This topic has been suggested to me a lot lately and I was initially hesitant to write it because I don’t claim to be a financial adviser in any way shape or form! So proceed with CAUTION! These are just things I’ve learned from living and doing. Don’t expect any legitimate strategies here! However, I do have a couple of tips and tricks up my sleeve that often times surprise my friends who are stumbling through adulthood like me, and aimlessly trying to figure out how money works. I am often surprised myself when some of my friends haven’t heard of some resources I’ve become so accustomed to and integrated with my everyday life. So here it is: A Crash Course to Financial Awareness.
Budgeting
Budgeting is tedious and boring, I’m not even going to lie about it. However, it is absolutely needed and requires a lot of diligence. The good thing is, if you’re meticulous enough, you’ll only really need to do it once and just tweak the original for the rest of your life. There are two ways to go about this you can either plan it or live it– depending on your comfort level.
- Planning it is easy enough if you have been on your own for a while and have a steady income. How much do you make a month? How much do you spend a month? Make each expense a line item (gas, groceries, monthly subscriptions, rent, etc.) From here you should be able to gauge what can be adjusted. For instance, if you’re spending $200 a month on manicures and $150 a month on Starbucks coffee alone whilst living literally paycheck-to-paycheck, you probably need to readjust your priorities.
- Living it – Let’s say you just started a new job or work part-time with an hourly wage and you have no idea what your average monthly income is but you’ve been living your life long enough to realize “erm…I’m incurring a little bit of debt and must learn how to budget like, yesterday.” Better late than never! However, if your situation is harder to figure out what you have and what you are lacking– just live your life for a month whilst carefully monitoring your expenses and work backwards from there. Figure out how much your monthly expenses are, how much you need in order to pay all of your bills in full, and what you can cut in order to make those payments.
Contingency Fund
As soon as you figure out your budget, you need to prioritize and designate a small portion of your net income to build a contingency fund. Most people don’t have a contingency fund– in which case, a solid $1,000 will do if you’re just starting out. That’s just generally speaking— $1,000 can get you out of a lot of trouble. In truth, everyone has a different idea of what a contingency fund should be and it really is subjective to the individual. My personal contingency fund is $4k which is equivalent to 2 months of work because I am a very, very paranoid and well-prepared person. That isn’t to say I starved myself to death for 2 months until I had $4k in my savings account. (I definitely wouldn’t advise that.) It was slowly built up over time, throwing change here and there until finally one day I had a solid, stagnant $4k sitting in savings. Some people say 2 weeks of work alone makes a solid contingency fund; others 1 month. In the end, it is up to the individual, but is an absolute necessity. When in doubt, save $1k.
Credit Cards — a double-edged sword
Credit cards are inherently evil. Why would anyone pay more for something they don’t already have the money for is beyond me. However, it’s a necessity if you really think about. It’s hard to build up credit for yourself unless you have a credit card. Yet, with a credit card, it’s so easily to fall in the pit of debt. That is why before I got my first credit card, my father said I was only allowed one if and only if I was able to pay off the full balance each and every month. It is because of this that my credit score is currently in the 700s. To this day, I pay off my full monthly balance of my credit card. A credit card can still really help you out when you’re tight on funds; I just wouldn’t advise using it past the point of your ability to fully pay it off. Honestly, once you cross that line, it’s really difficult to recover. If you don’t already have a credit card, or looking to get another one, here’s a couple of things to consider: get one that offers a high % cash back on purchases, low APR– or better yet– extended period of 0% APR after initial sign-up, and NO ANNUAL FEE. My first credit card had an annual fee of $89/year and offered absolutely no cash back benefits! So, be careful and don’t fall into that trap.
Investing in Stocks/401(K)/(Roth) IRAs
I tell everyone that you’re never too young to start investing in stocks. I paid off more than 50% of my student loans accrued from graduate school with money I gained from investing in stocks within one year. (For reference, I had taken out a $40k student loan to pay for my graduate school tuition.) People always ask me, “how much do you need in order to start investing?” For real, you can invest with $5, but I always tell people $1,500 to have a good, solid, account. I have been blessed with a financially literate father who always encouraged me to learn stock trading and be interested in these things. While honestly it still hasn’t caught my genuine “interest” it is still amazing that I have yet paid-out-of-pocket with the money I earn from working, to my student loans. My stock account is on a monthly $500 automatic withdrawal to which I commit 100% of it to my monthly student loan payments (which is also more than double the minimum amount so I can pay it off faster, with less interest. #Protip.)
