7 Things You "Should" Know by Now

This post is dedicated to both of my twenty-something, professional, college grad, savvy, caring, super smart younger sisters. 

The people I care about most -- my family and friends -- aren't as obsessed with personal finance as I am (I know, big shocker). They come to me with:

"You gotta help me with this stuff"

"I don't know nearly as much as I should.

So here it is, the bare minimum of what you "should" know by now:

The Past (Debt)

  • Pay your credit card balance off each month because:
    • If you carry a balance it will increase the amount of money you owe over time significantly.
    • Also, if you carry a balance month over month for several months, then your credit score (which is your financial G.P.A.) will suffer.
    • I know it's hard to stop using it. But figure out what you're using it on most. Do you actually need that? What can you do instead of going shopping for it? If you don't pay off your credit cards each month, then you are in emergency mode, and it should be your #1 financial goal. 
#1 Recommended Step to $ Peace-of-Mind:
Make paying off your credit card each month your #1 financial goal. 
  • Student loans can wait: 
    • If you have a very good reason for paying them off early then do it. Otherwise let and let live. By paying them off faster you'll save money in interest over time, BUT you may also lose money. Example of how you could lose money: Say your student loans have an interest rate of 4%, but your retirement account performs at 8%, then you would be losing money if you put your extra cash your student loans instead of retirement. I know, you're looking at me like WTF? Keep reading...
  • Interest rates are the price you pay for borrowing money. Always. Look. At. Interest. Rate. ALWAYS. Say your friend needs $500, and they ask you for it but you don't really want to lend it to them because it's your last $500, so you say "No." But your friend counters with, "If you lend me $500 now, I'll give you back $600 in a month." Well that sounds sweet, right? So, you decide you'll lend it. You lent $500, and got back $600, so you made $100. The $100 dollar difference is interest. It's the money your friend paid you so they could barrow from you.  
    • Interest rate is also what you pay your credit card company, your student loan lender, and every loan ever. 
    • Once you understand interest rates, then you can make educated financial decisions pretty much forever. 
#2 Recommended Step to $ Peace-of-Mind:
Write down all of your debt in one place (spreadsheets a glorious things people!), the interest rate for each, automate the minimum payment for each, and then decide if there are any you want to pay off more quickly. Tackle either the smallest loan or the highest interest rate loan first. Only tackle one at a time. These calculators will help you decide which/if you want to pay them more quickly, and here I share my own interest rate epiphany. 

The Present (Budgeting, Credit Score)

  • Budget Future-Focused Flow I hate the word budget so much. Instead, focus on the future. What is your dream scenario? What if you had all the money that ever lived? :) What would you do with your time? Go on a road trip cross country, fly all over the world, volunteer with orphan elephants in Kenya? Rather than focus on the past pennies you've lost (aka budgeting) focus on where you want money (which is just a tool to get you something) to go. Decide on your life goals, and automate your money to support getting you there. Automate what goes into savings, your checking account, and retirement. Set and forget it. Auto-pay everything and make how you want to spend your time the question that drives your financial decisions, rather than how you want to spend your money. 
#3 Recommended Step to $ Peace-of-Mind:
Automate 'er thing! Read this to see what I do with my money. Even if you don't have direct deposit, set aside time (like actually put it on a calendar) for 15mins twice a month to make the transfers. For me, on the 15th and last day of the month, I take 15mins to look at my checklist for both what's automated and what's not. Yes, I have a checklist so I don't have to just remember it all (it's in the same place as the calendar), and I check: "Okay X amount went to retirement as it was suppose to. Check. It's the last day of the month, so I'll pay the rent. Check. etc.).
  • Get your financial G.P.A  (also known as your CREDIT SCORE). This is what banks look at to decide if (a) they should lend money to you, and they judge you on whether you'll pay them back based on this, and (b) what Interest rate -- our friend from above -- they'll charge you. In other words, if you want to barrow $5,000 to buy a car, then whoever is deciding whether to lend you the money will look at your credit score to decide if they will lend it to you, and how much on top of the $5,000 you'll have to pay them back. If you have a high credit score (like an "A") then maybe you'll pay back $5,200, but if you have a low credit score (like a "D") then you'll pay back $6,200. It's up to them and your credit score. Credit score are numeric and loosely letter grades. But the point is, know yours.
  • Keep (or make!) your Credit Score solid by paying off your credit card each month, making on time payments, keeping credit cards (or other debt) open for a long period of time (years), keeping your debt-to-income ratio low. Debt to income ratio example: Say my credit card limit is $10,000 and I'm in credit card debt for $9,000, then my debt-to-income ratio is very high because I'm using 90% of my limit. But if my credit card limit is $10,000, and I have credit debt of $1,000, then my debt-to-income ratio is very low, which is a good thing because it shows I'm responsible and not over spending. 

