Managing money doesn’t come naturally to everyone, and many people keep on earning and spending their income without thinking about how they could better utilize their resources, grow their wealth, and create a healthy rainy day fund. Financial decisions are tough decisions.
While the early 20s is the best time to start planning your savings and investments, experts say that it’s never too late to adopt good money management habits and gain control over your financial wellbeing. Here are 12 tips that will help begin your journey to financial freedom, a better quality of life, and possibly early retirement.
1. Automate your payments
The first financial decision you need to make is to automate your payments. This is a simple yet very effective habit that will help you make timely payments, avoid penalties, ensure regular savings and protect your credit score. In addition, develop the habit of using less cash and making online transactions as much as possible (people tend to overspend when they’re carrying cash).
Automating your credit card payments, debt installments, utility bills, and other regular payments could save you a couple hundred dollars or more in late fees and penalties, which adds up to a lot over, say, five years.
2. Evaluate your fiscal health
Assessing your total savings, debt, income, and assets thus far is important as you age in order to get a clear picture of where you stand in terms of financial stability over the coming years. If you see that your expenses are more than your income, it’s never too late to become prudent in financial planning and adopt a practical approach to building your wealth slowly and steadily. For starters, take measures to curb needless spending, set a savings goal, open a savings account, and set up automated debits to ensure mandatory contributions to that account.
Related: Real-life Organizational Decision-Making Examples
3. Open an individual retirement account (IRA)
Being your own boss and working from yourself has many advantages, but there are some downsides too. Pensions in retirement, for example, aren’t organized for you by the company – you have to sort one out for yourself.
It’s not just setting money aside for a pension that you need to do. You’ll also need to find the best way of drawing an income from that money during your retirement. The simplest way to do that is to set up a pension annuity.
Setup Annuity
You can set up an annuity when you’re aged 55-75, and it’s basically an exchange of your pension savings in return for a regular, guaranteed income. Life insurance companies sell annuities, and the rates change all the time, so the amount of income you receive will be determined when you set the annuity up.
When you’ve committed to a particular annuity, you can’t change your mind, so it’s important to get the choice right.
With each provider, there are different options to consider. You can choose to receive your annuity income monthly, six-monthly, or annually. Most people take their annuity income in monthly installments, but it’s down to individual choice. You may also decide to have the same amount of income every month or to fix the income to rise by a fixed percentage rate each year so that it grows in line with rises in inflation. You may want to have a joint annuity that includes an income for your partner or spouse after your death.
IRA
According to experts, one important financial decision is to set up a retirement fund as soon as you start working. In fact, you can open an IRA as soon as you begin your first job, which is even more important if your employer doesn’t offer a 401k account. If you do have a 401k account, you can still go ahead and open an IRA to increase your savings and earn a side income from your investments (the money in your IRA is invested in assets by your bank and also earns you compound interest).
4. Pay high-interest debt first
Financial experts swear by this golden rule that can save you hundreds of dollars in interest and leave you with more disposable income (and peace of mind) that you can use to travel, boost your emergency fund, or learn a new skill. An easy way to have more money to pay off your larger debts is to save by choosing cheaper but quality alternatives in your everyday life while buying groceries, eating out, entertaining, and traveling.
5. Set up a revocable trust
Another useful financial decision is to set up a revocable trust. A revocable trust is a legal document that’s slightly different from a will. While the information in your will is made available to the public after your death, a revocable trust will ensure privacy for you and your family. Having a revocable trust protects and manages the trustor’s money and assets while they’re alive, and it enables easy distribution of their estate upon their death. This is because, unlike a will, a revocable trust does not need to undergo the probate-court process.
6. Change your credit card
The ideal solution would be to give up using credit cards altogether. If that’s not possible at this juncture of your life, one of the best decisions you can take to boost your financial health is to stop overusing your credit card and opt for a card with better terms, such as a balance transfer or a 0% APR credit card. In addition, develop the habit of paying off your balances every month—not having to pay huge interest on rollover balances will save you a significant sum over a year.
7. Buy adequate insurance
As you build a family and grow your wealth, protect yourself and your loved ones by purchasing the right insurance cover at the right time. If you live on rent, buy renter’s insurance for protection against catastrophes. In trying to get car insurance, business insurance, health insurance, home insurance, and so forth, things can get overwhelming and make you feel like you’re paying way too much money to insurance companies. If you already have multiple insurance policies, revisit each and find out how you can save on premiums at a better rate. Even a few hundred dollars saved each year can add up to a handsome amount over time.
8. Build a diverse investment portfolio
As a young professional or entrepreneur, you’re decades away from retirement and therefore can invest in high-risk stocks with impressive returns. However, don’t limit your investments portfolio to a certain type of asset. Explore mutual funds, bonds, and real estate and strive to create an investment portfolio that’s a healthy mix of high-risk and low-risk options that will grow your total wealth over the coming years. Having a diverse portfolio will also mitigate your risk of loss in times of economic slump.
9. Update your retirement fund contribution
If you opened a retirement savings account in your 20s and haven’t increased your contribution, now is a good time to do so. Ideally, you should be able to put away at least 15% of your current income. Every salary increase and the bonus is a good opportunity to perk up your nest egg contribution. The more money you have in your retirement account, the more you stand to gain from compounded interest, tax savings, and investment earnings.
10. Get professional help to plan your finances
Most people have limited knowledge and skill to manage their wealth. To maximize efficient use of your money, seek professional guidance from a financial advisor or wealth management expert who will help you make the right savings and investment decisions taking into account important factors such as your income, age, number of dependents, savings so far, and possible retirement age. In addition, there are plenty of online tools and apps to learn money management skills, automate your investments and budget your day-to-day expenses.
11. Avoid falling into the trap of easy money
If you want true financial stability early in life, avoid falling for the lure of lotteries, payday loans, and similar traps. While short-term loans may serve as a temporary boost when you’re cash-strapped, they’re difficult to pay off owing to their high-interest rates. The best way to financial freedom is to learn to spend less than you earn and save at least 10% of your monthly income for emergencies.
📖 More similar articles
12. Reassess your priorities
As you age, take a deeper look at what gives you joy and what you want to do with the money you have available. For instance, do you want to put your savings into buying a house and take up a 15-year mortgage or would you rather explore living in a tiny house and use your money for other things.
Do this for the smaller things as well, such as buying a new car versus going for a dream vacation or sending your child to the most expensive school in town versus a cheaper one that offers similar levels of education. Once you determine what matters to you most and what could be done away with, you can allocate your income more efficiently and have greater control over your finances.