I’m not a stock broker and I can’t tell you what to invest in or what to do with your money. All I can say is: buy what you like, figure out which stocks you’re going to keep long-term/short-term and then just go for it. Don’t freak out if you experience a loss because most often than not, stocks go back up. So don’t sell just because it is trending downwards, just wait a bit. Better to make a little, than to lose a lot. As Warren Buffett says, “Rule #1: Never Lose Money. Rule #2: Never Forget Rule #1.”
401(k)s are a little bit different, I wouldn’t get one with your company unless you are willing to devote a chunk of your lifetime to it. Most companies have a vesting policy (meaning you have to stay a certain period of time in order to keep all of it.) I was a little salty with my former company because they told me I had to work a full year before I can opt into their 401(k). This is not true. You should be able to opt for a 401(k) the day you sign on with a company. The question is then, how much should you pay into it? You should pay into however much the company is willing to match. ALWAYS! Because whatever you don’t pay into, is a waste– you’re missing out “free” money the company is willing to match! Overpaying into it, well you’re just being a fool and losing out money that you can use to build up your personal savings account or your IRA (more on that later). Again, I emphasize to only get a 401(k) if you know for a fact you will stay with your company for at least 5 years. Some companies are really open about their vesting policy, some are not. (Trust me, you don’t want to find out the hard way!) In my personal case, because my company said I had to work a full year in order to pay into my 401(k), I instead put the money I would’ve paid into it, into my stock trading account to further assist my ability to pay off my student loans.
IRA or “Individual Retirement Account” is SUPER important because not many people think about retirement until it is way too late. A general rule of thumb states that you’d need 25x of your annual income to retire happy and healthy. For instance, if your annual income averages around $40k, then you’d need $1 million dollars in savings by the time you retire. This is across the board, generally speaking. For a more accurate estimate (keyword: ESTIMATE) you can use this retirement calculator to figure out how much you need to retire happy and healthy. Now, if the idea of $1,000,000 freaks you out, just imagine realizing that when you’re in your 40s or 50s and are nowhere close to even having that. (It happens!) This is why I tell people around the age of 25 or so to start saving up for their IRA because we got a long way to go, kids!
There’s two types of IRA accounts: Traditional, and Roth. Yes, there are differences between the two, but I’m not going to get into it here. (As if my blog posts aren’t already long enough.) You can read the specific differences between the two here. They both have a contribution limit of $5.5k (as of 2017) or $6.5k if you’re over 50. Both have tax incentives but differentiate on when you can obtain a tax break. Contributions are tax-deductible for the years you contribute to Traditional IRAs whereas Roth IRAs, you avoid taxes when you withdraw after retirement age. That is the biggest difference between the two. In simplest layman’s terms, if you are older and/or earn a much higher income– get a Traditional IRA. If you are younger, don’t care about obtaining annual tax breaks for every year you contribute, and want tax-free earnings and withdrawals in retirement, get a Roth IRA. I have a Roth IRA. One is not better than the other. It literally depends on what you want.
A lot of people get 401(k)s and IRAs confused. While both are for the sake of retirement, just know that 401(k)s are employer-sponsored since they match contributions, whereas IRAs are set-up by the individual so in terms of investment, there is a lot more freedom because you’re in control of it.
Rebates and Rewards
When you absolutely can’t help succumbing to your buying needs– at least do it smart! There are a lot of reward/rebate programs out there in the world! For instance, remember earlier where I mentioned if you spend $150 on Starbucks you’d probably need to readjust your priorities? You’d probably regret it a little less if you were part of their rewards program. By that rate, you’d get two free drinks a month, not to mention free in-store refills. I still get surprised every time someone who frequents Starbucks still isn’t a member of their rewards program. Back in my day you just needed to visit 30 times in one year to achieve gold status. Nowadays you need to spend $150 in one year to achieve gold status. Then again, if you’re already spending $150/month on Starbucks, you’ll achieve that status in just 1 month. Just think of all the perks you’ve been missing out on all this time! (Including a cute gold card personalized with your name!)
