A few years ago, my knowledge about smart financial decisions was limited. My focus was always on studying hard to achieve good grades and secure a well-paying job. I had a savings account, but that was the extent of my financial planning. When I started working, I lived impulsively, spending my money as soon as it came in, assuming I would earn more the following month.
However, as time went on, I realized the importance of educating myself about personal finance. Looking back, there are 20 smart financial decisions I wish I had known earlier. Let’s explore them:
- Prioritize Savings: When you receive your paycheck, allocate at least 10% of it to a savings account, Roth IRA, 401(k), or any other investment account. Consider this 10% as your first expenditure. Investing in your 20s is a wise move.
- Build an Emergency Fund: Aim to save 3-6 months’ worth of living expenses. If your monthly expenses amount to $2,000, including housing, transportation, food, insurance, etc., you should aim to have a cushion of $6,000 to $12,000 for unexpected emergencies like loss of income or illness.
- Invest Instead of Solely Saving: Simply saving money in a bank account won’t make you rich. Investing in assets such as real estate, stocks, bonds, or mutual funds has the potential to generate higher returns over time. Investments appreciate in value, while savings may depreciate.
- Track Your Expenses: Keeping a close eye on your expenses is crucial for effective financial management. It allows you to understand your spending habits and identify areas where you may be overspending. Remember, small leaks can sink a big ship.
- Create a Monthly Budget: Although the word “budget” may have negative connotations, it is a powerful tool for managing your money. Through budgeting, you can prioritize your financial goals, such as investing, debt repayment, or saving for specific expenses like a kitchen remodel. Save receipts and track all expenses to create an accurate budget.
- Benefits of Budgeting: I used to dislike budgeting until I learned its benefits from Dave Ramsey. With a budget, you can include the things you want while maintaining financial stability. It helps you focus on what matters and ensures your money aligns with your goals.
- Lessons Learned from Budgeting: Through budgeting, I discovered that using cash instead of a debit card helps me spend more consciously. I now think twice before making purchases. Budgeting also brings me peace of mind, especially during events like birthdays or Christmas, as everything is planned and accounted for throughout the year. Additionally, it allows me to identify areas where I need to cut back and allocate funds wisely.
- The Dangers of Buying on Credit: Financial expert Dave Ramsey emphasizes that if you can’t pay with cash, you can’t afford it. Buying on credit often means paying more in the long run due to interest rates charged by credit companies. Failure to make timely payments can also result in lower credit scores, reduced credit limits, higher interest rates, and late payment fees.
- Pay off Student Loans before Buying a House: Money expert Dave Ramsey suggests prioritizing debt repayment, including student loans, before saving for a house. Housing payments should ideally range between 28-35% of your income, while 15% should be allocated to debt repayment each month. Aggressively paying off student debt allows you to free up money for a reasonable down payment on a home, avoiding higher interest rates and private mortgage insurance (PMI).
- The Benefits of Paying Off a Mortgage Early: Paying off your mortgage sooner reduces the total interest you’ll pay, saving you thousands of dollars and allowing you to build equity faster.
- Impact on Taxes: Paying off your mortgage affects your taxes. While you can deduct a certain amount of mortgage interest when you have an active mortgage, paying off your mortgage eliminates this deduction, potentially increasing your taxes.
- Why Financing a Car is Unwise: Financing a car means you don’t truly own it until you complete the loan payments. Monthly car payments can strain your budget, and many cars lose value rapidly within the first few years. For example, financing a $20,000 car could cost you $27,000 over five years, while the car’s value depreciates significantly.
- Buying a Car without Financing: With discipline and dedication, it’s possible to buy a car with cash. Start by purchasing a reliable used car to meet your transportation needs. Save the amount you would have spent on monthly car payments, and after a year, sell your current car. Use the accumulated funds as a down payment for an upgrade. Continue this process, saving and upgrading, while avoiding debt and ownership limitations.
- Avoiding Brand New Cars: Purchasing a brand new car comes with a higher price tag and faster depreciation compared to used cars. New cars lose around 20% of their value the moment they leave the dealership. Opting for a two-year-old car can save you money while still providing a relatively new and modern vehicle.
- The Importance of Investing in Yourself: Investing in yourself is a crucial financial decision. Enhance your knowledge and skills to become more valuable to others. Take classes or courses, whether in person or online, to develop valuable skills. Investing in yourself is a surefire path to financial independence.
- Diversify Your Income Sources: Increasing your income sources is key to achieving financial independence. Explore alternative sources of income to bolster your investment portfolio and overall financial stability.
Reflecting on these simple guidelines, I realize that avoiding the money mistakes I made in the past would have had a significant impact on my life. Learn from my experiences and make sound financial decisions to shape your future positively.