Take care of your financial health and become financially fit and happy with these tips.
Personal finance is a lot about common sense, and this article will reflect that. We put together some basic tips for the younger crowd that should serve as solid reminders for a healthy financial life. I’ve stuck to these guidelines all my life and have gotten a lot of mileage from them (at my age).
“Money doesn’t buy happiness, but it sure helps” said somebody famous. There are a few common sense steps we may want to follow in order to reach financial quasi independence at age 50 or earlier and be reasonably happy if we have the four principal ingredients:
- A good wife/husband (or none whatsoever)
- Good health (you can still climb two flights of stairs without suffering a heart attack)
- A job you enjoy and
- Financial peace of mind.
If you are age 18 to 30, the following advice may well lead you to that lofty goal:
#1 Go crazy in the earlier years.
Take your risks early. Do all the crazy things you want between 18 and 25. Don’t worry too hard about money or your financial future, as there’ll be time enough for stress later on. Get it (whatever your preferences may be) out of your system. Climb the highest mountain, go hunt the great white shark, or find out what Copacabana is all about during Carnival. A couple of important caveats: Get an education in between crazy experiments and begin developing a discipline for saving.
#2 Consider the 20 / 80 savings rule.
Save 20% of your take home pay if you are single, and save as much as you can if you are married, preferably 10% of both incomes. DO NOT, under any circumstances, touch that money. Simply forget that it exists.
#3 Start investing early, and wisely.
Invest early! Put in as much as you can muster into an investment account to take advantage of the wonderful effects of the power of compounding. Specifically, when you reach savings of more than $1,000, start investing in mutual funds. Invest with reputable financial institutions, ask about hidden fees, and read prospectuses carefully. Look into index funds and build a simple investment portfolio that will do the trick and provide you with solid investment growth. Add to it religiously, each month, and consider that investment as your lifeline.
#4 Be conservative with credit cards.
Credit card arbitrageurs won’t be thrilled with this advice, but you can’t go wrong with the conservative approach especially when dealing with credit cards. Avoid making these credit card mistakes. You’ll play it safe if you get rid of (or pay off) all your credit cards, except one. Choose the card that charges the least amount of interest (that, of course, has to do with your credit score) and that gives you a grace period in case you forget to make a payment on time.
#5 Annuities, anyone?
Depending on your requirements, an annuity may be something you’d like to consider. This may be a little different from conventional financial wisdom, but if you’re looking to shelter some investments, I would consider buying an annuity that allows me to add money every year. If you find that annuities are right for you, then here’s a plus: some companies will give you 10% interest the first year. You can decide how much money you want to assign to the NASDAQ, S&P 500, Dow Jones or simply a fixed interest (generally low). You cannot lose your principal under any circumstances, but you can make good money if the market is bullish. The down side? Lack of liquidity and higher costs than ordinary investments.
#6 Live within your means.
It sounds so obvious and yet, 70% of Americans accumulate debts every year (e.g. via credit cards) that they really can’t afford nor maintain. Why buy the BMW if you’re not a high-powered salesman (image sells)? Stay away from timeshares; most people never use them and yet they still pay the annual fee faithfully. Go frugal and try to make things last longer: for instance, buy a good reliable car, hold on to it for at least 10 years (Honda, Toyota come to mind) or if you can, drive it to the ground!
By the time you are 50, you should not have serious debts; the house is almost paid, the cars certainly should be, and you’ve got funds for your college kids.
But most importantly, in order to enjoy your semi-retirement at age 50, you’ll be prepared to face whatever life throws at you: an accident, a serious illness, or an ungrateful child. That is almost happiness; the rest is between you and your Maker!
Care to share your favorite tips for healthy financial living?
Image Credit: Fruitlift.co.uk
Contributing Writer: Jacques Sprenger, a former college professor in psychology and English, a counselor, and now a teacher for challenged students. This post first appeared on September 8, 2008.
Copyright © 2011 The Digerati Life. All Rights Reserved.
{ 21 comments… read them below or add one }
#2 and #6 are hardcore, i love it. i’m happy to report i’ve been pretty good at them starting in ’08…still wish i would have purchased a smaller house, but what are ya gonna do about it right? I can tell you one thing, i’ve learned to budget the hell outta my stuff 😉
#6 and #3 are the key for me.
I saw nothing about a buying a house between the pieces of advice so “… the house is almost paid…” sounds strange.
I strongly disagree with #1. That is simply inviting future debts to come into your life. If you want to have a better and financially rewarding life, manage your money earlier. The idea of wasting your money by these “experiments” between age of 19-25 is ridiculous. I actually find it rather confusing when at the end of #1, it says “begin developing a discipline for saving”.
Can you save money while you “Climb the highest mountain, go hunt the great white shark, or find out what Copacabana is all about during Carnival”?
The whole “living within our means” seems to ring true for most of us. It’s when we forget how to apply this principle that we begin to get into financial trouble.
