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10 Ways To Avoid Getting Into Debt In Your 20’s

10 Ways To Avoid Getting Into Debt In Your 20’s

Your late teens and early 20’s are times in your life when many people are making transitions from dependency to independence. With that, comes financial independence. Maybe you’re in college, or have just moved out of the house you grew up in.

Regardless, learning to balance rent, bills, groceries and other expenses can come as quite a shock, and many young adults end up accruing large debts that can plague them for years on end.

Many young adults are targeted by usurious credit lenders, offering high interest credit facilities such as credit cards, department store-specific cards and loans. These are often sold to young adults as a safety net for emergencies, but the reality is that frequently, these credit facilities are maxed out very quickly, saddling the borrower with high-interest debts that can take years to pay off.

Here are some simple, no nonsense pieces of advice for any young adult who wants to live a debt-free, stress-free life during their best years.

1. Avoid credit cards

If we could give one piece of financial advice to anybody in their 20’s, it would be this. You may think that it’s a good idea to have a credit card for emergencies, or to use one to improve your credit rating, and although these are all well and good, the reality is that credit cards are rarely used for these purposes, and the temptation to spend on them is always there.

Credit card companies aim to get people into debt while they’re young, and keep them their by bleeding them very slowly (through minimum payments and compound interest). Credit lenders are masters of making money, and they will play on your fear of being broke to mislead you into getting a credit card.

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The only real way to beat the credit card companies is not to get a credit card.

2. Overestimate your outgoings, underestimate your income

It always makes sense to have a budget for rent, bills, food and other expenses, but one thing that people seem to neglect to factor into their budget is that income and outgoings can fluctuate wildly. For this reason, it’s always a good idea to draw up a budget using your maximum estimated outgoings, and your minimum estimated income.

Remember that if you are sick one month, your income will decrease, and during the winter, your heating bills will increase. Using this method should help to ensure that there are no nasty surprises at the end of the month when the figures don’t match up.

3. Be prepared for sudden expenses

Never make the mistake of assuming that things won’t go wrong. Things will break, prices will rise and fines will be charged. When drawing up a budget, I find it’s wise to set aside 15% of your income just as a buffer against sudden expenses.

Your car might breakdown, your boiler might go on the fritz, your dog might get sick. Be prepared for this.

4. Accept that you may not be able to afford luxuries all the time

Luxury items bring fleeting and temporary happiness, which dissipate as quickly as they come. Expensive clothes, technology and furniture actually do very little (if anything) to improve your life and general satisfaction levels.

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That’s why it’s better to invest in doing things rather than having things. You don’t have to live a bare-essentials lifestyle, but cutting back on unnecessary luxuries during your younger years will not only save you a mountain of debt that you’ll have to pay off, but will also allow you to live a simpler, more care-free existence.

In the words of Roger J Corless, “Happiness is not something I have, it is something I myself want to be. Trying to be happy by accumulating possessions is like trying to satisfy hunger by taping sandwiches all over my body.”

5. Give yourself an allowance and stick to it

Sticking to a budget is often easier said than done. We often find the easiest way to regulate spending is to have an account which your wages are paid into, and a separate account for spending, and then arrange for a set amount to be paid into the spending account (either monthly, weekly or even daily), to ensure that you can keep track of your finances without overspending.

6. Save for things you really want

One of the side effects of the western fast-food culture of instant gratification, is that we struggle to get our heads around the concept of waiting to get what we want. In fact, we have all sort of credit schemes set up to actively encourage us not to wait.

Almost anything these days can be bought on credit. This usually involves making small, monthly payments for years on end at a massively inflated interest rate. It all seems very manageable, but one small payment added to another small payment, and another and another all begins to add up.

Before long, your disposable income has shrunk down to such a small amount that you can barely afford to buy gas for that over-sized car you’re still paying off. And what happens if you lose your job and can’t afford to make the repayments? Well, then you have to hand it all back.

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7. Learn to enjoy the little things

Some of the best things in life cost little to nothing. You can’t put a price on good company, laughter or fun. Anyone who claims that you can’t have fun without spending money probably isn’t much fun to begin with. Some of the best activities in your life life can absolutely be cheap or free. Trade TV and computer games for socializing, and you’ll find life becomes richer (and you, too!).

8. Use savings to pay off debts

This is one of the most obvious but commonly overlooked ways to reduce your debt level. If you have $1,000 of debt, accruing interest at 18% APR (if you were so lucky as to have it so low), and $1,000 in savings, accruing interest at 3% APR (if you were so lucky as to have it so high), then you would immediately save yourself money by paying off your debts with your savings.

There is pretty much no scenario in which you will be borrowing money at a lower rate than the interest on a savings account.

