Did your father sit your down for that big talk … not about sex but about personal finance? Mine certainly didn’t. He did impart some nuggets of financial wisdom over the years but he never gave me the big picture — of what it takes to be successful at managing my finances. As a result, I made some serious financial mistakes that continued to haunt me for many years.
Even if your father did sit your down to talk about personal finance the odds are that there are things he neglected to tell you and here are five things he may have missed.
1. You don’t need a formal budget
The most fundamental concept taught by almost all experts on personal finance is that you need a budget. There’s even a very popular software program called, yes, You Need A Budget or YNAB for short. The problem with most budgeting software and apps is that they require an enormous amount of record keeping and an incredible amount of self-discipline. For example, to get started with budgeting generally means writing down all your spending for at least a month — right down to that drive-through coffee you bought for a dollar. Then you’ll need to organize all your spending by categories, determine those categories where you could reduce your spending, continue tracking your spending, make adjustments to your categories as necessary and on and on. Plus, you must have enough self-discipline to stay within your budget, which will likely mean a number of sacrifices — like saying goodbye to eating out three times a week and sitting home, eating popcorn while watching Netflix … instead of going to a film with friends.
2. There’s a simpler answer
A simpler answer than having a formal budget is to sit down and first add up your non-discretionary expenses like housing, utilities, transportation, auto insurance, your cell phone bill your debts, etc. Subtract this from your total earnings and then divide what’s left over in two — with at least 10% earmarked for saving and the rest for your discretionary expenses — eating out, entertainment, clothing, food, etc. Pay your bills, put that 10% into a savings account or IRA and you can then spend what’s left over any way your heart desires. Of course, if you run out of discretionary money before you run out of month you’ll have to take a hard look at where the money went and figure out how you can do a better job of managing it next month.
3. Saving just for retirement can be a mistake
If you father is typical, he probably harped on the importance of saving for retirement. And he was right. It’s important to be saving for retirement. But if your retirement is 30 or 40 years away that can be a pretty intangible goal. What’s better is to have at least one short-term goal, too. For example, your short-term goal could be saving for a special vacation. You could set up a separate savings account just for it, deposit something like $100 a month into it and then just sit back and watch the money grow — knowing that with every deposit you make you’re just that much closer to realizing your goal. This alone can be a powerful motivator to help keep you on track.
4. If there’s no 401(k) your best option is probably not a Traditional IRA
If your company has a 401(k) plan where it matches your contributions and you’re not taking advantage of it, you must have a hole in your head. Matching employer contributions are like free money. Unfortunately, not every employer offers one of these plans. If this is true where you work, you need to start an IRA. While your father may have told you to open a Traditional IRA, that might not be your best choice. Traditional IRAs can be very tempting because the money you contribute is tax deductible meaning that you pay no income tax on it — until you begin taking withdrawals. In contrast, with a Roth IRA you pay taxes on the money you contribute so you’re investing with after-tax income and your earnings are tax free. Plus, when you retire your distributions are not taxed. Given all this a Roth IRA is usually a better choice for people in their 20s or early 30s.
While you certainly can save more by cutting down on your spending there’s another option that works better for many people and that’s to earn more. And by that we don’t mean hitting your boss up for a raise. There are literally dozens of ways to increase your earnings. For example, if you’re expert in math, writing or a foreign language you could become a tutor. We know of one recent graduate that’s knocking down an extra $1000 a month tutoring high school students in Calculus. How about those weekly yard and estate sales? This is where the old adage of “one man’s trash is another man’s treasure” definitely holds true. However, before you rush out and start buying stuff to put on eBay spend some time there in research so you’ll know what things are worth. Since it’s impossible to know what everything sells for, pick a category like antique china, model trains, coins or sports memorabilia and then learn all you can about it.
Of course, the simplest way to earn extra money is to get a part time job. Sure, they usually don’t pay much more than $10 an hour but if you could log just 20 hours a week that’s probably around $160 net or $640 a month. Work that second job for six months and you’d have $3840 to stick away in an online savings account or your IRA.
If you aren’t able to work a second job, there are still a number of ways to earn extra money without leaving home. Are you a reasonably good writer? There’s also money to earned writing articles for websites. There’s also extra money to be made serving as an online juror, taking surveys online or by becoming a blogger. In fact, you put your mind to it and do some simple research on the Internet you’ll probably find 25 or more ways to increase your earnings — and again without even leaving your home.