Here are 11 money rules you need to have memorized before you’re 40 that can significantly affect the rest of your life.
1. Pay off your credit cards monthly
The average American has $7,000 of debt, racking up fines on their credit cards, and this is the number one financial mistake people in their 20s and 30s make, says Carla Dearing, a certified financial planner and CEO of SUM180, a digital financial planning service.
“Too many people think a little credit card debt is no big deal, but do you know what the acceptable amount to carry over is? Zero,”
she explains. Because of their high-interest rates, paying off your credit cards every month should be your number one financial priority. Once you do that, you can incorporate these ideas to save more than $1,000 every month.
2. Save six months’ worth of expenses
Half of adults don’t have $400 in case of an emergency, much less the money they’d need for a broader event, like losing a job Dearing says.
“Everyone knows they should be saving more money but that’s where they get stuck,”
she says. “The trick is to know your ‘number.’” And by ‘number’ she means the amount of money it would take to cover six months of your basic expenses. Just sitting down and writing out your expenses—even if you don’t start saving right away—is a huge leap forward as it will help put you in a savings mind frame, she adds.
3. Do a 30-day money fast
Juice and water fasts are all the rage in health circles right now, but it turns out one of the healthiest fasts you can do for your life is a “money fast.” This means going for a full month without spending anything other than paying your basic bills and putting all the money you don’t spend into your savings, Dearing says.
Not only will the no-spend month give your savings a good boost, but once you see how much you really are spending on little things, it’ll be easier to make those tiny cuts. You can always start with these 28 ways to save on food.
4. Figure out your 401K
Do you know what your 401K is? Where it is? How much is in there?
“People think they should know all of this money stuff and get paralyzed when they don’t but ignorance is not an excuse for inaction,”
Dearing says. And nowhere is that ignorance more damaging than when it comes to saving for retirement.
About 42 per cent of adults in America aren’t saving for retirement at all, according to Motley Fool. No one is expecting you to be a retirement expert, she says, so ask your HR representative or a bank representative to help you figure it out.
Her number one tip?
Make sure you’re making the maximum contribution each month and are taking advantage of any matching programs your company may have.
5. Check your credit report
Thanks to a recent law, Americans are all entitled to one free credit report per year, and you should be taking advantage of this. It’s so important to stay on top of your credit because it’s being used to calculate everything from your rent to your insurance rates, she says, adding that you should aim for 710 or higher.
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But don’t stop at the top number. Look over your entire report for old loans you may have forgotten about, outstanding bills, mistakes, and evidence of fraud. These problems can take months to fix so get started on cleaning them up right away. And in the meantime make sure you know these 13 things debt collectors won’t tell you.
6. Make a monthly budget
Back when everyone had to balance their chequebooks regularly, budgeting made more sense to people, Dearing says.
But now that we do everything electronically, many people have lost all track of what’s coming in and going out of their bank. And even though this makes budgeting a little harder—often you have to track down multiple accounts—it makes it all the more important.
“It doesn’t have to be a complex spreadsheet, a good old-fashioned worksheet is fine,”
she says. There are also several cool new apps that bring your budget right to your phone.
7. Deal with your student loans
The average class of 2018 graduates picked up $29,800 in debt along with their diplomas. The loans that they didn’t pay much attention to during their coursework suddenly come due after graduation and that can be a huge financial burden, Dearing says.
The first step, she says, is to separate your loans into federal (government) versus private. Then check to see if you are eligible for the recent programs set up to help consolidate and reduce payments for federal loans.
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If your loans are privately held, contact each lender about consolidating and see if you can negotiate better terms. And to help your kids from repeating the same mistake, check out these 10 strategies for making it through college debt-free.
8. Buy term life insurance
Life insurance, like retirement accounts, is another item many people think is too confusing and so they choose to ignore it, Dearing says. But it doesn’t have to be complicated.
“You only need to purchase 20 to 25 years’ worth, or until your kids (if you have them) graduate from college,”
she explains.
“There are many affordable options, and this is one of the best things you can do for your loved ones and your own peace of mind.”
Hint: Stay away from the insurance policies you don’t need.
9. Invest in real estate
More and more young adults are putting off buying a home in favor of the flexibility of renting, but that is a mistake, according to Dearing.
“Real estate isn’t just for rich barons! A home is the number one wealth-building asset for most people. The return on homes is consistently better than the stock market,”
she explains.
The one caveat is that you must have enough cash saved for a 20 per cent down payment, she adds. But if a house is totally out of reach right now, consider going in on a rental property with a family member or even adding more real estate stocks to your portfolio.
10. Look for identity theft
Do not, we repeat, do not throw your statements straight into the trash (or do the digital equivalent of deleting the emails without reading them). Statements and electronic alerts from your bank, credit cards, and loan holders are one of the first ways you can spot suspicious activity, Dearing says. And staying on top of fraud is super important because the longer it goes on, the longer it will take to untangle and the more damage will be done to your finances.
11. Live within your means
This is the most fundamental principle of all personal finances, and yet so many of us have such a hard time doing it!
“It feels harder than it really is,”
Dearing says.
“Basically what it comes down to is finding little ways to increase your income and decrease your expenses.”
And in our Internet-based world, finding these little opportunities is easier than ever.
Buy items used off Craigslist, set up a small Etsy store to sell your hobby items, trade goods and services on apps, put up a room on Airbnb, or sign up for Mechanical Turk. Once your creative juices start flowing, the opportunities are endless.
Article first published in Readers Digest.
