Start Your Finances Correctly
Congratulations! You’ve completed school and/or training and are now ready to begin your new career. When starting out in the workforce, how you handle those paychecks can have a major impact on your future. Starting your financial future on the right path can give you security and peace of mind well into the future.
Clear Debts
Your first step is to clear out all existing debt. It is likely that you have college loans and credit card debt. Your paycheck should help to clean up those accounts. Spend as much as possible each pay period on paying down old loans. You may have to get creative to find funds to throw at old balances every month, so don’t be afraid to buy a used car, live with a roommate or settle for a smaller apartment. Managing your spending by reducing credit card debt and credit card use is a key process. Every dollar you spend buying down debt is one you have invested in your future security. You can’t say the same for heated seats in a new car.
To help you clear debts, consider consolidating student loans. If you qualify for consolidation packages, the term of your loans may lengthen, but you’ll be paying less each month freeing up some cash to use on paying down credit card debt which undoubtedly has a higher interest rate. Be sure to evaluate the options first, in a rising interest rate environment the costs of the student loan consolidation may exceed the savings.
Start Saving
Once you have your debt under control, and possibly before if you’re working on a very large amount of debt, you need to begin saving. Arrange with your bank for a portion of your directly deposited paycheck to be whisked away to a savings account before you even see it. This will help you avoid the temptation of “extra” money and it will also make savings easy.
Set up a realistic budget and be sure to include savings. Then, simply arrange for the budgeted amount to be removed from the check before you see it and the rest of your funds are available to be spent as you’ve arranged.
Ideally, your first set of savings should be liquid assets enough to cover three to six months of living expenses. You can begin saving in an interest bearing checking account or statement savings account, but once you’ve reached the minimum deposit, move your money into an account with a greater yield. Money market accounts are liquid investments in safe vehicles offered by most banks. Bank money market accounts offer a higher rate of return and usually have stable rates of return, and still have guaranteed principal due to the FDIC guarantee on bank accounts.
The next step for savings is to become diversified and spread your investments out over different assets classes. Start small with a mutual fund and grow from there. Automatic deposits that can be taken directly from your checking account works great for these investments as well. The deposits can be small and the periodic investments over time mean you engage in dollar cost averaging where you are buying the same amount of a mutual fund every month regardless of the share value. This helps to stay diversified.
Get Insured
After you’ve established a steady savings plan, or preferably at the same time, find insurance. You need health insurance and might consider life insurance as well. Although at the age of twenty-five, it is far more likely that you will become disabled rather than die, so strongly consider obtaining disability insurance.
Your employer may offer these insurance packages or facilitate packages through other vendors. But if not, research insurance rates and coverage on your own and arrange to be protected.
Retirement Savings
Once you’ve met your goal of three months spending in short-term savings, turn your attention to your retirement and long-term goals. Your company may offer a retirement fund such as a 401k, and if so you should take advantage of it. If your company offers a matching contribution, regardless of other savings, contribute the percentage that the company matches. The more you save early in your career, the more that money grows. And there is almost never a good reason to turn away free money.
If your company does not offer a 401k, or even it does, research other retirement options as your alternative or supplemental choice. An individual retirement account, or IRA, is an excellent tool for retirement investing. A Roth IRA is also an excellent choice but has certain conditions that must be met. If you meet those conditions, you can invest after tax earnings in a Roth IRA to be pulled out tax free after the age of 59 ½. In 2007, you’re able to contribute $4,000 annually to an IRA.
Credit
Spend some time planning your credit’s future as well. Find a credit card that will suit your needs but also meet your financial goals. Consider the fees, interest rate, grace period and terms and conditions when selecting a credit card. Incentives are worth considering as well, but be sure you take into account your personal spending and payment habits.
Move Forward
Finally, move forward with your life both in a financial and realistic sense. Working early on to develop healthy savings habits will benefit you tremendously in the long run. Also a healthy savings habit will endure over time once you’ve learned to live within your budget and designate funds for savings every month. Soon you’ll be able to relax and enjoy peace of mind rather than worrying about making it from one paycheck to the next.
Why You Should Pay Off Your Debt Today
In today’s society, credit and debt is a part of life. In fact credit is frequently very beneficial. The most valuable aspects of credit and debt are loans that are used to buy assets such as houses. However, it is best to avoid carrying large amounts of debt. Not only should most consumers avoid large amounts of debt but debt that is incurred to purchase items used for everyday consumption is never advisable. This type of debt is almost always in the form of credit cards and store cards. Even debt like car loans must be treated carefully since these types of loans have large monthly payments and though a car may seem like a good asset, cars depreciate rapidly. Some of the best reasons to consider paying down your debt as soon as it is feasibly possible include:
You’ll Save Money
Interest is expensive. The longer you owe a debt, the more interest you’ll pay, and the more your original purchase costs you. If you have large amounts of debt at high interest rates, most of the money you’re paying is going towards interest, not towards the principal of the loan. Normal consumption expenditures will cost more if they are financed. The total cost of any good goes up the longer the purchase is financed for and the higher the interest rate on the credit used to make the purchase. For certain debt obligations it may be beneficial to consider refinancing to get the lowest interest rates possible, and pay off your debts as soon as you are able. A credit card balance transfer to a lower interest rate is a viable debt reduction technique as long as the credit cards that end up with a reduced balance are not used once again. Refinancing a home loan or a car loan can also be beneficial if it reduces the interest rate or the term of the loan.
