The Young Adults Guide to Finance
January 2, 2018
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Growing up is inherently unnerving. The thought of mortgages, investing, careers and children can be enough to push anyone into a classic case of Peter Pan Syndrome. Fortunately or unfortunately, we don't live in a fairy tale and all the things that come along with being an adult are inevitable. Money, however, doesn't have to be the scary monster that many people think.
First and foremost, find a bank that you feel comfortable working with. Get advice from people you know and trust for ideas. Once you have a list of banks to check out, walk into a branch of each, sit down with the manager, explain your situation and see what they have to offer. No matter your choice, you will need to establish checking and savings accounts to get started.
A checking account is going to be your most liquid or accessible account. It will be the account you use most often, accessing your money by debit card or personal check. Because this account is so liquid, checking accounts rarely bare any interest. They exist primarily to give you easy access to your money.
Savings accounts are less liquid than checking so it's not as easy to get to that money. They usually bare a small amount of interest and are primarily used for rainy day funds for unexpected expenses.
Although checking and savings are the two basic types of accounts you'll need, banks offer other types of accounts to suit different goals. Most of the accounts handled by a typical bank provide you more interest as you sacrifice liquidity or accessibility to your money.
Your credit is basically a report card telling lenders or sometimes employers how good you are about paying off your debts in a timely manner. This report card is tracked by your FICO score, a combination of the scores from the 3 largest reporting agencies. Placed on a scale of 300 to 850, a higher FICO score usually means easier access to credit for loans and credit cards as well as lower interest rates.
Simply establishing credit is an important first step. Afterwards, if you have some early blunders with your credit, you're certainly not alone and it does not relegate you to financial purgatory until the end of days. When you fall behind on payments, the first thing to do is call the lender, explain the situation and they will most likely work with you to find a solution. From there, following a few basic steps can help you regain good credit and get back on track.
Money management is the cornerstone to a successful financial life and it all starts with making a budget. Knowing how much money you have, earn and spend are all important parts of making a budget for yourself. A good budget not only tells you what is available at any given time but also shows how much you can devote towards paying off debt.
Along with regularly checking your credit report to look for inaccuracies and discrepancies, monitoring your spending and staying within your budget is crucial in staying out of financial trouble. There are many free apps available to help you monitor that spending.
Of course, successful money management also includes paying off loans to reduce the total amount you pay towards interest and to protect your credit. It's always a good idea to start paying off loans immediately. Also, always plan for the future and create a 3 to 5 year game plan that works along with your budget.
It's always smart to have 6 months worth of income saved for life's curve balls. Although it might take some time to accumulate, it will serve as a welcomed buffer if you were to lose your job or suddenly have expenses due to medical bills or anything else. That buffer is sufficient for cash savings but certainly not the only type of savings you should accumulate.
While it may seem silly, it's never to early to start saving for retirement. However, as with many financially-related topics, retirement planning can become quite complicated but doesn't have to give you a headache. A few key points are more than enough to get you started.
Employer-sponsored retirement plans like a 401(k) are accounts that are established through your employer. Every pay check, an amount of your choosing is funneled into these accounts on a pre-tax basis or, in other terms, before they are taxed by the federal and state government. Instead, it is taxed when you withdraw the money in retirement.
Within those accounts, you can choose what the money gets invested in, typically a choice of mutual funds. They tend to be very low in administrative costs so they are both tax and cost efficient. The downside is being limited exclusively to the investments offered by the plan.
A solo 401(k) is similar to a regular 401(k) but is specifically used by the self-employed. The same tax benefits are included but, because it's only a single account, the costs can be higher for administrative and investment fees. Since a solo 401(k) has the flexibility to choose the provider, it allows the owner more investment choices.
From a tax perspective, an IRA is similar to the 401(k) plans but from a smaller, more DIY approach. As long as you or your spouse have earned income, you can put pre-tax money into an IRA. There are many providers to choose from so choice of investments isn't an issue.
A Roth IRA works like a regular IRA but is taxed in the opposite fashion. Although the contributions are not pre-tax, that same money isn't taxed upon withdrawal in retirement. If you are in a low tax bracket now but will be in a much higher one in your 60's, a Roth IRA might be a good way to go.
Investing means to place your money into other instruments like stocks and bonds so they will grow more over the longer term. While it seems like everyone has their own opinion, sticking to specific strategies when starting to invest can save you some sleepless nights. No matter who might be providing the advice, however, stocks and bonds will almost always be the building blocks of any investment account.
With stocks, you purchase ownership, shares, of a company through a broker. As other shares of that company are traded on an exchange, all shares of the company, including yours, go up and down in value. Bonds are traditionally more stable than stock. With a bond, you are lending a company or municipality money with the promise they pay you back at a specific interest rate.
Since the number of stocks and bonds in the world seems almost infinite, many people use mutual funds or exchange-traded funds, ETFs, to invest the money for them. By investing in these types of products, the fund manager takes your money and invests it in many different stocks or bonds. It's a convenient way to spread your money out and diversify across many companies and industries. The more diversified your money is, the better you are protected from risk. Aside from these basic investments, it never hurts to research other places and techniques to investment your money.
Taxes tend to be the most unpleasant of the financial topics. No one likes to part with their hard-earned money but, if you're smart, there are ways to minimize what you give to the government.
First of all, taxes represent what the federal, state and local governments require of you to pay for the services they provide. Generally speaking, the more money you make, the greater the amount of taxes you'll owe them.
The primary way, but certainly not the only way, you get taxed is through earned income. For every dollar you earn from your employer, the government is entitled to a certain portion. Though never fun, using things like a 401(k) or an IRA can help soften the blow.
Furthermore, the IRS lets tax payers reduce their tax liability even more by allowing some expenses to be deducted from their taxable income. Certain medical expenses, mortgage interest, state and local taxes, among other things, can be deducted from income. Of course, this isn't true for everyone so you would need to research this on your own or consult a tax professional to see if these deductions apply to you. There are plenty of resources available to first time tax filers to better familiarize themselves with income tax.
If you've taken the time and effort to open the necessary accounts, familiarize yourself with credit, money management, investing and taxes, it might be time to take your diligence for a spin and look into buying a car or even saving for a home.
When it comes to buying a car, make certain you know what you can afford before you begin shopping. An auto loan payment calculator can help you estimate how much your monthly payments will be so you can work the new expense into your budget. Also be certain to research the cars that interest you to check for reliability, safety and fuel efficiency. You want to be confident that the car isn't subject to mechanical issues and is affordable for you to drive.
Buying a first home is a daunting but rewarding process for any first-time home buyer. Just like financing a car, some research is in order to learn about the different interest rates, loan types and lenders available. Saving for a down payment is also critical in finding a house and mortgage that is affordable to your budget. Also keep in mind that owning a house will always involve unexpected expenses like plumbing issues, cracked driveways and roofing repairs. Be certain to enter these types of things in your budget and savings plan.