Tuesday, September 29, 2015

7 Financial Lessons to Master by the Time You're 30

Welcome!  Well, this is the last day of September and this month I turned 39.  Another ten years of life is soon to be behind me.  I don't know about you, but it sure seems like time is speeding up.  I remember my days as a twenty-something when each year lasted a year.  These days a year feels like it goes by in nine months!  Totally not fair.  I suspect this warped sense of time loss has to do with how busy I am.  And this brings me to today's financial literacy lesson.

Most people will jack-up their daily productivity upon leaving college and getting a job, and/or once they settle down and start a family.  It's easy to get in a rut of doing the things one needs to do to survive to the next day, and the next, and so on.  Out the window go important financial lessons that must be practiced often so that they become habits over time.  The sooner you develop strong financial habits, the better off you'll be at retirement.  That's why mastering the following 7 financial lessons by the time you're thirty, will put you leaps and bounds above your peers, and on pace to retire in style.

1.  Create a monthly budget and stick to your budget for at least three months.  Don't start and stop like a car on a busy expressway, choosing to budget one month, foregoing on the next, and getting on a monthly budget again months later.  You don't make it automatic this way!  If you can do three solid months on a budget, you can handle a whole year, and a lifetime of living within your means.

2.  Pay yourself first!  If you take out money from your paycheck as soon as you get paid you will force yourself to scrutinize every purchase and subsequently redefine your needs and wants criteria constantly.

3.  Write S.M.A.R.T (Specific, Measurable, Attainable, Realistic, and Timely) financial goals.  Example: By the time I am 30, I will have started my own _________ company, and made _$_________ in top line revenue.  What you fill in after the dollar sign will depend on what you fill in for the first blank.  Remember, your goal has to be attainable and realistic.  So if you write, "Cupcake company" and "$5 million," you are not being realistic and your goal will not be attainable unless you happen to be selling magic cupcakes with ingredients hailing from Colombia.

4.  Take on good debt.  Eliminate and become psychologically averse to bad debt.  Good debt is hard to come by unless you have great credit to finance your fledgling company, real estate purchase, etc., Or you have learned how to use OPM (Other People's Money) expertly.  At best, learn to leave no credit card with a balance each month so you never have to pay interest.

5.  Invest three months worth of your six month emergency fund money in a liquid account.  Most people let all of their emergency fund sit idle in a practically zero interest bearing account.  You can be in and out of the market in a matter of days.  If you encounter an emergency, use your three months worth of cash in savings first.  If you're in a losing position with your invested portion of your emergency fund, use rally days to get out one month's worth at a time, giving yourself more time to hold your position and perhaps get out at better prices.  If you're up, i.e., sitting in the green, liquidate a months worth of cash at a time so you don't miss out on additional upward price action.

6.  Contribute to your retirement monthly.  Putting money into your retirement account monthly is like going to the gym regularly.  There are people who can do it.  There are people who can't.  The people that go to the gym regularly began building this habit early on in their lives and stuck to it.  If you don't contribute to your retirement as soon as you get a full-time job, benefits or not, you will be one of those people needing to make a new year's resolution to lose weight every year!

7.  Use your credit cards and don't have more than three.  Yes, in your twenties you should be making as many purchases as possible with your credit card.  But the trick to establishing great credit is to never use more than one-third of your credit limit for each card each month.  Example, you have a $600 credit card limit on one card.  Don't charge more than $200 on it each month.  And of course, be sure you can pay off the entire amount when the statement comes in so you're not charged any interest. 

Okay, ladies and gents, I hope this has been useful information for you.  Your twenties are the peak of your physical self and it's all downhill (gravity taking over) from there.  Your financial self is just starting to ascend the mountain so you should be practicing your climbing skills.  A fall from low elevation won't be so bad if you learn where you stepped incorrectly.  However, if you wait until you've almost reached the top of this metaphorical mountain, realize you aren't hooked to a lifeline, get nervous, and fall, getting back up and starting up again won't be as easy as it was in your youth.  So take my suggestions above and strap on that backpack hiker! 

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