People say that money makes the world go ‘round and with good reason. But that also makes finances one of the most troublesome topics out there. A “rule of thumb” is that you learn about finances as you go, meaning that you learn by growing up and making mistakes that you might regret making in the first place. That’s why nobody really bothers to give you heads up. However, the sooner you learn about finances the better. Therefore, here are a few lessons every 20-year-old needs to know about finances.
Create a budget plan
Having a budget plan is the essential basic when learning about finance. It gives you insight on how much money you actually own, which you later break down on how much you have to spend and where. That way, you’ll be able to spend your budget accordingly and cover all the essentials, maybe even have a little saved up at the end of the month.
Try to cut costs
Every 20-something is careless, especially when it comes to finances. If you try to cut costs as much as possible, you will be able to save that money for something more important. Ask yourself, do you really have to buy frivolous things just to stay trendy or can you spend that money more wisely and buy things that you actually do need?
Debt is one of the worst enemies of your financial plans. Young adults that get their hands on credit cards don’t really care where they swipe them and or why, as long as they pay the monthly minimum, everything will be fine. It won’t, actually. What you may not know is that the longer it takes to pay off your debt the more money you’ll waste on interest rates that feed the banks. If you can’t avoid debt altogether, then at least try to regulate your spending and pay it off as soon as you can.
A lot of adults don’t know much about the personal credit score, but that doesn’t mean you shouldn’t be either. A credit score determines your creditworthiness. That means that lenders take your credit score into consideration when you’re looking for a loan. A bad credit score results in loans being denied or being charged extra-high interest rates by the lenders.
Read your credit report
Learning about finance means that you’re aware of your financial status. You could be paying your bills on time, making sure there’s no outstanding debt on your credit cards and still have a bad credit score because of a simple mistake in your credit report. That’s why you need read it regularly, because that way, you can spot if there is in fact a mistake or if someone else is using your social security number making you a victim of an identity theft.
Insurance is one of the key elements in finance. Everything you have built up until now or everything you’re trying to build could be compromised by a simple accident. Investing in personal insurance is always a good way to protect yourself, as well as your assets in case something goes terribly wrong. That’s why you should always consider insurance as part of your financial planning.
Understanding surety bonds is also one of the important financial elements. You may ask what is a surety bond? Simply put, it’s an insurance bond that guarantees that all agreed upon obligations will be met. For example, if you’re in the construction business and you promise to build a house under certain standards in the agreed-upon amount of time; if you fail to deliver on your promise, then claims can be made against you.
This is important to know because if you’re planning on starting your own business then you may be obligated to obtain a surety bond by the government. On the other hand, you need to know about bonds if you procure services from such companies and make sure you can recover your losses if they fail to deliver as promised.
Here’s the kicker: you need to start saving now if you want to have enough money to spend when you’re old and retired. The irony may bring tears to your eyes, but the reality is what it is. Nevertheless, understanding retirement plans is essential when you’re learning about finance, because social security won’t be enough to secure a good retirement and you’ll need either an individual retirement account (IRA) or an employer sponsored plan 401(k) to get you settled.
If you save enough money, you might consider investing it in some way to turn a profit. Understanding how and where to invest is important if you want to have stable finances. For instance, you may choose to invest in the stock market and buy a few shares of some company. Each year you will be paid dividends on the company’s shares you own which you can allocate to your savings account or reinvest them on same terms to grow your profits, which is called a compound interest or compounding.
Understanding the risk
It’s important to know that each investment is a risk. How risky will your investments be depends on you, but you’re always at risk of losing all of your assets. For example, a bank goes bankrupt and you lose your savings, a company goes bankrupt and you lose your shares and so on and so forth.
Another important aspect of investments is understanding liquidity. Liquidity is how fast you can turn your asset into money. How liquid are your assets depends on what you’ve invested in. Therefore, if you invested in a piece of real estate, such as a house, it will take time before you liquefy a property into cash. Only cash, gold and stocks are liquid on their own.
Money loses value over time, because as the population grows, more money is printed and it essentially loses value. Just remember that your parents bought a house when they were young, for a significantly smaller price than you’d have to pay for the same house today. What you have now, may be worth less tomorrow.
Have an emergency fund
Emergency funds are essential to have outside your regular finance plan. You never know if something may go bad and being prepared just in case, puts you one step ahead of the danger. Emergency funds come in handy if you’re between jobs or if you need to access the money right away.
Taxes are those pesky fees you simply have to pay unless you want to get stuck in a perpetual cycle of debt for the rest of your life. Education doesn’t teach us about taxation in most cases, but don’t let that stop you from learning about it as soon as possible. After all, it’s sometimes about 40% of your overall income that goes to taxes and that’s not an amount you can neglect.
Always have a long term plan
This may be the most important lesson you need to learn. Having a long term plan for the future will give you an opportunity to prepare accordingly. As a 20-year-old, you may not think that planning is relevant at your age. However, it’s never too early to formulate a plan. Planning for college, family, buying a car or a property will give you time to prepare, so you won’t have to improvise once you’ve made a decision.
Finance can be a dull and difficult topic but, be that as it may, it’s still very important and you can’t really avoid it. It’s better to learn early on, than it’s to find yourself in a difficult position with no knowledge on how to sort it out.
Emma Miller is a marketer and a writer from Sydney. Her focus is digital marketing, social media, start-ups and latest trends. She’s a contributor at Bizzmark blog and a mother of two.
All views and opinions of guest authors are theirs alone and are not representative of the views of Petersons.com or its parent company Nelnet.