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Dear 20-Somethings, If You Don’t Know These 7 Important Things About Money and Finance, You’ll Regret It in 10 Years

Dear 20-Somethings, If You Don’t Know These 7 Important Things About Money and Finance, You’ll Regret It in 10 Years

It goes without saying that your 20s come with lots of new things: new friends, new experiences, new perspectives, and new legal allowances.

As it turns out, they’re also packed with defining moments that will shape the rest of your life. And while it’s usually very difficult for young people to think about things like planning for retirement and investing in life insurance, the truth is that those AARP discounts are closer than you might think. So if you can learn these important things about money and finance now, in the future you’ll be happy that you did, and probably a lot richer too.

1. Pay Yourself First

“Don’t save what is left after spending; spend what is left after saving.” – Warren Buffett

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    While the concept of saving may be a familiar one, paying yourself first is often misunderstood. I didn’t understand the idea until I was well beyond my 20s, but I wish I had understood it sooner.

    Paying yourself first means taking a portion of your earnings and putting it into a savings account or investment that can then work to earn you more money, all while you sleep.

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    The reason why this is so important is because when you’re saving money it grows in relation to the interest it accrues, so the more money you have to save and the longer you’re saving, the more you can take advantage of this extra “free” money.

    Alternatively, by not saving you’re also losing the money that could be gained in interest. That’s why it pays to learn how to pay yourself first.

    2. Learn how to Leverage the Power of Compound Interest

    “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

    In his book

    The Slight Edge, Jeff Olson explains the power of compounding with a penny. A penny doubled each day for thirty-one days is greater than one million dollars today, he explains, and actually adds up to $10,737,418.24!compounding
      Photo credit Cviko Vidakovic

      Twenty-somethings have the best opportunity to take advantage of compounding because of the magic of time and the power that compounding gains as it grows. Unfortunately, many 20-somethings ignore this wealth-making practice and lose valuable opportunity in the process.

      3. Grow Your Financial Education

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        Becoming financially literate is not rocket science, though it can seem like it — especially when the majority of us are not taught financial literacy in school. But just like a higher academic education helps you advance in your career, higher financial education helps you advance in life and in what you can do. Thankfully, there’s no better time than your 20s to start the learning curve with any number of great resources.

        4. Know Your Credit Score and Keep it Up

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          In the September 2014 issue of Success Magazine, Suze Orman, the money guru herself, says that understanding your credit is key to financial health. “A FICO score will determine if a landlord will rent to you. It may determine if an employer will hire you. It determines if a telephone company will give you a phone, and it even determines what your car insurance premium happens to be.”

          As credit scores go, anything below 500 is a red flag and, just like your grades in school, it’s a lot easier to slide down than it is to bring back up, so pay attention. For additional queries and your free credit score, use CreditKarma, Credit.com, or Bankrate.

          5. Live Within Your Means

          “Do today what others won’t, so tomorrow you can do what others can’t.” – Dave Ramsey

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            In theory, if you have an income that can pay for your basic needs, you can eventually amass at least a small fortune by paying yourself first, using the power of compounding, making smart investments, and living within your means. However, most 20 somethings are still honing these practices. Not surprisingly, this is also the time when many people begin using credit cards to pay for things not necessarily within their budgets.

            Living within your means may look like skipping the movies on the weekends, trading your daily Starbucks for a homemade cup of coffee, or forfeiting that shopping spree in favor of recycling your wardrobe for a few seasons. However, when you practice this without reliance on debt, you give yourself a better chance to build a strong financial base. You might not think so now, but if you don’t put down that iced latte, you may be kicking yourself in the future.

            6. Learn to Use Discipline to Manage Income and Expenses

            “We must all suffer from one of two pains: the pain of discipline or the pain of regret. The difference is discipline weighs ounces while regret weighs tons.” – Jim Rohn

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              There’s a great book that every 20 something should read called The Richest Man in Babylon. Trust me, if I had read this book in my 20s, I’m sure I’d be a millionaire by now!

              Through a series of parables the author, George Clason, relates the common experiences of poor money managers and outlines disciplines that lead to lifelong riches and wealth.

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              So imperative to financial health are the disciplines of managing income and expenses that these lessons serve as the foundation of the entire book. Unsurprisingly, failure to have a financial plan with these in mind is the number one regret of people when they reach retirement. Luckily for you if you’re in your 20s, it doesn’t have to be yours.

              7. Learn to Manage Your Emotions Around Money

              “In the world of money and investing, you must learn to control your emotions. High emotions equal low intelligence.” – Robert Kiyosaki

              There’s no denying that having money (or not having it) comes with a lot of emotion. When we have it we’re happy (and often irrational), and when we don’t we’re sad. With each emotion come behaviors that can make or break our financial stability for the future. Many a divorce, bankruptcy, and heart attack have been attributed to the stress that people feel around money that could have easily been avoided.

              Learning to manage your emotions with money is not only a good idea, it’s the thing that will help you to successfully navigate your way through the thousands of financial decisions you’ll need to make throughout your life, so it stands to reason that the better you can do this, the more money you’ll keep.

              While it may be easier said than done, there are always resources that can help you identify your level of emotional intelligence around money and work to improve it at the same time.

              Your twenties are a mixed bag full of fun experiences and new opportunities for growth. But if you can find a way to incorporate the seven practices above, you’ll not only thank yourself later, but even be able to afford to buy yourself an expensive treat!

              Noize Photography via photopin cc

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              Last Updated on September 2, 2020

              How to Set Financial Goals and Actually Meet Them

              How to Set Financial Goals and Actually Meet Them

              Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

              In this article, we will explore ways to set financial goals and actually meet them with ease.

              4 Steps to Setting Financial Goals

              Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

              1. Be Clear About the Objectives

              Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

              It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

              Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

              2. Keep Goals Realistic

              It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

              It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

              3. Account for Inflation

              Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

              Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

              For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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              4. Short Term Vs Long Term

              Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

              As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

              By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

              How to Achieve Your Financial Goals

              Whenever we talk about chasing any financial goal, it is usually a two-step process:

              • Ensuring healthy savings
              • Making smart investments

              You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

              Ensuring Healthy Savings

              Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

              This is the focal point from where you start your journey of achieving financial goals.

              1. Track Expenses

              The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

              Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

              If you’re not sure where to start when tracking expenses, this article may be able to help.

              2. Pay Yourself First

              Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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              Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

              The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

              Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

              3. Make a Plan and Vow to Stick With It

              Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

              Nowadays, several money management apps can help you do this automatically.

              At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

              Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

              You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

              4. Make Savings a Habit and Not a Goal

              In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

              Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

              • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
              • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
              • If you go shopping, always look out for coupons and see where can you get the best deal.

              The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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              5. Talk About It

              Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

              Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

              6. Maintain a Journal

              For some people, writing helps a great deal in making sure that they achieve what they plan.

              If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

              When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

              Making Smart Investments

              Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

              1. Consult a Financial Advisor

              Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

              Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

              2. Choose Your Investment Instrument Wisely

              Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

              Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

              As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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              3. Compounding Is the Eighth Wonder

              Einstein once remarked about compounding:

              “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

              Use compound interest when setting financial goals

                Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

                Start saving early so that time is on your side to help you bear the fruits of compounding.

                4. Measure, Measure, Measure

                All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

                If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

                Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

                The Bottom Line

                Managing your extra money to achieve your short and long-term financial goals

                and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

                More Tips on Financial Goals

                Featured photo credit: Micheile Henderson via unsplash.com

                Reference

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