9. Pay debts on time

If you have debts to pay, make sure you have the correct direct debits/standing orders and available money to pay them on time. Often the charges for missing payments can cause your initial debt to soar, which can lead to spiraling debts and financial chaos. Always ensure you know when money is due to be paid, and ensure that you have the funds set aside to do so.

10. Interest-free credit is not free money

Just because something says it is interest free for six months, don’t assume that this means you have just been given a fistful of free cash. These offers are setup to deliberately encourage reckless spending, and as soon as the interest-free period is over, you’re saddled with a high interest rate on an insurmountable heap of debt, which you probably don’t have much to show for.

Now, we know what you’re thinking; you could just put all of the money in a savings account, wait until the six months is up, and then pay it all off, keeping all of the interest accrued for yourself.

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Great idea… In theory. The reality is that less than 1% of people who attempt this actually manage it. Your creditors know this. They are not stupid, they know how to get you into debt and keep you there for as long as possible. Don’t be caught out.

Hopefully, this has given you some insight into how to avoid debt. Debt is a totally unnecessary stress that the majority of us deal with throughout our lives. Your younger years should be spent enjoying the simpler things in life, not over-complicating it with financial worries.

With a little calculation, and a lot of impulse control, you can have a fun, free and fulfilling life. Without Debt.

Featured photo credit: Flickr via farm8.staticflickr.com

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JC Axe

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Published on May 7, 2019

How to Invest for Retirement (The Smart and Stress-Free Way)

How to Invest for Retirement (The Smart and Stress-Free Way)

When it comes to stocks, I bet you feel like you have no idea what you’re doing.

Everyone who’s not a financial expert has been there. I’ve been there. But, time is passing and you need to be crystal clear with how you’re investing for your retirement.

Otherwise, it’s back to work until you can afford not to. So, how can you invest for retirement when you’re not a financial expert?

You take the time to learn the fundamentals well. If you do, you can grow your wealth and retire happy. The best part is that you don’t need to be a financial expert to make smart investment decisions.

Here’s how to invest for retirement the smart and stress-free way:

1. Know Clearly Why You Invest

Odds are you already know why should invest for retirement.

But, maybe you know the wrong reasons. It’s time you get clear on why you’d like to retire. Here are some questions to help you get started:

  • Will you spend more time with your family?
  • What does retirement mean to you?
  • Are you looking to launch that business you’ve been holding off for years?

Everyone wants to retire but not for the same reasons. Once you’re clear for why retirement is important for you, you’ll focus on making it happen.

Investing in the stock market allows you to take advantage of compound interest.[1] All this means is that your money earns money on top of its interest. A reason why investment in the stock market is one of the best ways to plan for retirement.

2. Figure out When to Invest

“The best time to plant a tree was 20 years ago. The second best time is now.”– Chinese Proverb

It’s true if you’d had started investing when you were 10 years old, you’d have a lot more money than you do today.

The reality is that most people don’t start investing until it’s too late. So, if you’re currently waiting for the perfect time to start an investment, it would be today. Open your calendar and block out 2 to 3 hours to choose how you’ll invest for retirement.

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A quick way to get a snapshot of where you stand is to use Personal Capital. Input all your personal information and spend some time setting your retirement goals. Once completed, you’ll know where you stand with your retirement.

Having a savings account for retirement isn’t planning for retirement. Why? Your money loses value when you factor in US inflation.[2]

3. Evaluate Your Risk Tolerance to Create the Perfect Portfolio

Investing your money well depends on your emotions.

Why?

Because when the market drops most people panic and withdraw their money. On average, the US stock market yields an annual 6% to 7% ROI (return on your investment.) But, this won’t happen if you’re worried about short-term loses.

Before you invest your next dollar, know your risk tolerance.[3] Your risk tolerance determines the number of risky and safe investments you’d have.

Regardless of your investing style, you need to view investing for retirement as a long term game. Know that some years you’ll lose money but recoup this in the long-term.

Avoid watching market-related new. Also, create a double authentication to log in your investment account. This way you’re less likely to withdraw your money.

4. Open a Reliable Retirement Account

Depending on your circumstance, you may need to open a new brokerage account. This is the account is where you’ll invest your money.

If you’re currently working for a company, odds are that they offer a 410K investing account. If so, here’s where you’ll invest most of your money. The only problem with this is that you’re limited to the stock options that are available.

You do have the option to open a separate IRA (individual retirement account.) Here are some of the best brokers:

  1. Vanguard
  2. TD Ameritrade
  3. Charles Schwab

5. Challenge Yourself to Invest Consistently

Committing to invest for retirement is hard, but continuing to do so is harder.

