7 Financial Tips that Can Set You Up For Life
I am going to get straight to the point here. Here are 7 financial tips that I wish I knew sooner!
1: Budget: Do you know where your money is going? Are you someone that looks in your bank account and wonders where your money went? I challenge you to analyze your bank & card statements for the last 3 months and find out where each dollar is going. I am telling you, this exercise can change your life. This exercise paired with the zero-base budget changed my life about a decade ago!
What is a zero-base budget? It is a budget that manages how EVERY dollar is spent each period. It is typically done per pay period but can be done per month as well. Your categories of spending can be as strict, or as lenient as you want them to be. You can still budget your money to you give yourself the freedom to enjoy things, or you can restrict yourself to reach specific goals you have in mind – it is totally up to you!
When you manage your money & understand where each dollar is going, it helps you place value on the things you are spending on. For example, one month, you may realize you spent hundreds going out to eat but food is not something you value over another category, like a family activity. Being able to put a number to the action, can help change your spending habits so you are spending on things you truly love and want. It takes away mindless spending.
I sort of *accidently* did a zero-based budget right out of college because I was so tight on money and wasn’t sure how I could manage – and it was game changer! At the time I was forced to create this budget, I was making $13/hour at my full-time job and had a few part time jobs like babysitting and bartending. I had $1,000 student loan payments per month + additional bills like rent, car payments, cat supplies, utilities etc. Because of this budget strategy, I was still able to save a good chunk of money every month – which later led to real estate investing and other investments. I still use this strategy because no matter where you are in your financial journey, it is important to understand how you are spending and if it aligns with your values and goals.
I will do a blog on this later to better explain this method and other budgeting methods like “the envelope budget” and the “rule of thumb budget”.
2: Create your emergency fund: It’s boring, it’s annoying, but it needs to be done. Your emergency fund should be at least 3-6 months of expenses before starting other investing; however, I *personally* made some exceptions.
One of the exceptions that I would make if I did not have my full emergency fund set up yet is matching my employer in my 401k if they offer it because #freemoney. What do I mean by this? A 401k is a retirement account. There are employers that use an employee match as one of the benefits to working for them. So, if your employer matches 6%, I would be contributing 6% of my pre-tax dollars to my 401k.
If your salary is $60,000 and your employer matches your 401k to a max of 6%, I would contribute 6% of my paycheck as well. This means that I would be contributing $3,600/year to my 401k a year AND my employer would contribute $3,600 as well. That is $3,600 of free money.
Salary: $60,000 Employer match: 6% * 60,000 = $3,600
If I couldn’t hit the 6% match because it didn’t fit in my budget, I would try to get as close to the match as possible. If I could contribute 3% of the 6% match, I would do that – heck if I could only afford to do 1%, I would do that. #Freemoney is #freemoney, honey.
One of the other exceptions I would make is if I planned to house-hack. If I knew house-hacking would eradicate my biggest expense every month (rent), I would do it even if I didn't have a full emergency fund. If I no longer had to pay to live in a house, I would be able to build my emergency fund faster so that I could move on to other investing faster. I will explain more about house-hacking itself in another category.
3: Make high interest debt pay-off a priority: I went into extreme detail in this blog, but the general idea is that it’s rare to find an investment that will have returns higher than the interest rate of your high interest debt – wow that was mouthful. Most investments average a return of about 7% a year, while high interest debts like credit cards have interest rates that are 17%+. Therefore, although investing is the right thought process, you will rarely get a 17%+ return to make up the loss of money from that high interest debt. Moral of the story – pay off high-interest debt asap.
4: Build your credit: I don’t care what Dave Ramsey says – having good credit is important. Why? Because it tells lenders how you are with borrowing money. It determines the interest rate at which they will lend you their money and how much. I am a big believer in leveraging money, so getting a low interest rate is now a priority for me in everything that I do.
I did not know what credit was until I got out of college. I was trying to buy my first car and I had n0 credit because I had never borrowed money before (besides an astronomical amount in student loans which is mind-boggling that it’s legal and not considered predatory, but I digress). Because my credit was virtually non-existent, it gave me awful loan options with extraordinarily high interest rates – something I did not understand or care about.
All that I knew at the time is that I needed a car and I wanted my payments under $300 a month. So, I did it. I bought the car and if I am remembering correctly the interest rate was 15%. Yikes. DON’T LET THIS BE YOU. Your interest rate is just as important as your monthly payment.
Let me explain.
Let’s say the car cost $15,000 and I put a $1,000 down payment. The loan was for 72 months (or 6 years). At 15% interest, in the 6 years of a $14,000 loan ($15,000-$1000 down payment), I will have paid, $7,314.17 in interest alone. In other words, instead of paying $15,000 for the depreciating asset aka my car, I would have paid $21,314.17. Oh, my heart aches for young me. Used cars rarely even last 6 years.