I keep all my punch cards to everywhere that offers them even if it means digging through my purse and holding up the line for 15 minutes. I don’t care. If there’s a deal, I’ll get it. My phone is also cluttered with food apps specific to one food joint that offers rewards as well. These companies make it hard to track your points for a reason–so you’d forget and not redeem anything. But if you’re a crazy person like me, who’s into extreme couponing and hoarding apps/punch cards…a little goes a long way. It’s like when you have absolutely no money, but dig in your car for a good 5 minutes and find $5 in change! Doing things like that and keeping track of everything always adds up in the end.
Honest to God, my favorite thing it the whole wide world is Ebates.com which is an online rebate site. How it works is you sign-up for an Ebates account and shop on your favorite online retailers’ website and when you checkout you can earn up to 40% cash back (some places even offer rebates from Ebates in-store now — whaaat?!?!) I’ve been using Ebates since I was literally in college and now have earned over $300 in rebates in my entire history of using this thing. Typically, I tell people of this site and they won’t even look at it– they think it’s too good to be true and it’s a scam. All I have to say to them is, “Fine, don’t save money, I don’t care!!” If you click on this link and sign-up you’ll get $10 of credit courtesy of ME to put towards your first purchase in any of the bazillion gazillion retail stores Ebates have a partnership with. Just kidding, “bazillion gazillion” isn’t a real number but check out Ebates yourself and see just how many retailers they have listed eligible for rebates! It’s insane! They even got Amazon
Freeloading & Rent where you can.
Did you know you can have multiple accounts for Hulu, Netflix, AND Amazon Prime?!? I’m only mentioning this because while budgeting, monthly subscriptions are typically the first to go. That, and downgrading to generic products when buying groceries. Amazon Prime
Netflix and Hulu is a little bit harder to share but maybe your bestie/fam won’t mind giving you their login information. Just don’t be a jerk and watch on their profile and mess up their viewing settings! Be courteous and always make your own profile if someone is nice enough to let you borrow theirs! Netflix also offers one month free trial just like Prime, Hulu on the other hand, offers a free trial for two weeks. (Again, be mindful of that trial period!)
You can also rent things rather than buy items you know you only need for a short period of time. I don’t mean renting a place to stay, or even renting furniture/electronics. Be careful with lease-to-own retailers because typically you’ll end up paying more than what it is worth paying it outright. I’ve known some people falling into that trap. After doing a little math, they come to realize by the time they are done paying for it, they have paid enough to own two of what they rented because of lease-to-own. Remember– those types of retail stores need to make money some way too! While it seems like you’re getting a deal while paying for it, in the long run you’re really better off just buying the item outright. A great example of an item to rent instead of own are college textbooks. Throughout my higher education experience I probably bought textbooks for one whole academic year before realizing how much money I was losing from buying textbooks. The buyback value are always next to nothing compared to what you bought it for, even if you bought it USED! I quickly learned to rent my textbooks from online or resort to ebooks (you can buy/rent those too! Buying ebooks is already substantially cheaper than buying the real book, if the option is available.) There are many sites that offer textbook rental but my personal favorite is Chegg (which you can get 3% cashback with Ebates! FULL CIRCLE!) In fact, renting from Chegg throughout college was how I got most of my money from Ebates. Even if they didn’t have Ebates, Chegg has very low prices for renting textbooks AND they are a very philanthropic company which I LOVE. I love supporting their philanthropic efforts from planting a tree for every textbook you rent to providing various scholarships, and MORE. So, if you’re a student looking to rent a textbook, please consider Chegg because they honestly do good work. (#NotSponsored– that’s how much I love them.)
Once more, full disclosure, I’m an Arts major– I don’t know anything about finance (or at least have the education/degrees to back up any of the information I’ve disclosed here.) This is just stuff I learned from doing, mainly because my father did his due diligence in informing me and teaching me these things. I got all of this from word of mouth and honestly, might not have gotten some things 100% correct; but it’s gotten me this far! I’m still alive and not starving to death on the street. Did I get something wrong? Do you have something else to add? Did you learn something? Not learn something? Did I put you to sleep?! Let me know in the comments below and start a discussion because as always, I’m eager to learn more and hear from you!