A class titled “Finance for Young Adults” usually isn’t part of a high school curriculum. This unfortunate lack leaves many young adults clueless about how to manage their money, apply for credit, and get or stay out of debt. States are beginning to remedy this shortcoming—as of 2020, 21 are requiring high school students to take a course in personal finance, and 25 are requiring that they take an economics class.
That should help at least a segment of the next generation. But for those whose high school days are past, let’s take a look at eight of the most important things to understand about money. These financial tips are designed to help you live your best financial life and take advantage of the fact that the younger you are, the more time your savings and investments have to grow.
If you’re lucky, your parents taught you this skill when you were a kid. If not, keep in mind that the sooner you learn the fine art of delaying gratification, the sooner you’ll find it easy to keep your personal finances in order. Although you can effortlessly buy an item on credit the minute you want it, it’s better to wait until you’ve actually saved up the money for the purchase. Do you really want to pay interest on a pair of jeans or a box of cereal? A debit card is equally handy and takes the money from your checking account at once, keeping you from racking up an interest-bearing balance.
If you make a habit of putting all your purchases on credit cards despite not being able to pay your bill in full at the end of the month, then you might still be paying for those items in 10 years. Credit cards are convenient, and paying them off on time helps you build a good credit score. And some offer appealing rewards. Except in rare emergencies, though, make sure to always pay your balance in full when the bill arrives. Also, don’t carry more cards than you can keep track of. This financial tip is crucial for creating a healthy credit history.
If you don’t learn to manage your money, then other people will find ways to mismanage it for you. Some of these people may be ill-intentioned, like unscrupulous, commission-based financial planners. Others may be well-meaning but may not know what they’re doing, like Grandma Betty, who really wants you to own your own house even though you can only afford one by taking on a risky adjustable-rate mortgage.
Instead of relying on others for advice, take charge and read a few basic books on personal finance. Once you’re armed with knowledge, don’t let anyone catch you off guard—whether it’s a significant other who slowly siphons off your bank account or friends who want you to go out and blow tons of money with them every weekend.
Once you’ve gone through a few personal finance books, you’ll realize how important it is to make sure that your expenses aren’t exceeding your income. The best way to do this is by budgeting. Once you see how the cost of your morning coffee adds up over the course of a month, you’ll realize that making small, manageable changes in your everyday expenses can have as big an impact on your financial situation as getting a raise.
In addition, keeping your recurring monthly expenses as low as possible can save you significant money over time. Even if you can swing an amenity-packed apartment now, picking something plainer could let you afford to own a condominium or house sooner than you otherwise would.
One of personal finance’s most-repeated mantras is “pay yourself first.” No matter how much you owe in student loans or credit card debt, and no matter how low your salary may seem, it’s wise to find some amount—any amount—of money in your budget to sock away in an emergency fund every month.
Having money in savings to use for emergencies can keep you out of trouble financially and help you sleep better at night. Also, if you get into the habit of saving money and treating it as a non-negotiable monthly expense, then pretty soon, you’ll have more than just emergency money saved up—you’ll have retirement money, vacation money, or even money for a down payment on a home.
It’s easy to put your fund into a standard savings account, but this earns almost no interest. Put your fund in a high-yield savings account, short-term certificate of deposit (CD), or money market account. Otherwise, inflation will erode the value of your savings. Just make sure the rules of your savings vehicle permit you to get to your money quickly in an emergency.
Just as your parents probably sent you off to kindergarten with high hopes of preparing you for success in a world that seemed eons away, you need to plan for your retirement well in advance. Because of the way compound interest works, the sooner you start saving, the less principal you’ll have to invest to end up with the amount that you need to retire.
Why start saving for your retirement in your 20s? Here’s an Investopedia example: You start investing in the market at $100 a month, averaging a positive return of 1% a month or 12% a year, compounded monthly over 40 years. Your friend, who is the same age, doesn’t begin investing until 30 years later and invests $1,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly. After 10 years, your friend will have saved up around $230,000. Your retirement account will be a bit over $1.17 million.
Company-sponsored retirement plans are a particularly great choice because you get to put in pretax dollars and companies will often match part of your contribution, which is like getting free money. Contribution limits tend to be higher for 401(k)s than for individual retirement accounts (IRAs), but any employer-sponsored plan that you’re fortunate enough to be offered is a step closer to financial health.
