Last time we talked, I gave step by step instructions on
taxes and what the different forms are and what you need to do them yourself. I hope it helped some people!
You know what else isn’t taught in schools to our country’s future
leaders? How to be fiscally responsible, build credit, or how a
retirement account works.
First, let’s discuss saving money and retirement accounts. These are important.
Savings is the easiest thing to explain, so I’ll start with that. At any given time, you should have
3-6 months worth of bills and living expenses saved in your savings account.
If you spend $2000 per month, your savings account should have $6000 to
$12000 in it. This is to ensure that you are taken care of in the event
of a medical emergency, a job loss, or any sort of general emergency
(for example: your car breaks down and you need it for work).
There are a lot of different ways to approach saving. $12000 is a lot
of money, but you have to start somewhere! And every journey starts
with a single step.
- One option is to take a specific percentage of their paycheck and
put it into savings, say 10%. This is a very good way to save money
every month.
- Another way is to pay all your bills and expenses out of your
checking account and the night before you get paid your next paycheck,
put all of the leftovers from your last check in savings. Some weeks it
may be $50, others it could be $250. This is a less reliable way to save
specific amounts, but can be effective.
- Another way is to automatically deposit a specific amount, say $100
per paycheck, into your savings. You can set your bank account online to
automatically make this transfer for you, recurring weekly, every 2
weeks, or monthly. This is also a reliable way to save.
All of these are effective ways to save money, and you should be doing one or more of them.
Retirement Accounts
There are 2 main types of retirement accounts. One is a
401(k),
which is through your employer and you can have multiple of them,
through each of your past and current employers, or you can roll old
401(k) accounts into your current one. The other is a
Roth IRA, a long-term investment account using after-tax dollars, invested in stocks, bonds, and more.
Main differences:
401(k) uses pre-tax dollars, and you pay income tax when you take the
money out at retirement. A Roth IRA is different than a 401(k). A Roth
IRA uses after-tax dollars to give you an even better deal. With a Roth,
you put in already taxed income into stocks, bonds, index funds, etc,
and you don’t pay when you withdraw it.
Here are the ways to put money into these 2 accounts: You
automatically transfer $100 per month into an IRA you opened yourself
through Charles Schwab (or Wells Fargo, or many many other options). You
yourself are putting your after-tax dollars into the IRA. For 401(k),
the money is taken out of your paycheck before you are paid and
deposited into the account. You are not physically depositing or
transferring the money yourself.
These two accounts work well together, and you should definitely have
both. You should start a 401(k) the moment you have a job, and a Roth
IRA as soon as possible. These accounts will grow over your lifetime and
will be what you use in your retirement as income.
Many employers will match a certain amount of money in your 401(k).
For example, my last employer would match half up to 6%. Which means if I
put 6% of my pay into my 401(k), at the end of the fiscal year, my
employer would put in an additional 3%, half of what I contributed. This
is money not out of my pocket, and serves as an incentive to put money
in the 401(k) and save for retirement. Check with your employer to find
out if they do matching and what their parameters are, and then take
advantage of that.
Roth IRAs are great because you can contribute however much you want
to them, and you can invest in mutual funds, stocks, bonds, and more.
You’re not restricted to what you originally invest in, you are able to
buy and sell within the account as much as you want.
The important thing to remember is this: They are both great accounts
to save for retirement, you should do it as early as humanly possible
in your life, and the biggest differences are that 401(k) is pre-tax
dollars that you will be taxed on when you remove the money, and Roth
IRAs are after-tax dollars that you do not pay income tax on when you
remove the money at retirement age.
There are other types of retirement accounts, and also traditional
investment accounts, but these are the 2 most common and work well in
conjunction with one another. Feel free to do more research! Learning
about finance stuff can be very fun!
Building Credit
You need good credit for a lot of things in life. These include:
buying a car, renting or buying a home, getting a loan, and more.
Basically, you will need good credit for
almost any major purchase in life.
Sometimes you don’t have any credit simply because you have been
extremely fiscally responsible and have paid for everything you have
outright in cash. Sometimes you just haven’t made any major purchase
that requires credit. Either way, having a solid credit score is going
to be important in life.
The easiest way to start building a good credit score is to get a
credit card. Even if you don’t think you need one, get a credit card.
Then to actually build the credit, you need to USE the card, not go over
the limit, and pay the bill on time every month, with at least the
minimum payment.
However, the BEST way to use a credit card is to make your regular
purchases, like gas, groceries, dinner out, drinks at the bar, things
that you already spend the money on, and then
pay off the credit
card every month. By paying on time every month, you are establishing a
solid credit history of on time payments. By paying it off, you are not
wasting money on the interest your credit card will charge you if it
holds a balance.
As you continue to use your credit card responsibly, the bank will
often raise your limit, lower your interest rate, and sometimes offer
you perks. Because this is money you would usually spend in cash, you’ll
be able to pay it off monthly. But instead of the 0.003% interest you
earn from the money sitting in your bank account, you can also get
perks, points, and rewards from using a good credit card.
Many cards offer cashback, discounts on certain items or categories
(like groceries or movie theaters), and air miles towards flights around
the world. These are awesome perks that you can build up while using
your credit card for things you already have the money for.
Credit cards are also of use in an emergency situation, like car repairs, dental work, doctor visits, and more.
Other ways to build or grow your credit are very similar. Basically,
have bills in your name. Make sure your car and insurance are in your
name, and make sure you are paying these bills on time. Anything that is
in your name is helping you build credit. Things like having your
apartment lease in your name, the utilities bill, gas bill, etc.
If you’re a parent, you can help to build your child’s credit early.
My parents had my car insurance in my name when I was 16, even though
they were paying the insurance (I had given up my allowance and gotten a
job at 15, and my allowance money I would have gotten covered the car
insurance cost). By making timely payments, my credit was already
starting to be built when I graduated high school and moved away for
college. This was a very helpful jump-start!
Even if you have good credit, you will likely still need a cosigner
on student loans, apartment leases, and car financing until you are
around 21 years old. Having bad or no credit will absolutely impact your
life. You will have higher interest rates on credit cards and loans, if
you can even get one, and you may be barred from loans or even getting
an apartment lease based on your credit score!
Once you have started to build your credit, you should also make sure
to manage it. Once a year, run your credit report and make sure that
everything is correct. If you ever notice something on there that is
incorrect or fraud, you need to report it immediately so that your
credit is always correct.
Conclusion
Saving money, having retirement accounts, and building your credit
are extremely important, and is what will allow you to be a
self-sufficient, independent adult and later, a self-sufficient retiree.
You may not have heard much about these in school, but you are in
charge of your money and your destiny here. Educate yourself on fiscal
responsibility. Even if you think you have plenty of time, start a
retirement account ASAP, and build your credit so that you can have nice
things in your life. This stuff is so important for your future, and
it’s hard to realize it’s importance at 19 or 21 or 25.
Read more, learn more, get interested! Financial stuff can be
exciting. The first time I put money into the stock market, I was
nervous and very excited, and learned a lot about how the stock market
works.
Get interested! This is your future, and you need to be in control of it!
