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The high school and college years go by really fast.
It feels like one day you’re at prom, you blink, and BAM!- you’re an adult.
Seeing as how personal finance isn’t a mandatory part of our education system, I decided to put together a list of 10 money tips you should know before you hit the real world.
1. You Need To Have a Monthly Budget.
Yes. It’s true. You need to learn how to create a budget specific to each month.
Budgeting gets a bad wrap because so many people have used the term to control and maipulate others. In reality, though, a budget is just telling every dollar you earn where to go before you ever get it. That’s it.
Taylor and I have a budget meeting on our calendar for the 4th Sunday of every month to ensure it gets done.
2. You Will Need An Emergency Fund
The first time I ever used a credit card was because my car broke down on a road trip over 20 hours from home. Yes I was dumb and went on a major road trip with no money :-|.
The problem with using a credit card as an emergency fund is that you’re still financially responsible for the emergency.
Instead of saving up an emergency fund and covering that repair bill with cash, I went into debt and paid a ton of interest on the credit card.
In addition to that, I now had a credit card bill to pay every month which led to me taking on even more debt when other things came up and the cycle continued until we decided to pay off the $61,000 in debt a few years later.
The recommendation is to have 1 month of expenses while you’re focused on paying off debt. Once you’ve paid off everything except the mortgage, up the emergency fund to at least 6 months of expenses.
3. Make Your Money Work For You
The key to wealth is not working for money. The key to wealth is having your money work for you.
Albert Einstein is credited with one of my favorite personal finances quotes. It’s “Compound interest is the 8th wonder of the world. He who understands it earns it; he who doesn’t pays it.”
You have to begin viewing your money as an employee that works for you and not your boss.
We do that by creating several different income streams and creating systems that make us money while we sleep.
4. Fear of the Stock Market Is Irrational
Too many people have an irrational fear of investing in the stock market.
I often hear people ask “what if I lose all my money?”
The odds of someone losing all their money in a well-diversified portfolio over the long term are slim to none.
Let’s be clear: when I say long-term, I’m referring to a time period of at least 5 years. If I need the money I plan to invest within 5 years, I simply don’t invest it. For example, I would never invest in the market to have enough money to buy a home within 3 years.
However, when we’re talking about building wealth that will last for decades in retirement, you’d be hard-pressed to find a better investment than securities.
Therefore, the real, long-term financial risk lies not in investing in the stock market, but, rather, in not investing in it.
There’s a great book on this topic called “Simple Wealth, Inevitable Wealth” by Nick Murray that I highly recommend.
5. Your Credit Score Doesn’t Measure Wealth
As a wealth coach, I’ve sat face to face with folks who have 800 credit scores and are hundreds of thousands of dollars in debt and living paycheck to paycheck.
There is absolutely no correlation between a high credit score and wealth.
Your credit score is determined by 5 factors:
- 35% payment history
- 30% amount owed
- 15% length of history
- 10% new credit
- 10% types of credit used.
That’s it. Your income, savings ratio, net worth, etc are nowhere to be found.
I’m not saying that we should completely abandon our credit scores, however, it’s time we prioritize building wealth over building credit because only one of those can be passed down generationally.
6. You Don’t Have To Wait Til You’re 65 To Retire
Another book I love is “Retire Inspired” by Chris Hogan. In this book, Chris shatters the myth that retirement is about age and states the belief that retirement is more about your personal financial number.
That puts the responsibility back on us to create the retirement of our dreams.
Want to live a minimalist life in a log cabin near the mountains? You can create that life.
Want to travel the world? Or spend as much time as possible with your family? You can create that.
And you don’t have to wait until age 65 to do it. Smart investing early can help you generate enough passive income to not have to work by the time you’re 40 years old.
There are people actually accomplishing this in their 20’s and 30’s.
7. Make Sure You Keep Adequate Insurance
The purpose of insurance is to transfer risk away from you.
We pay health insurance so that we aren’t taking the financial risk of covering a major surgery or illness.
Life insurance ensures that your family can continue moving ahead financially should you lose your life.
Long-term disability takes away the risk of a total income loss should you become unable to work.
Homeowners/Renters and auto insurance protect some of our largest and most expensive purchases.
Identity Theft protection helps keep our personal information safe and helps us restore everything if that info is compromised.
The right insurance policies are not a money grab. They are key components to a healthy financial plan. Without them, you could be one accident away from bankruptcy.
8. You Can Negotiate Your Salary
Most job applicants are so eager to get an offer that they become afraid to negotiate the terms of that offer when it does come.
You obviously don’t want to be rude or entitled, however, negotiating salary is an expected part of the process.
Make sure you have credible reasons why your work is worth more money and be able to present it professionally.
For more tips on salary negotiation and asking for a raise, check out this blog post.
9. Scholarships/Grants > Student Loans
Student loans are not a requirement to be a student. My wife is a real-life example of this.
Taylor has a master’s degree and never took out any student loans.
She received a full academic scholarship from the University of Houston and decided to attend there although it wasn’t her first choice for undergrad.
During undergrad, she worked at the Houston Zoo (and dealt with me) and still managed to graduate with a 3.8 GPA.
2 years after graduation, she applied for and was accepted into a grant-based program for her Master’s degree at U of H. By then she was working full-time as a teacher and still completed the program with a 4.0 GPA.
Some takeaways from her story are:
- Be open to different colleges.
- Apply for as many scholarships as you can.
- Don’t be afraid to work during college.
- There are a ton of grant-based programs out there looking for qualified students.
10. New Cars Are Terrible Purchases
One of the first things people do when they land their first professional job is buy a new car.
Taylor and I both made this mistake, and it was a pretty costly one.
New cars will, on average, lose about 20% of their value within the first year with some models being as high as 50%.
After four years, most cars have lost 70% of their value. If any other “investment” lost money this fast, it’s likely that you’d never buy it.
What this, also, means is buying a 3-4 year old car with cash and driving it for several years will save you thousands of dollars.
Finally, the average car payment is currently $475 per month spread out over six years. Invested in the stock market over time, that $475 could grow to over $1.5 million dollars by the time a new graduate turns 50.
Let someone else cover the bulk of the depreciation and pay cash so you’re not driving your retirement fund around.