If you don’t have access to a company plan, don’t despair. Those who are self-employed have a range of options for setting up retirement plans. Others can open their own IRAs, allowing for a set amount of money each month to be withdrawn from their savings account and contributed directly into their IRA. Even if it’s only a small sum, it will eventually add up to something helpful.
It’s important to understand how income taxes work even before you get your first paycheck. When a company offers you a starting salary, you need to know how to calculate whether that salary will give you enough money after taxes to meet your financial obligations—and, you hope, meet your goals.
Fortunately, there are plenty of online calculators that take the dirty work out of determining your payroll taxes, such as PaycheckCity.com. These calculators will show you your gross pay, how much goes to taxes, and how much you’ll be left with—which is also known as net pay or take-home pay. For example, an annual salary of $35,000 in New York City would leave you with around $27,490 after federal taxes without exemptions for the 2020–2021 filing season—about $2,291 a month. Then you need to consider state and (for New York City) city taxes in addition.
By the same token, if you’re considering leaving one job for another in search of a salary increase, then you’ll need to understand how your marginal tax rate will affect your raise. For example, a salary increase from $35,000 a year to $41,000 a year won’t give you an extra $6,000 per year ($500 per month)—it will only give you an extra $4,227 (around $352 per month). The amount will vary depending on your state of residence and its potential tax bite, so take that into consideration if you’re pondering a move.
Finally, take the time to learn to do your own taxes. Unless you have a complicated financial situation, it’s not that hard to do, and you won’t have the expense of paying a tax professional for the work. Tax software makes the job much easier than it was when your parents were starting out and ensures that you can file online.
If meeting monthly health insurance premiums seems impossible, what will you do if you have to go to the emergency room—where a single visit for a minor injury like a broken bone can cost thousands of dollars? If you’re uninsured, don’t wait another day to apply for health insurance. It’s easier than you think to wind up in a car accident or trip and fall down a flight of stairs.
If you’re employed, then your employer may offer health insurance, including high-deductible health plans that save on premiums and qualify you for a Health Savings Account (HSA). If you need to buy insurance on your own, investigate the plans offered by the Health Insurance Marketplace of the Affordable Care Act (ACA). There are federal plans, or your state may have its own plan. Look at quotes from different insurance providers to find the lowest rates and see if you qualify for a subsidy based on your income. If you have health issues, know that a more expensive plan could be cost-effective for you. Research all your options.
If you’re under age 26, then your best choice may be to stay on your parents’ health insurance if they have it—an option allowed since the 2010 passage of the ACA. If you can manage it, offer to reimburse them for the additional cost of keeping you on their plan.
It also pays to take daily steps now to keep yourself healthy—such as eating fruits and vegetables, maintaining a healthy weight, exercising, not smoking, avoiding excessive alcohol consumption, and driving defensively. All these behaviors can save you on medical bills down the road.
To make sure that all of your hard-earned money doesn’t vanish, you’ll need to take steps to protect it. Here are some steps to think about, even if you can’t afford them all right now:
If you rent, get renter's insurance to protect the contents of your place from events such as burglary or fire. Read the policy carefully to see what’s covered and what isn’t.
Disability insurance protects your greatest asset—the ability to earn an income—by providing you with a steady income if you ever become unable to work for an extended period of time due to illness or injury.
If you want help managing your money, find a fee-only financial planner to provide unbiased advice that’s in your best interest, rather than a commission-based financial advisor, who earns money when you sign up with the investments that their company backs. The latter has a potentially divided loyalty (to their company’s bottom line, and to you), while the former has no incentive to guide you down a wrong path.
You’ll also want to protect your money from taxes—which is easy to do with a retirement account—and from inflation, which you can do by making sure that all of your money is earning interest. There are a variety of vehicles in which you can invest your savings, such as high-interest savings accounts, money market funds, CDs, stocks, bonds, and mutual funds. The first three are relatively free of risk, while the remaining three carry greater possibilities for financial setbacks but also greater possibilities for monetary rewards. Learning about investing is an important skill for building up your savings—and, eventually, building wealth.
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Alfredo Gaxiola has worked on numerous IRS problem cases and has successfully settled with the IRS to release liens on houses, bank accounts and wages and, if needed, setting a payment installment plan that is not burdensome for the client. He has conducted appeals before the U.S. Tax Court and obtained favorable resolutions in reducing the tax debt of his clients. Mr. Gaxiola served as Treasurer of Camara de Empresarios Latinos, one of the largest and strongest Hispanic organizations in the city of Houston. He has conducted financial and accounting seminars for the Houston Small Business Development Corporation, as well.
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