Oh to be able to turn back time! I’m sure we’ve all thought about it from time to time: what would I do differently if I could turn back time and go back to my early 20’s? A lot of times these thoughts relate to decisions revolving around Money. If only we knew then what we know now!
I don’t know about you, but fresh out of high school I wasn’t ready (or willing) to listen to all the advice that was coming my way from older generations. I was ready to take on the world, and taking it on my way was the only way! Looking back, I cringe at those thoughts!
We all make mistakes early in life when we’re trying to make that transition into adulthood. Sometimes we knew in the back of our minds the decisions we were making probably weren’t the best, but our priorities were not in the right order. Other times, we truly thought we were doing what was best at the time.
So, this is a letter that I am writing to my 18-year-old self, for what I wish I had known at the time about money and finances:
To my younger self,
Throughout the years I have learned a lot about the benefits of making solid Financial decisions, and more importantly, the consequences of making poor choices with money. Please take each point of advice to heart and set yourself up for success early in your adulthood.
1. College is more importantly about your education and future, not the experience.
You’ve been dreaming of going to a big college, living on campus and having that full (and fun) college experience. The cost of tuition, consequences of taking out large student loans, and the return on investment are not being prioritized like they should be.
Paying for an exciting experience is not a wise investment. Go to a community college to take your core education courses and transfer those credits to a 4-year University. Take more time applying for every single grant and scholarship available that you qualify for. Do not take out more student loans than necessary. Live at home and commute to school. And make sure you choose a major wisely and consider earning potential versus the amount of debt incurred to earn that degree.
2. Fully understand credit cards and debt, and avoid starting your adulthood in debt.
You often hear that credit cards can get you into trouble quickly and to stay away! Yet you still think that you can handle a credit card, or that it’s worth it to only pay $20 a month for that amazing new laptop that you “must” have for college.
Know that even though you think you can handle the credit card, the temptation to use it is too much for you to overcome. Though you are also trying to justify it by saying it will be good to have it on hand for emergencies, it will quickly spiral out of control and become too easy to rely on.
Stay away from credit cards and other non-student loan debt!
3. Read the fine print
If you ignore my above advice or find yourself in a situation where you must make a tough financial decision, be sure to read the fine print! There are financial institutions and other businesses that rely heavily on taking advantage of the young and inexperienced, or those who are desperate and not making good decisions.
If you do not take the time to read the fine print and full details of a contract, you could find yourself with a credit card with a limit of $500 and a balance of $200 from fees before it even makes it into your wallet. Or, you could end up with a private student loan that has a 30% interest rate. While you’re at it, educate yourself about interest rates and minimum payments! Learn how to do the math to calculate how much interest you will pay on a $1,000 balance at a 19.99% interest rate while paying only the minimum payment.
4. Set up a budget
As a 20-year-old, the thought of creating a budget, tracking your spending and taking time each week to update your budget may sound lame, but it’s so important to start your financial journey on the right foot. Creating budgeting habits early will have a large impact in your success and teach you how to properly handle your money.
A budget allows you to ensure you are living within your means and being realistic about your money situation. Without a budget, you risk overspending and digging yourself into a financial hole that will be difficult to climb out of.
Saving money for your future and larger expenses, such as a car, is an important part of your budget.
5. Don’t try to keep up with the Joneses
Even after high school, you will be inclined to feel peer pressure. But not the same type of peer pressure you experienced as a teenager. The peer pressure you experience as an adult usually comes in the form of those around you making you feel that having nice, expensive things is extremely important, and not having those things make you feel unsuccessful.
Material items do not define your success and they will not bring you happiness, either. Focus on establishing a better future for yourself and do not become distracted by your neighbor and what they have. Do not compare yourself to others. Chase your own dreams; not the dreams of others. Understand that the Joneses probably went into debt to obtain what they have, and that’s where you don’t want to be.
6. Build and maintain an emergency fund
You must prepare for the inevitable… an emergency will come up costing you money that you did not expect to spend. You will come to find this is a part of being an adult, and there’s no way to avoid it. There’s certainly no running away from it when it happens!