After years of building credit history and a good credit, once I got my next car, my interest rate was 1.7%. If we take that exact same scenario, with an interest rate of 1.7% instead of 15%, I would only pay $736.04 in interest in that 6 years and my monthly payment would be $204.67/mo. In total, the car would’ve cost me $14,736.04. That is a huge difference from the $21k+ that I would be paying in the other scenario.
Your credit score matters. Your interest rates matter. Your monthly payment matters. It all matters.
Play around with this tool if you want to run your own numbers: https://www.investopedia.com/car-loan-calculator-5084761 .
I plan to do a blog post going into greater depths about how to improve your credit score so stay tuned! A good first step would be downloading the free app called Credit Karma.
5: Use Credit Cards to your Advantage: Credit cards can be the killer to most people’s financial journey, or they can be one your biggest assets. How can you use credit cards to your advantage? The biggest thing to understand about credit cards is it is not free money. It is not something you should use to finance things you can’t afford.
Credit cards should be used for things that you already pay for and plan to pay for in your everyday life. For example, groceries, phone bill, subscriptions, gas, daycare – anything that you are already spending money on because you can afford it. Once you use the credit card for those things, pay it back in that same billing cycle.
Why would you use a credit card for things you already afford especially if you’re paying it back in the same billing cycle? Because, you can earn money, even free vacations if you’re strategic with the credit cards you get.
Before getting a credit card, you should be looking at a few things.
1: APR/interest rate 2: Bonuses: You will see most cards offer a bonus if you spend a certain amount in the first few months. Example: If you spend $3,000 in the first 3 months, you will get $500… or your will get 100,000 points (which can transfer to an awesome free vacation). NOTE: DO NOT SPEND THE $3,000 IF YOU DO NOT HAVE IT! 3: Rewards: Cards offer cash back rewards, or points for things you spend money on. Example: 2% cash back for spending on groceries, 3% on travel etc. Which card fits your spending habits?
I used my cards very strategically. With my Capital One Quicksilver (referral link), I typically get between $50-100 cash back every month & pay $0 interest every month because I pay it in full. One of the easiest ways to make money every month. One of my other favorite cards is Chase Sapphire Preferred (referral link). Right now, I have 105,000 points and am planning a 3 night trip to Mexico *FO FREE*.
To qualify for good credit cards, you need a good credit score *cough see importance of credit score cough*, If you are working on building your credit, start with a credit card with no annual fees & work towards building your credit.
Truth be told, I don’t use my debit card for anything. If you’re disciplined, you can really reap great rewards with using a credit card.
Here is one of our YouTube episode regarding this topic: https://www.youtube.com/watch?v=CqH1wtdJwPs&t=23s
6: Open a Roth IRA: Lawwwd, if I understood what a Roth IRA was when I first started earning money, I would’ve been contributing since I was 11 years old. Why? Because time in the market is better than timing the market.
What is a Roth IRA? A Roth IRA is an individual retirement account in which you contribute after-tax dollars. Your contributions and earning grow tax-free and you can withdraw them penalty-free after the age of 59 ½ and once the account has been open for 5 years. There is no minimum contribution but you cannot contribute more than $6,000 a year (or $7,000 if over 50 years old). There are also income limits; $140,000 for singles and $208,000 for joint at the time of me writing this article (there are strategies out there for high-income earners to still benefit from this account).
Why do I like this so much?
The main reason is compound interest.....well, free compound interest.
Let me give you a few examples. Realistically, the amount you can contribute will change over time, but for simplicity, I will keep it at one number.
If I started contributed $20/month to a Roth IRA when I started earning money at 11 years old and continued to contribute $20 for the next 49 years, with a 7% return, I would have contributed $11,760 while the growth would be $90,959.76. That is a lot of tax-free money! I used $20 because that is realistic for an 11 year old, but at 500/mo, it would be at over $2 million tax-free dollars.
Now, let’s say I contributed $500/month (to max the $6,000/year) starting at the age of 20 for the next 40 years. Your contribution over the 40 years would be $240,000, but with a 7% growth, your tax-free money would be $1,197,810.67. Hello, millionaire.
Here is a calculator that you can play around with for your situation: https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
7: Househack: My love for house-hacking has no end. House-hacking was a game changer for me. Prior to my first house-hack, rent & utilities took up most of my budget. According to the Consumer Expenditures Survey, in 2020, housing costs represented about 35% of the average person’s budget. Given the current real estate climate, I can only imagine that percentage has increased from 35%. Imagine if you could completely eradicate that expense? It is a life-changing!!
I have written extensively on this topic and you can find the posts here and here.
Here are my top reasons for suggesting house-hacking:
1: If done properly, it eradicates your most expensive bill - rent
2: Tenants are paying down your mortgage/building your equity
3: Tax benefits
4: A good introduction to real estate investing
5: Natural appreciation
6: You can get better loans because it will be your primary residence
This was one of the best decisions I ever made. I will recommend it to anyone that will listen.
And there you have it, 7 things you can do that WILL get you on your way to financial freedom.
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