Are you beginning to dive into the world of personal finance, and finding it a little overwhelming?
That’s okay. It’s totally understandable. There’s a lot of different information out there – some basic, some advanced – and a whole lot of opinions to sort through as well.
So if you want a good starting place, here are 10 financial basics everyone should know.
1) How to Get a Free Credit Report
Did you know that you’re entitled to one free credit report per year from each of the major credit bureaus? This service is available on annualcreditreport.com.
Why should you care? Because there could be false information on your credit report that you don’t know about, which may be causing a drop in your credit score.
You can get up-to-speed on credit scores here, but just know that you don’t need to fork over $30+ for a report from a company unless you’ve exhausted these free reports.
2) Save for Retirement as Early as Possible
Most 20-something-year olds aren’t concerned with saving for retirement. We’ve covered why that’s a mistake in past posts, but if you want to take advantage of compound returns, you should start saving for retirement as early as you possibly can.
If you’ve never looked into a 401(k), now is the time. Check with your employer to see if you’re able to contribute to one. Ask if there’s a matching contribution. If there is, contribute up to that amount to get the match. Why? It’s free money!
Don’t think you earn enough to contribute? Any amount helps. Remember, you have another 30-40 years of saving to go. What you contribute now will grow and help you later.
What should you do if you don’t have access to a 401(k)? Open an IRA! Anyone can open one – you don’t need an employer to make that happen. As long as you’re not making a ton of money (over six figures), you can contribute to one and open an account at the financial institution of your choosing.
3) Credit Cards Don’t Equal Free Money
One of the biggest mistakes young adults make is in how they use credit cards. Some think it’s free money – just swipe, and pay later! But that’s not actually how it works.
Leaving a balance on your credit card means interest accrues, and this causes your purchases to cost more than they originally did.
Furthermore, leaving a balance on your credit card doesn’t help your credit score. There’s no reason to do it. Pay your credit card balance in full every month, especially if you have a rewards card!
4) Tiers of Credit Scores
A lot of my peers don’t know what credit scores are, much less what the different tiers are and what they mean.
While there are quite a few different scores out there, we’re going for basics, and the most common range is 300-850. The higher, the better.
The exact ranges within tiers vary depending on lender, but here are general rules of thumb:
- Excellent: 720+
- Good: 690-719
- Fair: 630-689
- Bad: 300-629
In general, once you make it over 720, you’re eligible to receive the best interest rates. While it’s fun to be in the “over 800” club, there’s not exactly any pressure to get there.
5) Track Your Spending
I know a lot of people will say budgeting needs to be at the top of this list, but as budgets don’t work for everyone, I’d rather recommend keeping a pulse on your spending.
Being aware of your spending patterns is going to do you a lot of good on its own. Most people simply lack awareness when it comes to where their money is going, which causes the, “Where did my money go!?” response a few days after getting paid.
By knowing where your money is going, you can control your expenses. If you have no idea which categories are problems, then you can’t fix your leaks.
6) Debt Payoff Strategies
When you graduate from college with student loans, it’s easy to start paying the minimum and never look at it again. The same goes for credit card balances. It says $X is due, so you pay $X.
While there’s nothing inherently wrong with that – you’re paying off your debt, at least – it still pays to know the other debt payoff strategies that exist in case you want to make more headway.
The popular ones are the debt snowball method and debt avalanche method.
The debt snowball method has you paying your debt off from the smallest balance to the largest balance. Once one balance is paid off, you “roll” the payment you were originally making into your next payment. So if your first debt required $50 per month, and your second debt requires $100, you pay $150 on that second debt.
The debt avalanche method involves paying off your debt from the highest interest rate to the lowest interest rate. Mathematically, this strategy makes the most sense as you’ll save money in interest over the course of paying off your debt. However, it can take longer, so some choose the snowball method for psychological reasons.
Either one is fine, the point is to find what works for you.