Do yourself an important favor and start setting aside some money each payday to save for an emergency fund. You may only be able to save a very small amount at first, but it’s important that you save something.
If you are prepared for the unexpected, then those financial emergencies that used to send you into a panic will become much simpler inconveniences instead. Just imagine the load that you could take off your mind when you don’t have to worry about what you might have to sell if your car breaks down!
7. Consider all of your options carefully for owning a car
Most people just assume and accept that they will always have a car payment. Do not adopt this kind of thinking at such an early age! Do not associate a car as a symbol of your success. It only serves to get you from point A to point B.
Cars depreciate and lose value, and should never be considered an investment. While in college, ask family and friends to help you with rides while you save up enough cash for a used car that will do the job. After purchasing your first used car, continue to save money as if you had a car payment. By the time you run that car until it won’t run anymore, upgrade to a “new-to-you” used car with the cash you’ve been saving.
8. Do not go overboard with your wedding
Every little girl dreams of that magical day when she says, “I Do.” It is so easy to get carried away with the details of the sparkly and shiny things that fill the day. Trust me, you can still have your fairytale wedding and not break the bank.
Having a budget in place before the big day is a priority and will keep you on track. The average wedding cost is 20 to 30 thousand dollars. Always remember the importance of the day and embrace the moment. You are not going to remember the bells and whistles of the day. You do not want to start the honeymoon bliss off with looming debt from your big day.
9. You don’t have to rush into buying a house
After getting married you assume that you are ready for the next step: buying a home! Oh, of course it sounds so fun! You daydream about decorating and furnishing your home. You’ll soon realize that just because you can afford the mortgage payment, it does not mean you can afford everything else associated with a home.
Take into consideration property taxes, home insurance, and household repairs. All of which can be costly and add up if you are not well prepared for these expenses. Although you will hear that home-ownership is the typical American dream, it may turn into a nightmare if you are not ready. There is nothing wrong with renting until you are financially ready to take on home-ownership.
10. Invest early into your 401k
I know 40-some odd years seems like forever away. You feel like you could make better, wiser decisions with that money that will help you become financially secure, but the smartest thing you can do with that money is to invest it wisely.
Educate yourself about compound interest and how powerful it can be. This will help you understand why there is such a big difference investing at age 23 than it is at 35. A small investment right out of college can go a very long way. By investing in your early 20’s, you could easily retire with over a million dollars.
If you leave a job, always roll your 401k over into an IRA. I know it will be very tempting to view your 401k as free money just sitting there, available for the taking when you might have moving expenses or living expenses after a lay-off. But that is what your emergency fund is for. Do not touch that money! When your 65-year-old self writes you another letter in the future, they will thank you for helping them retire with over a million dollars!
11. Do not upgrade your lifestyle when earning a raise or promotion
You’ve just got that great promotion you’ve been working hard and waiting a long time for. That raise in your income does not make you rich! Your first paycheck will feel great and give you the illusion that you don’t have to worry about money anymore and that you can increase your spending habits. You might want to eat out more, upgrade your cable service, buy more expensive makeup, etc.
It’s important you do not give into these urges and overdo it. You’ve become accustomed to your lifestyle and you’re doing just fine without those “extras.” Take that extra money and put it into your savings, either for your car fund, house down payment, emergency fund (if 3-6 months hasn’t been saved up yet), or in your general savings account.
With your stubbornness, I know it’s difficult to take advice from others about how to handle your money. You think times are different, your situation is unique, or just assume that you will be making a lot of money by the time you’re 30.
I’m here to tell you that the decisions you are making with money will have a larger impact later in life than you realize. From creating bad habits that are hard to break to acquiring a large amount of debt that will take a lot of time and hard work to pay off. Time and effort that could have been put to better use.
Learn to be grateful for everything you have, and strive for a life of financial freedom where money does not dictate your life. Take control of your money early so that money does not control you as you become older. Enjoy life and make smart decisions!
The post Dear Younger Self: How to Avoid Financial Blunders appeared first on The Frugal Sisters.