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Up until a few years ago, i did not know much about smart financial decisions.We were always encouraged to study harder to get good grades, so as to get good jobs.I always had a savings account, and that is it.When i started working, i lived impulsively, spent the money as it came in, saying that i will get more next month.
Fast forward, i educated myself about personal finance, below are the 20 smart financial decisions i wish i knew sooner.
After receiving your paycheck, before paying any other bill, put at least 10% of that check into a savings account, Roth IRA, 401(k) or any other investment account.In order words, your 10% is your first expenditure.This is the best investment in your 20s.
Save for 3-6 months living expenses.If you spend $ 2,000 a month, on housing, transport, food, insurance etc, you need between $6,000 – 12,000 dollars as a cushion for when emergency strikes.Emergencies can include loss of income, reduced income as a result of sickness etc.
No one ever got rich from a savings account.With investing, you buy assets such as real estate, stocks, bonds, mutual funds, these investments will make money for you.Investing has a higher returns because it appreciates the value over time, while savings may depreciate the value.
Why is it important to keep track of your expenses?
Trackingyour personal expenses is the best way to manage finances, it helps you figure out what you really spend your money on every month.It will show you the reality of your finances, it will help you avoid overspending.Small leaks can sink a big ship.
I hated the word budget, i associated budgeting with restrictions.I educated myself about reasons for budgeting through Dave Ramsey, my life has never been the same.I found out that you can have the things you want, as long you include them in the budget.
A budget is telling your money what to do.It helps you focus on the important things that move you towards your financial goals like investing, getting out of debt or saving for a kitchen remodel.Save all your receipts and track down your expenses.Go through all your expenses for every month, this will help make a budget.
Financial expert Dave Ramsey says that if you can’t pay cash, you can not afford it.Many times, buying stuff on credit means you pay more for your purchase in the long run, than you would have if you were paying with your own money.
Credit companies usually charge interest rates on the credit extended to you.Failure to pay off credit quickly, results in you paying extra on each payment cycle on the money you still owe them.
Ask for interest rate before making a purchase on credit, assess whether the interest rate is worth the intended purchase.
If you must purchase on credit, strive to pay back the balance during the first payment; many creditors do not charge interest as long as you pay off the debt during the agreed period of time.This is also good for building your credit score.Failure to make payments on time, affects your credit score, lower your future lines of credit, results in higher interest rates and late payment fees.
Why it is better to pay off student loans first then save for a house.
This depends on how much student debt you have.Money expert Dave Ramsey advises that housing payments should range between 28-35% while 15% should cover debt repayment every month.
The money will quickly add up since a mortgage is a huge money pit, with unforeseen repairs etc.
Student loans will not prevent you from buying a house, but the effect your student debt repayment, monthly car payments, credit cards etc on your pay check will be the key deciding factors.
Zero down payment mortgage options are available, however you will most likely pay much higher interest rates and private mortgage insurance(PMI).
PMI can cost you between 0.5% and 5% of the original loan balance.Paying off student debt aggressively, will “free up” your money for you to be able to put a reasonable down payment on your home.
TheIRSlets married couples filing jointly to deduct a certain amount of interest you pay on your mortgage debt.However, when your mortgage is paid off, you lose the ability to write off the interest expense.This raises your taxes.
Financing a car means the car does not belong to you.It is owned by the financial institution that extended the loan to you.You take ownership of the car once you have completed the loan within the agreed time.
The average americanpays$ 550 per month for a new car.This makes it harder for many people to keep up with monthly payments.Many cars lose their value within the first 5 years.For example if you finance a car for $ 20,000, after 5 years, you would have paid 27,000 by that time, the car’s value will be around $3,000.
With a little discipline and dedication, you will be able to buy a car with cash.Buy a dead beater car, to help you move from point A to point B.save the $ 550 (for monthly car payment), then buy a car with cash.
After 12 months of saving, you now have $6,600, sell your dead beater car for say 1,800, you will have $8,400.Then upgrade from a dead beater to an almost $ 9,000 car, the best thing is, without owing any financial institution.
Continue saving the $550 every month, 12 months later, resell your current car, then upgrade to a better car.The sky will be your limit with what you can do with the extra $ 550 every month.
Buying a brand new car is much more expensive, new cars depreciate in value more quickly than used cars.
Financing a new car means you will be i higher debt, at the same time, the car will be losing value faster.
Experts say that a new car loses 20% of its value the moment it is driven off the dealership premises.It is best to buy a 2 year old car, it is depreciated in value, but still new and modern.
Why is it important to invest in yourself?
Investing in yourself is one of the best smart financial decisions out there.Increase your knowledge and skills to become more valuable to others.Take an evening or online class.Once you have a valuable skill, the opportunities will appear.Investing in your self is sure way to financial independence.I invested in a few courses, it is the best thing i did for my self.
“The very best investment you can make is one that “you can’t beat,” can’t be taxed and not even inflation can take away from you. “Ultimately, there’s one investment that supersedes all others.”Warren Buffet.