Financial Planning

One thing that many high schools today fail to teach students is finance management. Studies have shown that many students graduate from high school without knowing the basics of personal finance. Many of these same students will shortly be sent a credit card after their graduation and because of this it is easy to see why so many people today have problems with debt and bad credit.

Broadcasting Some Bad Habits

The news and media are a part of the problem as well. We live in a society where people are constantly told that they need to borrow money in order to pay for things like cars, houses, appliances, and other large expenses. Financial experts tout the benefits of using secured loans, home loans, or other credit tools in order to pay for the things you need. The concept of saving money is rarely mentioned. Many people borrow until they realize that they’ve borrowed too much, and then it is too late. They end up debt they can’t get out of, and their credit could be ruined.

Save For Your Future

Saving money is a simple way of getting the things you want. It promotes discipline, honesty, and hard work. It is also a way of building long term wealth, especially if you put the money in an IRA, 401K, or other long term investments. It is a fact that the average American who makes $33,000 per year are guaranteed to make well over $600,000 in 20 years. The problem is, after 20 years have passed, most Americans don’t have anything to show for it. This is because they fail to save money.

Money, Money, Money

Most choose to take the easy way out and loan money from banks and credit card companies to pay for those big expenses like houses, cars, and education. These institutions will always charge interest on these loans. Consumers will never pay back what they owe. They always pay more, because interest is money that is charged on money. In effect, credit card companies become the masters, while many consumers play the role of being slaves. These institutions are guaranteed to get back more than they loan because of the interest they charge.

Because of this, it is important to save money for big purchases. Since we live in a society that is credit based, there is nothing wrong with having one or two credit cards. However, too many people end up with so many credit products that they put their financial future in danger. Saving money is a simple thing that anyone can do as long as they have a job or own their own business. You want to set goals for yourself. If you make $33,000 per year, this means that you probably make about $2,750 per month.

Imagine What You Would Do

What if you could set aside $750 of that money and save it? By the end of the year, you would have saved $9,000. Instead of carrying this balance on your credit cards, you could have it in your bank account. If you do that for another year, you would have saved $18,000. As you can see, doing this for a number of years can give you a fantastic amount of money. This is especially true if you invest a portion of it in mutual funds or other investments.

Personal Finance Training Starts at Home

Parents should teach their children about the importance of saving money while they’re young. Don’t count on the school system to do it, because it is likely they won’t. Instead of buying them something when they ask for it, why not having them do chores or jobs and then pay them? This will teach them to be mature and responsible when they are young, and when they get older they will not be prone to getting credit cards or loans in order to pay for expenses; saving money can help you avoid having bad credit.

During our working lives, many people fail to realize the importance of saving for retirement. In order to live the lifestyle you desire after you quit working, it’s important to build a nest egg prior to your retirement years that you can support yourself on. It’s never too early to start saving, and the longer you wait the less money you’ll have accumulated by the time you reach your golden years. In order to ensure a comfortable lifestyle once you retire, it’s important to take steps now to save the money you’ll need to support yourself for the rest of your life.

In order to start saving money now, it’s important that you create a budget and stick with it! Living within a budget is one of the most effective ways to save money and plan for the future, because it allows you to live within your means without going overboard. By creating and maintaining a budget, you know exactly how much money is coming in and how much money is going out. Cut back on unnecessary expenses and consider setting that money aside in a retirement savings account.

You’ll also want to review your retirement plan with your company to understand every aspect of the plan and how it will work for you in the future. Whether you have a 401K or another type of retirement plan through your job, it’s important that you know how the plan will work for you. By following these simple steps, you can be well on your way to ensuring your retirement years are comfortable. Preparing for your retirement now will benefit you immensely in the long run by ensuring you have enough money to live on and won’t have to work past your retirement age.

When thinking about retirement, most of today’s generation does not think about how much they will need to live a comfortable life. They only think about the surf and sand and peace and quiet. If you are one of these people, you are not alone. Most people today do not set aside enough for their retirement.

When it comes to retirement, most people do not discuss the issue of saving for their retirement years. You cannot live out your big dreams of sailing around the world or driving around in an RV if you cannot support those dreams. The financial responsibility, if not adequately planned for, can turn into a grave burden during retirement.

There are simple steps to follow when you are saving for retirement.

Needs versus wants: Determine your needs from your wants. Your microwave may break down and you feel that you need a new one. Do you really need it or do you just want it? Yes, they are convenient but convenience does not equal need. Spend wisely and use the extra to save.

Remind yourself why you are saving: Post a picture of something you dream of around the house to act as an incentive. The picture represents your dreams.

