Personal finance: good financial habits to start now
“I just got my tax refund, it’s time to go on vacation!” I can’t tell you how many times I heard this growing up and now I see it daily on social media. I recognized early in life that the way I managed money was very different from most people I knew. It has always baffled me because I never fully understood how people could spend money without even thinking twice about saving or retiring. Here are some basic habits you can start now to help ensure your future financial security:
1. Saving for retirement as soon as possible is the most beneficial thing you can do. Even if it’s just $50 a month, which is the bare minimum for most plans, you could be setting yourself up with thousands upon thousands of dollars when you retire. The sooner the better. For example, a 25-year-old who saves $200 a month until age 65 and earns exactly 6% of the funds saved annually will have accumulated about $400,000. But a 40-year-old who contributes the same amount each month to the same earnings rate would have amassed just $139,600 at age 65.
2. Never carry a balance on a credit card with an interest rate. This is one of the fastest ways to accumulate an amount of debt that could be a burden for the rest of your life. When you need to use credit and can’t pay in full each month, look for a 0% interest card. Many promotions are from six months to a year or more. If used responsibly, they are essentially a free loan. Just be sure to pay your balance in full before the term ends or you’ll end up with retroactive interest that could add hundreds of dollars (if not more) to your obligation.
3. Instead of buying a new car or leasing it, try to save up and buy a good used car for cash. What you save between interest, depreciation, taxes, plates and insurance will save you thousands. According to Edmunds.com, buying a car that is two years old is your best option because it avoids the biggest depreciation drop. Owning it for three years and then selling it will also benefit you because you’ll see another big drop after the fifth year due to the long-term maintenance that’s usually required at that point. If you can’t afford a two-year-old car without borrowing, then your best option is to get a slightly older one with long-term maintenance repairs (and low miles if possible).
4. Avoid eating out if you can. The average American goes out to eat 4 or 5 times a week and spends an average of $232 a month or about $2,700 a year. If you stopped eating out for two years, you would have saved enough to buy a nice used car like point three above.
5. Last, and possibly most important, is long-term thinking. The worst way to justify the expense is to do it individually against the monthly or annual aggregate. For example, eating out: While it may only cost you $10 per meal, keep in mind that if you did this three times a week for a year, you would have spent over $1,400. This same logic can be applied to practically anything: clothing, vacations, furniture, coffee, express shipping, etc. Every time you’re about to spend money, think, okay, how much is this going to cost me each year.