People often ask if they are doing the right things with their money. As an advisor, I have a duty to clients to provide the best advice I can, but ultimately, it is up to the client to decide what is best for them. Think about it - why does something have to be a problem financially before you address it? Let’s pretend we have a brand-new iPhone. Do we wait until it gets broken before we do something to protect it? NOPE! Slap a case and screen protector on it before you leave the store. Oh, and don’t forget that extra $17/month for the insurance because we know what happened to the last one. Let’s not go there. This is called being proactive. Yay!
Let me ask you this - have you ever built a house? If not, why? You know how to use a drill, hammer, and tape measure, right? You know most of the materials you need, right? Lots of lumber, screws, sheetrock, etc., but how do you ensure all those pieces are put together correctly? Do you trust your skills as a carpenter, electrician, plumber, or roofer enough to want to live in this house you just built? If you don’t do it every day, building a home would be difficult, and you would likely make many mistakes.
The same can be said for managing your finances. Do you know enough about investing to get by? Likely. You know what stocks and bonds are. You pay your bills on time and save a little extra money every month. Is that enough? Maybe. Would you be great at it if you knew more and did it every day? Very likely. You wouldn’t build your own home, so why would you build your financial plan? Both have detailed blueprints that must be followed. Both also require great skill to put all the pieces together correctly. Most financial advisors would tell you that each of the following items will help you, and the sooner you get to them, the sooner you may achieve some financial independence.
- Find a financial advisor.
- Use your parents’ advisor, or if your parents don’t have one, find someone you know that does and use their person. Otherwise, do some research and find someone to help you. You won’t regret it.
- Pay Yourself First
- Saving money is important, and it’s never too early.
- The first 20% of your income should go to savings (in my opinion).
- Living on the remaining 80% gives you breathing room to adjust for potential increases in expenses.
- Compound interest. Interest earns interest that earns interest. Time is money!
- See above for advice on where to save your money. Hint: not in a jar buried in the yard. Also, don’t invest in your neighbor’s baseball card collection. I don’t care how many Ken Griffey Jr. cards are in the box.
- How do I pay myself first?
- Create a budget.
- Track where each dollar goes. This will help you realize where you can cut back.
- If you see where your money goes, you are more likely to be able to do something about it. Most people never realize how much they spend at Scooters, Kwik Star, etc., for items they don’t need. Consider taking it easy with the $8 coffees.
- Learn how credit cards really work.
- The interest you pay is bad. The interest you earn is good.
- Should you be buying a new wardrobe if you can't pay for it in full right away? Think about it: If you have $1000 of credit card debt with a 25.99% interest rate and are making a minimum payment of $100 per month, it will take you one year to pay it off. If you do the math on this, that is $1,200 to pay off your $1000 purchase. That's a 20% increase. Would you ever go to a store that was marketing a 20% increase in prices to shop? Not likely. This number increases dramatically with higher balances and longer payoff terms. Debt can snowball out of control if you don't manage it properly.
- The average American household has $10,000 in credit card debt. Let's take a look at those numbers. If you make a minimum of $250 payment monthly, it will take you 90 months. That's 7 ½ years to pay off. The interest paid on that debt...$12,436. Stop giving away your money!
- Think about how much debt you have compared to income. Stop digging if debt payments account for over 40% of your take-home pay.
- Acquiring too much debt, even if you are always on time with your payments, will still severely affect your credit score and will cost you if you need to borrow more.
- If you find yourself digging a hole you can’t seem to get out of, stop digging.
- You need a plan to get out; otherwise, you’ll be stuck there.
- Build a good credit score.
- A good credit score will help you pay less interest on the debt you acquire and save you money in the long run.
- Bad credit=risky investment. To justify the loan, the lender usually charges bad credit borrowers higher interest rates.
- Try to avoid buying discretionary items on credit, like new shoes you can live without. This is so easy. It gets easier to buy on credit every time. Before you know it, you have a closet full of new shoes and no money to go out on a date to show them off. Don’t be that person!
We all make mistakes. Most are avoidable. Working with someone who knows how to help you build your financial home will leave you far better off than if you were to build it on your own. A good advisor will help you avoid the more costly mistakes. Delayed side effects include sleepier sleep, more dates, more fun, more joy, more travel, more friends, and less stress. No prescription is needed! Contact me at firstname.lastname@example.org or 319-352-2880, and I'd be happy to help!