you if you want to open up one of their credit cards. As tempting as they are, most of them are a terrible idea, since they come with a ton of fine print and hefty fees. You can very quickly get yourself into a sticky situation with credit cards and loans if you don’t keep a proportionate debt to income ratio, which speaks volumes about your ability to make on -time payments. Think about it- if you’re carrying around a debt collective equivalent to double or triple your annual salary, you’ve handed yourself the shovel to dig your own financial grave.
Also, keeping the average age of your credit lines relatively old has an impact on your credit score as well, since it shows you have an established history of maintaining a diverse credit portfolio, as outlined above. So, opening several new lines within a short time period, or getting “hard inquiries” (which sit on your report for up to 2-3 years) are things your score will get dinged for. To put it into perspective, I had no idea there was a difference between soft and hard inquiries until I applied for financing on a laptop at 18, and was denied (this was before my credit card). That hard inquiry only fell off my report last year, and I am nearly 23.
Keep accurate records.
This is especially important if you make money from your blog or run your own business- but come tax time, you better be prepared to show up with the correct paperwork, or risk paying through the nose.
Keep your pay stubs, income statements, pertinent receipts, and itemized lists, if you’re planning on writing off anything. Keep in mind that the IRS, though it might not seem like it, is really particular about deductions, so it’s key to go to an actual accountant to prepare your taxes rather than risk an audit from doing it yourself incorrectly.
Secure the bag.
(Sorry, had to). If you want to make sure you don’t lose all your material belongings due to theft or natural disaster, you’re going to want to invest in renter’s or homeowner’s insurance. The costs really are minimal when you take into account that your personal belongings can be itemized and replaced, or even refunded if need be.
Additionally, even though you probably have limited capital at such a young age, it’s always good to look into other investment options like stocks, bonds, mutual funds, and high interest savings accounts (as mentioned above). You can even book a fee-based financial planner to hold your hand along the way- because they get paid to make decisions that have your goals and interests in mind, as opposed to someone who gets paid on commission.
At age 22, I have an extremely good credit score and healthy financial habits, which are helping me figure out my next steps in life. I don’t say that to brag or sound entitled, because no one held my hand or paid my bills for me at all. I just want to stress the importance of financial literacy as a millennial. You owe it to yourself to take control of your finances now, in order to enjoy life later on!
Oh, and for the love of god: LEARN HOW TO WRITE A CHECK (lol).