The author of this article was a financial planner for thirty years and has been nice enough to lend his expertise. The below is his insight into the two most important finance rules for your 20’s. Throughout his years of experience, he often saw these two cardinal rules being broken by young people who failed to understand the effects of their spending and saving habits.
1. PAY OFF YOUR CREDIT CARD. Then and don’t use it if you can’t pay the bill at the end of the month. The credit card is not your friend. If you want to make your credit card company happy, run up a big balance and pay the minimum payment every month. The credit card company makes a fortune and you get buried. It is so easy to bury yourself in credit card debt because it allows you to borrow money without any hassle but then you get charged a rate of interest as high as 20% or more. Just whip out the card and buy the $1,000 TV, make the minimum payments and it will probably end up costing at least twice the price. If the retail store tried to charge you $2,000 for a $1,000 TV you wouldn’t buy it. If you can’t afford it now, don’t buy it. Do not fall into the trap of “It is just another $30 per month”. The next thing you know you have $20,000 on the card and you are paying $400 per month just in interest.
2. CONTRIBUTE TO A RETIREMENT PLAN. If your company offers a 401K, make sure you contribute at least enough to get any matching contribution that the company offers. If there is no match you should contribute anyway. Yes you are young and you have stuff you want to spend the money on now but consider the math. Money invested at 25 has 40 years to compound and grow if you plan on retiring at 65. If you achieve a 7.2% return, your investment will double in 10 years. So every $1,000 invested at age 25 would be worth $16,000 at 65. The same $1,000 invested at 45 would be worth $4,000 at 65. Don’t wait unless you never want to retire. If your company does not have a retirement plan then open an IRA or Roth IRA and contribute as much as you can. Talk to an investment professional to find out which works best for you and to get advice on investments for the plan. If you take a do it yourself approach, make sure you diversify your investments in the plan and pay attention to the costs.
It is sort of a “Duh” that if you don’t spend money you don’t have and save money for the future that you will be in much better financial shape. Sure you may have to wait a little while to get that 60-inch flat panel TV with 1000 watts of surround sound, but there really isn’t much on anyway.
The creation of bad debt and a lack of investing can be mistakes in your 20’s that follow you for the rest of your life and may prevent you from retiring. It may be hard to stay home while the rest of your friends go on a trip you really can’t afford, or even just resisting that pair of shoes you’ve had your eyes on for months. Remember your end goals and smile when you think about how your plan NOW is getting you to all the things you want for your future. Like this week’s author pointed out – is that fancy new TV that costs a $1,000 really worth the $2,000 you will end up paying on your card, or would you rather not freak out when you turn 60 and realize you are 20 years away from affording retirement?
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