Your 20s can be a complicated time. For the first time, you may be on your own financially and it’s likely that you’ve never been taught the basics of good money management. If you’re struggling just to pay your bills, and feel lost when it comes to saving money, there is good news. Managing your finances doesn’t have to be complicated and time-consuming. We would like to provide you with six harsh truths about money you need to accept, which should relieve so me of your anxiety over managing your finances.
1. You won’t save money without a plan
Last time you wanted to take a trip did you spend a serious amount of time agonizing over your options? Did you worry about whether you should take a plane, a car, or a train, without first determining where you were going?
Just as, you first need to decide where you’re going on a trip, you first need to decide where you’re going with your money. You have to set financial goals for yourself.
Start by writing them down, and then prioritize them in terms of how important they are to you. Your first goal might be something short term like paying off a credit card debt, so you could then move on to something even more long term like saving for retirement.
2. Debt doesn’t just disappear
The worst thing you can do with debts is ignore them. Whether you have credit card bills, student loan debts, or medical bills, they just won’t disappear. Thanks to compounding interest, the longer you wait to pay down those debts, the more you’ll owe. Here’s an example of how wicked compound interest can be. Let’s say you owe $6,000 at 18% interest, and make just the minimum monthly payments of $120. Put this information into a credit card repayment calculator, and what you’ll learn is that it will take you 94 months to pay off the debt and cost you $5173 in interest!
The financial expert, Dave Ramsey, recommends what he calls the “snowball method” to repay debts. This is where you rank them in order of their size, and then focus all your efforts on paying off the one with the smallest balance. The idea behind this is that every time you pay off one of your debts, you’ll build momentum that will help you tackle the one with the next lowest balance, and so on.
Of course, the best plan is to stay out of debt. Here’s a video where Omaha billionaire, Warren Buffett, explains how to do this.
3. It’s unlikely you’ll ever beat the market
It’s possible you could become the next Warren Buffett, but it’s improbable. Even people who spend eight or 10 hours a day, five days a week, studying the market, don’t beat it on a regular basis. There are just too many variables. No matter how deeply you peer into your crystal ball, it’s just impossible to know how individual stocks, or even mutual funds, will perform over 30 or more years.
Low-cost index funds are broadly diversified as they hold many stocks. For example, there’s the Vanguard Total Stock Market Index Fund. It includes a mix of small-, mid-, and large-cap growth and value stocks, and that has an expense ratio that Vanguard says is 75% lower than funds with similar holdings.
Investing in an index fund won’t make you wealthy overnight, but you won’t lose a lot of money. Plus, it’s almost certain that you’ll see your investment grow over the long term.
4. You will have an unexpected financial emergency
Regardless of what you might think, you will eventually have an unexpected financial emergency. The transmission could fall out of your car, a tree could fall on your house, or you could suffer a big medical emergency.
The only way to prepare for these unexpected expenses is to have an emergency fund. If at all possible, you should have enough tucked away to cover at least three months of your living expenses. If you don’t think that’s possible, try for at least $1000. If you are unable to build an emergency fund, you’ll have to check out other options like a low interest, online loan.
5. You may have to spend more now to save money in the future
If you’re trying to be frugal, it can be tempting to buy almost everything at Walmart. However, in many cases it’s best to spend the extra money to buy stuff that will last, and you can have for a long time. This will save you money over the long haul, and should help you become a more conscious spender and maybe even think twice before you swipe that credit card.
6. It’s easy to overspend on payday
Getting paid is very exciting. However, if you’re not careful, it can trigger overspending. What you need to do is pay yourself first. You should try to save at least 10% of your gross income into a retirement account. If your employer offers a 401(k) plan, deposit your money into it – especially if it provides matching funds. If not, open either a traditional or Roth IRA and deposit the money into it. The easiest way to save is to have the money taken out of your paycheck automatically and deposited straight into your retirement account.
The net/net
If you learn and remember these six harsh money truths in your 20s, you should find it much easier to get your finances under control. You’ll then be on track for your 30s, when there’ll be bigger issues to deal with like buying a house or starting a family.