Personal finance isn't the most exciting topic. The phrases "emergency fund" and "401(k) contributions" are hardly thrilling, but they're important—even though a lot of people don't pay attention to it. Here's a handful of boring money advice you might be ignoring, and why you should pay attention and follow it.
Save for Your Retirement
A lot of people ignore this advice because "saving for the future" sounds pretty dull. Plus, if you're young, it sounds so far off that you feel like it isn't a concern of yours. But the sooner you get started, the better. To afford your retirement, you need time for your money to grow.
Retirement isn't just about not working—it's about having the freedom to do whatever you want with your life. In fact, some people choose to retire early and still work part-time, because they like the idea of being productive.
But a lot of people neglect this advice and end up regretting it. Some people start saving for retirement way too late, and it becomes a stressful task rather than a positive goal. The sooner you start investing, the better compound interest can work in your favor. As boring as this advice may be, you should start saving as soon as possible, so you'll have enough to retire on your own terms.
How to get started:
- Open an individual retirement account (IRA) or 401(k) as soon as you can, even if you're in your twenties.Read our primer on opening a 401(k) and/or an IRA.
- If you're employed full-time, find out if your company offers a 401(k) match. If they do, take advantage of it.
- Calculate how much you should save.
- Figure out how to pick investments (index funds make it really easy).
Spend Less Than You Earn
Spending less than you earn is, in other words, living below your means. Some experts refer to "The Gap." The Gap is just the difference between what you spend and what you earn. If your lifestyle expenses are too high, it's possible to live paycheck-to-paycheck even on a six-figure salary.
The wider the gap, the better off you'll be, financially. Earning more goes a long way in widening that gap, but spending less than you earn is key.
We have a limited supply of money, so we should spend it on stuff we actually care about. Spending less than you earn helps you make better money decisions. This not only keeps you from buying a bunch of stuff you don't care about; it also makes you appreciate your purchases more. When you make better money decisions, the things you buy have more value, because you actually care about them.
And, if you have dreams and goals that require money, spending less than you earn helps you save for them. Overall, this advice is about using money in your favor and making it work for you, not against you.
How to get started:
- Make a list of all of your expenses. Find out where every one of your dollars is spent.
- Find out the most common ways you waste your money.
- See if there's a way to cut back on each area.
- Budget your expenses (more on that next).
- When you get a new job or a pay increase, avoid lifestyle inflation.
Make a Budget
It's your money, it's in limited supply, and you should know where it goes. A budget helps you organize your spending and make it deliberate. It's the first step in gaining control of your finances.
Money can be a very limiting resource. A lack of money can keep you from traveling, saving up for your dream home, switching careers—taking on some major life milestones. It short, money can be really controlling. Starting a budget is the first step in taking control of your finances. You're telling your money where to go and what to do.
Yes, you might still be unable to do certain things because you don't have enough money. But again, a budget is the first step in taking control. Once you take charge, decide where your money is going and create a plan for it, you can better work toward your financial goals.
How to get started:
- Learn about your spending habits and list your regular expenses.
- Draft a spending plan that you will follow regularly. Read our budgeting primer that will start you in the right direction.
- Hone your budget using our tips on how to build the perfect budget.
Create an Emergency Fund
You don't want to be caught off guard, financially, when trouble arises. When you're struggling, even a small issue can seriously set you back. An emergency fund helps soften the financial blow.
It keeps you from charging an emergency to a high-interest credit card or taking out a payday loan—those options are a quick fix, but they can set you back even further.
Let's say you're struggling to pay off student loan debt, and a car issue comes up. You have to put your loan payoff on hold, charge your car repair to your car, and now pay that off, too. It feels like you've just taken ten steps back for one step forward.
It's a stressful scenario, but an emergency fund can help remedy it. With an emergency fund, if a car issue arises, you have your own money to pull from while you're paying off your loan. And, sure, you want to replenish that fund while you're paying your debt, but it's a lot easier to replenish your own money than money you owe.
