Every one of us has had "aha! moments." Epiphanies. Days when we reach a crossroads and realize that we have to make some changes. For the next two months, we're sharing moments like those in our Life Stage Lessons series: Real stories straight from the financial lives of our DailyFinance contributors about times when they realized they were due for a serious course correction. So read on, learn from our mistakes, and get inspired to improve your relationship with your money.
I didn't do all that bad at 19, and I was really lucky to have support along the way. But it's not uncommon for adults to look back at their early years and wish they had set a better foundation for themselves financially. Here's what I wish I had known.
Work to save, not just because. Most teens have a job at some point. I worked part-time at my mom's video rental store, back when there were businesses known as video rental stores. The job wasn't a gold mine, but I also wasn't budgeting or saving with any specific purpose. I estimate that, because I had no real expenses, I could have left home with over $10,000 saved up without breaking a sweat. Instead, I went off to school with nothing close to that amount.
Invest in education -- as long as you have a goal in mind to make it pay off. My mom paid for me to attend a two-year diploma program at a nearby school. I covered my own rent and food using the little money I had saved, and by taking out a student loan. Like a lot of new college students, I didn't know exactly what kind of career I wanted. Which may be one reason why after I graduated, I didn't find a job in my field. In hindsight, I wouldn't recommend attending college without some specific direction in mind. A good education can pay off huge dividends, but if you're not sure what to do with it, it can really weigh you down financially. Luckily, I didn't have to pay too high a price for my lack of focus. It only took me about five years to pay off my small student loan.
Live below your means. Travel back in time with me, if you will, and imagine the young man of 19, fresh out of school and financially independent. I lived with roommates, which saved on rent, but also provided lots of excuses to spend money having fun. I didn't overspend too badly in that regard, but why live with a bunch of dudes sharing one bathroom if it doesn't let you put some money away?
Plan for your desired future, and work to make it happen. I soon tired of working really hard for little money, in a job that has nothing to do with my field. That was when I started to wake up. I started reading and studying on my own. I took on some freelance work with companies in my field to increase my skills and experience. I learned about personal finance, and found that saving and budgeting suddenly became way easier. Within a few months, I landed my first real job, related to my degree -- but that's another story.
My financial life didn't take off until I took control. For me, it took living on my own in a less-than-ideal situation, and then realizing that it could go on like this fooooreeeevvvveeeeeer! When I started learning about how smart people earn and use their money, it made a huge difference in every part of my life. Suddenly I understood how I could apply what I had learned at college. My path of post-collegiate slackerdom quickly lost its luster. I'm glad I finally learned these lessons, but I wish they had come just a few years earlier. If you haven't learned your key money lessons yet, don't worry too much. The best time to learn these things is now.
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Managed to get that raise or promotion? Fantastic -- now don't go out there and spend it all immediately. In classic "keeping up with the Joneses" fashion, too many of us see an increase in salary or a sudden windfall (like an inheritance) as an excuse to take our lifestyle up a notch. We buy bigger houses than we need, get the latest gadgets even though ours work just fine,and spring for fancy steak dinners just because we can.
Instead, whenever your financial situation gets a boost, consider the best ways to put that money to work for you. The truly wealthy are those whose money continues to grow and earn them more, even when they're not actively doing anything with it.
The average American household that carries credit card debt holds a balance of around $15,000. If you're among those who have a credit card balance, you've probably seen the little chart on your monthly statement telling you how much you'll pay in interest over the next several years if you make only the minimum payment. (If you haven't, look at it.) The same chart will also compare that to a "suggested" payment that's slightly higher.
Our recommendation? Throw everything you can at paying your balances off as fast as possible. And make sure not to take on any additional debt in the future; if you can't pay for a consumer good out of pocket, don't finance it.
We don't demonize student loan debt the way we do credit card debt because we see an education as an investment -- and higher education often is the difference between one income bracket and another. Similarly, many people justify taking out a car loan by stating that they need a car to get to work.
That said, debt is still debt, and the longer you take to pay it off, the more interest you'll pay. Once you've freed yourself of credit card debt, paying down your car and student loan balances should be next on your list.
Whether it's to handle an unexpected car repair, a sudden illness or a major plumbing problem, you should always have some money set aside to cover unforeseen expenses. Set up a regular monthly transfer from your checking to your savings account to earmark this money before you're tempted to touch it. If necessary, cut back in another budget category (like eating out or entertainment) to free up the funds to save more.
Putting aside a little each month could prevent you from getting socked with a hefty bill you can't afford and then need to finance.
No matter your age, you should be adding to your retirement funds -- such as your 401(k) or individual retirement account -- each month. Just setting aside money sporadically won't cut it; you need to identify how much you'll need to live on once you stop working and monitor whether you're on track to reach that amount.
Here's a quick-and-dirty rule of thumb: multiply your annual spending by 25. This is the amount you'll need in your retirement portfolio, if you assume that you'll withdraw 4 percent per year to live on during your retirement. In other words, you'd need $1 million in your portfolio to live on $40,000 annually. Creating a plan will help you make sure you're able to retire the way you envision.
A home is a big investment, and sometimes that investment doesn't wind up netting you the return you thought it would.
The biggest culprit is having too large a balance on your mortgage, which detracts from your own personal stake in the current market value for your home. The sooner you pay this amount down, the better your home equity will be.
You also want to be careful when purchasing a new home. Buying in a neighborhood that's on the downward spiral or buying the most expensive home on the block, likely won't net you a good return when it's time to sell. Also take care to stay away from custom renovations (like turning the garage into a recreation room), which could negatively affect your resale value.
Paying high investment fees eats away at your gains. And since your gains compound over time, this creates a domino effect that can really chip away at your wealth. Take a close look at your investment companies' fees and shop around to make sure they're not taking more of your money than they need to be.
If you don't have a long-term investment vision and are simply playing the market, you could seriously undermine your wealth-building potential. Stop paying attention to market fluctuations, media pundits and the stories of your friends and family. Instead, create your own long-term investment strategy that will maximize your overall returns. Resist the urge it play it ultra-conservative (or fall for get-rich-quick schemes) and educate yourself on the best way to make your dollars work for you.
If you're having trouble making sense of your options or want a second opinion, seek the help of a trusted financial adviser.
Based on your experience and seniority level, education and industry, you should have a fairly good idea how much you ought to be making at your job. If you don't, check out a site like PayScale to get a ballpark figure.
If you're not making what you're worth, you're doing more than leaving money on the table; you're also losing all the compound growth and investment returns that money could be generating for you. Invest in yourself with professional development and continuing education, make the case for that raise or promotion, or seek out a company who will value you higher.
If you don't have proper insurance coverage, you're taking a very big risk that could come back to bite you. Too many people think the worst can't happen to them, but the hard truth is you can't predict the future, and scrimping on sufficient insurance is never a good idea.
Of all the things we're hesitate to part with our money for, adequate insurance coverage should not be one of them. No matter your age, everyone should be properly covered with:
Homeowner's or renter's insurance.
Flood insurance (if you live in a flood-prone area).
Umbrella liability insurance (especially if you own a small business).
If a spouse or children relies on you for support, make sure you have a decent term life insurance policy, as well.