#4 Recommended Step to $ Peace-of-Mind:
Get your financial G.P.A. credit score here and check it every 6 months. (Again, make spirochete for this!)

The Future (Savings, Retirement)

  • Saving, Retirement, and Investing are 3 different things. 
  • Save FIRST. If you leave it for last, or for whatever's "left over" you know you're not going to do it. Even if just $20 bucks a month. Automate it. One of the most gratifying feelings is seeing how many months I can live off of my savings (again, automatically calculated on my future-focused flow preadsheet). Decide how many months feels right to you (again the personal part of personal finance) and make that target your financial goal. 
#5 Recommended Step to $ Peace-of-Mind:
Automate your savings. Here is how I automate mine. And there's a super easy way to automate as well -- an app called Digit, which pulls spare change from your account automatically. If $20 a month sounds like too much, then Digit is a great place to start. 
  • Retirement. It's the inverse of borrowing money. Rather than paying money to barrow money, someone is paying you to barrow your money and you get paid interest. How much interest? Well, that depends how the stock market performs. Traditionally a retirement fund is an account you put money into (aka contribute to), and that money gets traded on the stock market, which goes up and down. Some days you lose money, some days you make money. But, on average, and in the U.S., and over several years (like 30+), you make money... enough money to where you won't have to work anymore (aka don't have to trade time for money anymore). That's when you're "retired."
    • There are a zillion types of retirement accounts. But they basically boil down to this:
      • Before taxes: Your $ goes into your retirement account > You get your paycheck
      • After taxes: You get your paycheck > Your $ goes into your retirement account
  • Give Yourself a Raise! The first time many people get a retirement account is with their first "real job." And, often times the employer also puts money into that retirement account. This is called "matching" -- for every $1 you put in, your employer puts in $1. Now it isn't always $1 for $1. Maybe your employer puts in 50 cents for every $1 you put in. Regardless of what it is, you should be taking advantage of it. Automate it, and match. Note: the IRS (Uncle Sam) puts a limit on how much you can put into retirement each year (wongt wongt wongt). Nonetheless, you should make it a financial goal to get as much out of this perk as possible because it means you won't have to work sooner (a.k.a. can retire sooner).
#6 Recommended Step to $ Peace-of-Mind:
Find out what type of retirement account your employer provides, sign up for it, automate it, and maximize your employer match as much as possible. Read this
  • Investing. Until you pay off your credit cards each month, have an emergency fund with a few months of savings (whatever amount of months let you sleep at night), and are maxing out your retirement contribution, then I'm not talking to you about investing. Period. Build the foundation of the house before you put on the roof. 

Big Bonus
  • Insurance. Like crazy basic explanation: If there's an emergency (injury, death, earthquake, etc.) you (or someone affected by he emergency) get paid a lot to help you get back on your feet. There are many types of insurance, here are a few:
    • Health: If you get really sick or into an accident, insurance helps pay for you to get better.
    • Car: If you hit someone's car, or they hit you, then insurance helps pay for the damage.
    • Life: If you (or someone you love) dies, then insurance pays you to help get back on your feet. Now this only typically applies if the person who died was a breadwinner. Example: You work and you job supports you and your spouse. If you have life insurance, and unexpectedly pass, then your spouse gets paid thousands of dollars because they needed your income form your job to subsist. I know. I'm sorry it's a morbid one. But insurance is for this. 
It's relatively common for employers to provide health and life insurance.

#7 Recommended Step to $ Peace-of-Mind:
Get health insurance from your employer or here. If you have a car, get car insurance. If you rent consider renters insurance. If you provide for anyone other than yourself (send your mom some money each month even) then consider life insurance. 

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