Plus, when you're trying to reach your financial goals, an emergency fund gives you peace of mind and puts you in a positive place to reach those goals. You feel secure and in control. And that can be really motivating.
How to get started:
- Open a savings account that you can withdraw money from in case an emergency pops up.
- Decide how much money should be in your emergency fund. You might want to start low.
- Decide what constitutes a true emergency.
- Don't spend the money unless a true emergency arises.
Get out of Debt
Some debt is unavoidable, but, ideally, you don't want to owe anyone anything. Don't take on debt if you don't have to.
When saving or investing money, compound interest can work in your favor. But when it comes to debt, compound interest can be a nightmare. Especially if your interest rates are high, you can end up paying a huge amount of money on a debt that was originally very small.
Another reason to get out of debt: it can hold you back. Debt can keep you from spending your money the way you want to spend it, even when you earn a decent living. Too much debt can also ruin your credit, especially if you ignore it and it goes to collection agencies.
Many people who finally get their finances in order regret being careless about their debt in the past. They have to spend time getting out of the hole, and this keeps them from reaching their financial goals faster.
How to get started:
- List all of your debts. Student loan debt, credit card debt, your car loan—list them all.
- Pick a method for paying each one off: The Debt Snowball, or maybe The Stack Method.
- Learn the difference between bad debt and good debt (good debt is taking on debt for an investment).
- Avoid bad debt.
- Work to repair your credit, if it's bad.
Make Financial Goals
Whether it's paying off debt or funding a vacation, making financial goals is about finding something meaningful to do with your money.
Creating a budget and coming up with a financial plan go hand-in-hand. A plan with financial goals gives you something to strive for, and, again, it keeps you in charge. Even if your goal is getting out of debt—at least you're working toward something. You might still feel like the debt is holding you back, but having a goal means you're addressing it. You're doing your best to manage the debt and keep it from growing.
Money doesn't buy happiness, but it does afford options. If you want to do something that requires money, having a plan in place will help keep you on track and motivated. It gives you a purpose for saving, budgeting and living below your means.
How to get started:
- List the financial accomplishments you want to achieve (i.e., get out of debt, save for travel, save for a home down payment, fund retirement).
- Make your goals actionable.
- Come up with a backup plan for financial setbacks. This will help you stay on track with your goals in case of an emergency.
- Set small milestones to make your goals easier to achieve.
- Learn how to deal with discouragement over goals that seem overwhelming.
Understand Your Taxes
We pay a lot in taxes. We should know what we're paying for and how the system works.
When you understand how taxes work, you can use that knowledge to your advantage. For example, you might be eligible for some big deductions you don't know about. That could mean you're missing out on some cash.
A little knowledge also helps you avoid IRS penalties. The IRS can penalize you for not paying your estimated quarterly taxes, for example. Many new freelancers learn this the hard way after their first year of self-employment.
Of course, you can hire a professional to help with this, too. But taxes are your responsibility, and it would benefit you to learn a little about them—even if just to make sure you pick the best tax preparer for your needs.
How to get started:
- Read up on the basics of paying taxes.
- Find out what tax bracket you're in.
- Learn about deductions. Check out our post on how to squeeze every last dollar from your tax return.
- If you're self-employed, find out how to handle taxes if you're a freelancer.
- Learn about IRS penalties and common tax mistakes.
- Learn why a big tax refund isn't actually that great.
In general, financial topics put a lot of us to sleep. When I tell people I write about "personal finance," their eyes glaze over. But the ultimate goal behind most personal finance advice is to become financially secure. And that, on the other hand, can lead to some pretty exciting stuff.
Photos by 401(K) 2012, Kamyar Adl, Chris Potter, Images Money, David, Bergin, Emmett and Elliott and Images Money.
Two Cents is a new blog from Lifehacker all about personal finance. Follow us on Twitter here.
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