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Once you’ve started investment for your retirement, you run at risk from stopping. Often you’ll want to contribute less, so you’d have more money in your pocket.

That’s why it’s important that you create a budget that allows you to invest each month. If you’re working for a company, you can set a percentage for the amount you’d like to contribute each month. Most people by default contribute 1% but aim to contribute 10% to 15%.

Be the judge for how much you can afford to contribute after covering important expenses. To stay motivated, use Personal Capital to view your net worth.

A benefit to contributing money to your retirement account is not taxed. For example, if you earn $100 and invest 10%, you’d contribute $10, then get taxed on the remaining $90. As of 2019, the most you’re able to contribute towards your 401K is 19K but this can change.

6. Consider Where to Invest Your Money

The most common way to invest your money is in stocks, but it’s not the only way. Here are other ways to invest:

Robo Advisors

Robo-advisors[4] are fancy algorithms that’ll choose the best investments for you. Sites like Wealthfront make it easy for first-time investors to invest their money. You’d input information about yourself and set your risk tolerance.

Then, set your monthly contribution amount and your robo-advisor would do the rest. Robo-advisors charge a fee to manage your money, but less than regular advisors.

Bonds

Think of bonds as “IOUs” to whomever you buy them from.

Essentially, you’re lending money and charging interest. Like stocks, not all bonds are equal. Some will be riskier than others depending on their rating.

Here are the different types of bond categories:[5]

  1. Treasury bonds
  2. Government bonds
  3. Corporate bonds
  4. Foreign bonds
  5. Mortgage-backed bonds
  6. Municipal bonds

Mutual Funds

Picture a group of people dumping all their money in a jar that’s managed by a professional. This is how mutual funds work. The fund manager manages the money looking to earn capital gains (interest.)

One of the best types of mutual funds is index funds. Since these funds don’t try to beat the market and instead follow it, they need less research. Because of this they often charge the lowest fees and yield the best long-term results.

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Real Estate

Yes, buying a home is an investment when done correctly.

Imagine buying a home and using it as a rental property. After repairing it, you receive a monthly surplus check of $100 to $200.

This may not sound like a lot, but repeat this process enough times and you’d earn a large amount of passive income. That’s why real estate is one of the best investments to not only retire but become wealthy.

But, it requires a lot of money to start and you should expect losing money along the way as you learn the process.

Savings Accounts

Your money can still grow in a savings account. Nowadays most online banks offer a 2% annual return. Although the average inflation is higher your money will be available when you need it.

7. Master Disincline to Dodge Short Success

Investing for retirement is a long-term strategy. That’s why you need to master delayed gratification. All this means is delaying short-term pleasure for something bigger in the future. Research shows that those who have delayed gratification are more successful.[6]

So how can you master delayed gratification?

By building your discipline.

Think back to what retirement means to you. A clear purpose will help you avoid withdrawing your money during a market downturn. It’ll help you contribute more towards retirement when you’d want to waste it instead.

Your journey towards retirement will be long, so reward yourself along the way. Choose a reward that’s relevant and meaningful, so that you reinforce positive behavior. For example, after contributing more towards retirement, treat yourself to dinner.

8. Aggressively Invest on This One Investment

I’ve mentioned several types of investments but haven’t covered the most important one.

It sounds cliche but here’s why you’re your best investment towards retirement. The more you know, the more money you’ll be able to make. The more good habits you adopt, the more secure your retirement will be.

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More importantly, investing in yourself is an investment that no one can take away. There’s no market downturn nor tragic circumstance that’ll wipe your knowledge and experience.

But, how can you invest yourself?

Reading books, blogs, and anything that’ll help you learn new topics daily. Listen to podcasts and audiobooks on your commute to/from work.

Save money to buy courses and hire coaches. I used to believe hiring coaches was a waste of money when I could learn the subject alone.

But, coaches see your blind spots and hold you accountable. Hiring the right coach will help you achieve your goals faster than you would’ve alone.

Retire Happy with Excess Money

The key to a secure financial future doesn’t only belong to financial experts.

It’s possible for you and I. What if you were able to retire earlier than most people and weren’t a financial planner? What if you were able to focus on what you enjoy doing the most while your money was working hard for you?

I know this sounds impossible now, but the truth is you’re capable of taking charge of your retirement. I’m not a financial expert but I’ve learned how to invest my money by reading books and learning from others.

Investing your money is scary. So start small and invest a small amount of your money with a robo-advisor. Feel your money drop and rise for a month or two. Then, invest more and keep this up until you’re aggressively saving for retirement.

One day, you’ll wake up with a net worth you’re proud of – confident about your retirement. You now know a few strategies you can use to invest in your retirement. Will you take action to retire happy?

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Featured photo credit: Matthew Bennett via unsplash.com

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