@Sam,
Pitching here in behalf of the writer, I’ll say that it probably needs to be clarified that we’re allowed to “go crazy” as long as we can afford it and that we don’t push things to the point that we do end up in debt. I agree with you that we should always be fiscally responsible regardless of our age and any such advice telling us to throw caution to the wind may be rendered “dangerous” or irresponsible.
But it depends on how you interpret this advice. On the other hand, if we end up feeling repressed when we are young, then that means sucking the enjoyment out of life — should we wait when we’re older and financially established to have a little fun? Well, how many people do we know who retire only to pass away a few days later without the chance to enjoy their golden years? I’ve heard of a few stories like this.
Anyway, the point is balance. I had a fun time in my teens and 20’s but I was also a disciplined saver and investor. So if you take things in moderation, and aim for debt avoidance, then there’s a great chance that you can be both happy and financially healthy at the same time.
I think the advice about trying to avoid unnecessary debt is spot on. I have known many people who racked up a large amount of debt on relatively stupid things and the credit companies are all too happy to let you do it.
If would be great if more young people could learn this before they actually get a credit card.
This might sound silly, but save your change. Over two years I have saved almost $500. What I like to do is treat myself with that rather than a credit card, a check or bills. Coin can really addup over time and you don’t have to feel guilty when spending it.
I have been going crazy in my early years, which is now. Problem is I did not use my credit cards wisely, but I am on the right track now. I am saving just below 20% of my take home pay per month right now which I can definately do better. The biggest struggle is this “living below your means” idea. I am still trying to define what that means in my life, quite a struggle because I want to continue enjoying myself. The tug of war we call life.
SVB,
This is a great post and I like all of the advice, except I’m not big on annuities. I’ll take a good mutual fund over an annuity any day.
Sam,
I don’t think going too crazy is good, but I do agree with taking some shots when you are young. After you get locked in with a career and a family, that opportunity is gone.
I have heard a lot of conflicting advice about annuties. How do you guys feel about the subject?
@Jim,
I’m getting ready to write a big article on this sometime. 🙂 I have a personal story to relate on the topic of annuities, but I have to get my facts straight before I launch into it.
So stay tuned! I’d love to hear more discussion about this particular financial product as well.
I traded in my SUV (though I loved the way it looked) for a small Toyota Corolla last year. My cost of gas was cut in half.
When I saw rule 20 / 80 savings rule I thought that he was going to recommend an 80% savings rate. I was a little dissapointed that he did not. I think that this would be an ideal situation, but for most people would be nearly impossible because we simply don’t make enough. But if you made 100K this would be fairly easy to do.
@Jack,
I would consider a 20% savings rate to be the minimum and I believe Jacques (the author) also meant that to be the case. Most people struggle to save anything at all so a 20% savings rate is something realistic that we can strive to do.
80% is a huge amount to save but is certainly doable when you have more money and have a greater amount of disposable income on you.
Thanks for the insight! You make great points!
I think it is time to cut spending given the financial mess America is experiencing right now. Although if everybody does it, this country will go down even harder. So let us all spend as much as we can afford.
#3 is a Big One….investing early and often can bring Big rewards.
I personally live by #2, #3 and #6. I like to focus on earning money first, followed by saving it and managing it next. Since our energies are limited and so is our time, then where would you prefer to focus all that on? Some people like to fuss about the details with their money — I actually function with regards to the big picture. I like to know what I can do for the biggest results — maybe NOT go shopping at all vs shopping on discount or when there’s a sale; maybe use my time to study investments vs study cost cutting measures, etc. For instance, I’d prefer to build a business vs find ways to budget. What is your approach to becoming financially fit?
Placing savings first has kept me on the straight and narrow for my whole life! The reason is I lived on what was left. Pretty simple!
Straight and narrow works pretty well when it comes to personal finance. While radical behavior may be rewarded in other aspects of life, it is probably not going to help you as well when it comes to money. High risk activities on an ongoing basis is not going to help you amass a fortune, although if you couple this with luck, you may have a chance. But it’s a crap shoot. My main approach to finance is “slow and steady”.
I’ll add one: detach from something. Pick something in your life…the remote control, the every Friday night movie, the daily latte. Set a goal to detach from one thing…just one…for 30 or 60 days. When you’re done, add up the savings, or add the calories expended (by getting up to change the channel) and realize that we have a lot more control over what we “must” have or do than we thought. It’s empowering!
Even while you’re enjoying #1 (reasonably), be certain to remember #3. Save as much as you can as early as you can. Take advantage of the benefits of compounding, and make dollar cost averaging work most effectively for you.
Great Article, I agree with what Carolyn said to take advantage of compounding.
#4 is definitely one of the big mistakes that people made, many seems to fall into trap of collecting multiple credit cards and unable to handle the responsibility that come with it, leading to more debts eventually.
I fall into that trap last time when I was younger and reckless, but fortunately, I had settled the accumulated debt and obtain the necessary discipline to handle the usage of credit card.