People tend to take risks when they are young. Old people prefer to settle down. They are not risk-takers. When making financial plans for 2016, keep this maxim in mind. Why? Because if you are a young person, then you should be taking risks.
But taking risk is not same as acting like a foolhardy. When making financial decisions in your 20s, don’t be hot-headed. In this article, I’ll help you get an idea of how to handle your personal finances when you are young.
Credit card debt
We tend to ignore credit card debts. Not only does this not help us, but it actually intensifies the problem. My advice to all of you is pay off the debt on your credit cards as early as you can. Don’t let it accumulate.
Due to poor financial decisions in your 20s, you may incur credit card debts. True, it’s not good for you but there’s an advantage – you have plenty of time ahead, which you can use to pay off the debt.
You may find yourself a job or make some quick cash in some other ways. Feel free to take risks,because the gain would be colossal – you’d get rid of the most annoying thing in this world – debt.
Young people need to learn budgeting. They can make a household budget and stick to it. They don’t need much grey-matter for any of these, all they need is smartness. First make a list of all incomes, from both stable and unstable sources. Then list down the monthly household expenses. Next, tally these two.
Let’s say your total household income is $4,000 a month and expenses are $3,000. You earn $1,500 from from stable sources and $1,600 of your monthly expenses are on required utilities. Try paying the required utility bill from stable income and the non-required bills like eating out, watching movies from non-stable income sources.
Acquiring budgeting skills in your 30s and 20s, especially in your 20s is critical to financial success in later stages of life. Financial decisions in your 20s determine how you’ll do with your finances later. Lessons learned from budgeting skills stay with you forever, benefiting you this way.
Using credit cards
Credit card again! Paying down existing debts helps but prudent usage of credit cards helps even more. Never use more than 10% of your credit limit. If your card has $500 credit limit, never use more than $50. Before you use the card again, pay off the $50 debt.
Retail outlets allow buyers to pay using their credit cards, which is a reason behind the craze of purchases made using credit cards. Financial decisions in your 20s can be mostly wrong. Overuse of credit card is one such decision.
Another thing, never make the minimum monthly payment. Always pay the full amount. The minimum monthly payment is often less than 10% of the debt. Given it’s 1% and you have outstanding balance of $1000, it takes more than eight years for you to clear the debt. Now add interests and charges and it takes even more. Plus, you end up paying more than what you actually owe.
When you are young, take risks. Pay all the debt at once even if you have to break your savings for that. You can earn money in the future, you have plenty of time.
Timely bill payment
You need to pay your bills on time. Young people tend to be forgetful and they don’t take things seriously. The result? They make delays in paying auto loans, electricity bills, student loans, etc. The untimely payment of bills hurt them in the end.
Your financial checklist probably excludes timely bill payment. But take it from me, it’s way more important than you think it is. Not paying bills on time is a bad habit. Beyond that it hurts your FICO score. Want to know how it happens? Then read on.
Here also, young people, especially those who are in their 20s and 30s have an edge. The FICO score can be under 620, making it hard for you to get approval for loans. You can still improve your FICO score by making lifestyle changes because FICO score is linked to your lifestyle.
The records of delays in bill payments stay on your credit report. Removing them is a herculean task. You have to negotiate with creditors and request the credit bureaus. At the same time, use your credit card to improve the score. Still there’s no guarantee that the records will be removed or the score will improve. Hence, be on the safe and pay all the bills on time.
You may be young, but that’s no excuse not to remember that financial decisions in your 20s can make or break your future. One such decision is saving for life after retirement. Saving consistently for the post-retirement life makes your future safe.
The 401(K) tax is huge. According to estimates done by private sources, an average person pays more than $100K through his service life for paying 401K taxes. This finding shows how much you can save if you make cogent plans.
Use all the non-taxable accounts to build your savings. Set up an IRA account for tax-free saving. Use the health savings account (HSA) to save because your employer sends money to this account before tax deduction. When you are young, spend time and resources to build savings for a better and secure future.
This article is contributed by Tina Roth who is the owner and blog at Pro Finance Blog – a leading personal finance blog.