Additionally, if you’re paying extra on your loans, look to see how that extra payment is being applied. Some student loan servicers are notorious for applying extra payments incorrectly.
7) Fire up that Emergency Fund
One of the first things you should do is save up enough money to fill an emergency fund. Just because an “emergency” hasn’t happened yet doesn’t mean it won’t. How would you feel having a $1,000 bill but no savings? Stressed!
A credit card isn’t a good emergency plan, either. As we covered, if you can’t pay off your balance in full, it’s a bad idea to be swiping excessively.
Do your best to put away a small amount with every paycheck. $500 – $1,000 should be enough to pull you through for now.
8) Keeping Up With the Joneses is a Losing Game
There is literally no reason to play this game. As a young adult entering the workforce, you want to make a good impression. I get that. But any reasonable people (read: anyone you want to work for) shouldn’t care about the car you drive, or the brand of clothing you wear. As long as you fulfill your job duties, your personal possessions are irrelevant.
The same goes for friends. I don’t know about you, but I don’t need to waste my money or my time trying to impress people who only care about the superficial. If you don’t want to be seen with me because I don’t have the latest fashion in my wardrobe, it wasn’t meant to be.
There are tons of people in this world who can look past all of that who you can still have a good time with. It’s important to build a good support network of friends and family who understand your financial goals and want to see you succeed. Otherwise, you risk failing before you’ve started.
9) Spend Less Than You Earn
This is a classic piece of advice that you should adhere to…to a fault. I covered this in a recent post, but basically, you want to spend less than you earn while also increasing how much you earn. The key is balancing it.
If you increase your earnings, that doesn’t mean you should increase your spending accordingly. Lifestyle inflation will happen, but by spending in line with your values, you should be able to keep your expenses at bay.
10) Focus on Reducing Your Biggest Expenses
It’s important to save money wherever you can, especially when your salary is low. But it doesn’t make sense to focus all of your energy on pinching pennies when there are bigger fish to fry. And it’s even easier if you start out with this focus.
Your three biggest expenses as a young adult are likely going to be housing, transportation, and food.
As for housing, it’s easier to find a cheaper place to live when you’re young. Split a house or 3-bedroom apartment with friends (or strangers), live in a studio apartment, or continue living with your parents.
For transportation, look at the numbers to see if it’s cheaper to take public transportation (if that’s an option). Not having to deal with car repairs, insurance, gas, tolls, and parking could be cheaper. If it’s not an option, carpool with co-workers and go for a fuel efficient car.
Food is the easiest expense to slash, in theory. Plan your meals, shop sales, use coupons, seek out manager specials, don’t shop when you’re hungry, get a loyalty card, and buy in bulk. Just be a conscious shopper.
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There are so many other basics we could cover, so instead, I’ll say this: always keep educating yourself. You’ll find that your financial needs change over time, and your financial education should evolve to match those needs.
What are some of the financial basics you wish you knew when you first started managing your money?
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I love how this gets right to the point. Each item is a basic yet very informative. I would rather live minimally instead of keeping up with the Joneses. On the flip side, I enjoy seeing how others become financially smart and learning how to do the same is definitely more beneficial then living beyond my means.
True when I had my frist budget I’ve started to read all finances blog and taking notes this list is helpful for budget beginner:P
Thanks Giulia! Blogs are definitely a great way to get free information.
Retirement is my biggest challenge because it is so far away and so uncertain when the actual date will be. In the short-term, my wife & I have focused on reducing our expenses and not giving into lifestyle inflation (keeping up with the Joneses) as our income has risen a little bit over the past couple months.
These are great tips, while simple, unfortunately, after high school, you would be surprised at the lack of info people have about finances. This should be taught in schools, to give young adults a better foundation to grow from.
I actually disagree that people are surprised at the lack of info people have about finances coming out of high school. I personally don’t think people think about finances to a great degree until after college, and even then financial literacy is pretty low based on recent surveys and research.