You’ll Get Better Rates
When potential lenders evaluate your risk for a loan, they take into account the amount of debt you are already paying, as well as your ability to pay it off. The greater your debt, the higher a risk you are for the lender, and the higher your interest rate. Credit scores already take into consideration an individual’s credit balances. Generally those car loan or home loan or even credit card applicants that have debt balances are considered a higher credit risk, will have lower credit scores and end up with higher interest rates. Paying off your debt will help you to get lower interest rates in the future.
You’ll Have More Credit
When potential lenders evaluate you for credit, they look at the amount you can afford to carry and pay back. If you are already carrying a large amount of credit for your income, you are less likely to be able to obtain more. This is generally not a significant concern for individuals trying to reduce their debt load but it can be important to have access to large amounts of credit for the purchases that involve significant assets such as purchasing a new home. Credit and debt is generally best saved to buy these large assets that can appreciate in value and since they are large assets, the terms of the credit you get is that much more important. With limited debt and a good credit history you are much more likely to receive a larger loan amount with preferential interest rates and loan terms.
You’ll Have Increased Cash Flow
Less money going to creditors on a regular basis means more money in your pocket. By paying off credit, you’ll decrease the payments you’re making each month and increase the amount of flexible income. The beginning stages of reducing debt can be mean significant changes in someone’s budget but as the debt amounts are reduced and the monthly debt payments drop, cash flow will increase significantly. More cash flow can be used more debt reduction and ultimately to a better balanced budget and lifestyle.
You Can Do More with Your Money
The money that you’re spending on interest each month could be going towards other uses, such as investments, stocks, or real estate. Pay off your debt and start putting your money to work for you instead of the credit card companies! This is the time when some short sacrifices on consumption and expenditures really starts to pay off with a more manageable, trouble free and enjoyable life style. We say it time and time again that a new granite counter top does not bring happiness, it doesn’t cook your food for you, it doesn’t bring you closer to family, it simply consumes money. This is true of the more expensive car or more expensive clothes.
Spend Less on the Holidays
The holidays are a time of family, rejoicing, and buying. Those holiday expenses can really add up quickly, and many a careful budget has fallen prey to the month of December. Last minute deals, unexpected guests and items that are too good to pass up all contribute to make the holidays very expensive.
Plan for the Holidays
To help eliminate some of the overblown expenses in the month of December, you should start planning a full year in advance. If you know that you traditionally spend around $1,000 on gifts, decorations, parties, dinners and babysitting, put $100 a month into a special account just for the holidays. In December, empty the account as you celebrate, and then in January you can start celebrating for the next year. These savings help you avoid using credit cards and costly finance charges.
In addition to savings based on an estimate, you should be preparing a budget as to how much you actually plan to spend on each gift recipient on your list. You’ll also need to include any extra baking supplies, decorations, or special events of the holiday seasons such as special performances or trips to see relatives.
Prepare your budget immediately following this year’s season to be sure you don’t forget anything. Then, compare your savings to your budget. If there is a large disparity, you’ll need to find items to reduce on your budget or save more every month.
Holiday Savings
One of the best ways to reduce your holiday spending is to buy when you find gifts on sale throughout the year. Rather than waiting until the sales in December, buy a gift or two as you see it in the store – be it January or August. You should most definitely purchase wrapping supplies and new decorations immediately following Christmas to save more than half of what you’d have to spend next year. Store your holiday stash in a closet and add to it as the opportunities arise.
Rather than buying a present for every sibling and spouse on your list, put everyone’s name in a hat and draw. This lets you buy a single present, presumably spend a bit time and money finding just the right thing, and avoid having to buy for the five others you would normally have to give at least a token gift.
Speaking of token gifts, rather than breaking the bank on something elaborate, give a small gift of gourmet chocolates or picture frame along with a handmade item or the gift of time. Create a coupon for a free night of babysitting for your sibling with children. Take your children on a special outing or arrange a family trip rather than buying many expensive gifts.
For families that seem to have everything, arrange a present that is truly unique and customized. Order a magazine subscription or name a star after the family. When you take time to find a gift that suits the personality of the recipient, you don’t’ need to spend much. It may very well be that your CD compilation and clever coffee mug are the best presents she gets this year – if only because you’re the only one who took time to personalize her gift. The amount of money spent never decides the true value of a gift.