Pay yourself first: Many companies offer 401k’s and will match a part of what you put into them based on a percentage. Therefore in order to get the most from your 401k, you should contribute the maximum allowed.

Keep making payments: If you have a loan and pay it off, don’t stop using the amount of the payment. You were already living without that extra income so take the payment amount and put it into your savings account.

Put away the extra: Let’s say you receive some money from a family member’s will or you get a raise at work. Just like above, you already live without that money so unless you really need it, put the extra money into savings.

Lower your withholding: Put your W-4 to work for you. Keep a little extra out each pay period. It is better to have the money now to put away rather than wait for tax refunds to come around.

Make your money do the work: Make sure that your savings account has enough to support you for at least 3 months at all times.

Lower monthly fees: Get rid of all the services you pay for but do not use. Do you have cable but are never home to watch it? Even a $20 a month cable bill adds up to $240 a year.

Do the little things: If you find a coupon you can use, clip it. Pack a lunch everyday instead of eating out. Put the extra money into your savings and see how much, over time, your savings has grown from just the little deposits.

The most important thing to remember is that there is never a bad time to start saving for your retirement. Even if you only have a few extra dollars, putting it into a savings account will help it grow. No amount is too small to be saved.

In many of my articles, I focus on young adults as my target audience. By young adults, I generally mean people between the ages of 18 and 35 years old. Why target this group? Quite simply, time is on their side when it comes to saving for retirement, and because of this fact, small changes in their spending habits can make a big impact on their investing results due to compound interest. When these numbers jump out and “surprise” a person for the good, that person is more likely to take action to get their personal finances in order. Therefore, in this article I wish to provide basic personal finance training aimed directly at young adults, with the hope of positively impacting their financial futures.

Start a Roth IRA ASAP

Unlike a traditional IRA and 401k which are income tax deferred, the Roth IRA features contributions that are taxed in the year they are made, while gains and withdrawals are never taxed. Therefore, the best time to contribute to a Roth IRA is when your income is low. When are our incomes typically at their lowest point? While we are young adults, of course. As long as you have earned income, an individual can contribute to a Roth IRA up to the amount of his/her earned income or $4,000 (increases to $5,000 in 2008), whichever is less. For a married couple, both spouses can each contribute up to $4,000 for a total of $8,000 (increases to $10,000 in 2008). Think of it this way, some part-time workers don’t even pay income tax, due to their low income coupled with qualifying deductions. In such a case you could actually make Roth IRA contributions which would not be taxed, and the account would never be taxed. Pretty sweet deal!

Gradually Ramp Up Your Lifestyle Over Time

Some people make the mistake after graduating from college of buying a really expensive car, I guess as a reward to themselves for all of the hard work they put forth to earn their diploma. This is absolutely one of the worst, albeit most common, mistakes young adults make. Why? Because after buying a BMW at 22 years old, do you think we’ll buy a Honda or a Mercedes at 25? Of course, we’ll buy the Mercedes because we don’t want to go backwards on the “perceived” quality scale. The point is, it’s a good idea to hold back a little on the quality we demand as young adults because our taste will probably only get more expensive as we grow older. In other words, making a less expensive purchase as a young adult translates into a lifetime of less expensive purchases, even while steadily moving forward on the “perceived” quality scale throughout.

Base-Load Your Investment Accounts

Another trick to take advantage of while still a young adult is to base-load your investment accounts. By base-loading, I mean contributing a larger than normal amount to your accounts at the beginning of your investment career and little to none the rest of the way. This advice works great if you take advantage of it before you are married with kids and have a mortgage. Before you walk down the aisle and start a family, your expenses are typically low, so you are able to put some of your excess cash to work. That way when you do take the plunge, you can cut back or even eliminate investment contributions altogether, and it won’t even matter. For example, say at 22 years old you start contributing the maximum of $4,000 per year to a Roth IRA and continue until you are 30, at which time you decide to get married and start a family. Because running a household and raising a family can get expensive, you halt all contributions to your Roth IRA from this point forward. However, you allow the contributions you have already made to continue compounding. If we assume the Roth IRA compounds at 10% per year, how much will your account be worth when you reach 65? Surprise, nearly $1.3 million dollars! Pretty amazing.

Summary

Young adults have a distinct advantage over the rest of us because they still have the most valuable resource of all on their side – time. Making wise financial decisions early in life sets the stage for financial success during your retirement years. Hopefully, my simplistic personal finance training offered here will inspire young adults to take action now so they will be able to reap the benefits in the future.