“Fasten your seat belts. It’s going to be a bumpy ride.” This famous quote describes the road to financial independence, especially if you’re starting out without a proper road map. We’ll put you on the right direction with these money management tips and investment strategies for buying a house and saving for retirement.
Money Management Tips When Starting Out
When it comes to money management, be honest with yourself. Are you a saver or a spender? Do you consider yourself financially astute or financially inept? For married people, understanding your own money management habits can help you head off potential conflicts with your spouse.
Preparing a Budget
The first step to achieving financial independence is to prepare a realistic budget that you can stick to. To prepare a budget, you should start with your fixed monthly costs, such as mortgage or rent payments and regular installment loan payments. Estimate your monthly variable expenses, such as utilities, telephone, food, and household supplies. You’ll want to include a category for discretionary items, such as charitable contributions, entertainment, vacations, home improvements, clothing, recreation, and hobbies. Be sure to establish an emergency fund with three to six months’ worth of living expenses. You should also outline your short-term goals which may include a vacation or new furniture, and identify your long-term savings goals such as a buying a home and saving for your retirement.
If possible, you should put 10 percent of your income into long-term savings, such as Certificates of Deposit (CDs), Individual Retirement Accounts (IRAs), mututal funds or stocks. However, if you have large outstanding debts with high interest rates, settle those debts first and then structure your budget accordingly.
One debt-reduction strategy to try is making a habit of using the first 10 percent of your net salary to pay your credit cards over and above the minimum payments. Target the accounts charging the highest interest rates. Make these special debt-reduction payments the first bills you pay each month. This strategy has two advantages: it gets you in the habit of diverting earnings to accomplish your savings or debt reduction goals; and it enables you to make large debt reductions each month. Once you reduce or eliminate your debts, you can modify your budget to increase savings or discretionary spending.
A 10 percent savings goal is very difficult for many people but 10 percent is not the magic number. It’s important that you set a realistic goal and stick to it. You should lock in these important habits that create savings, cut spending, and demolish debt.
All financial institutions are not the same. That’s why it’s important to shop for a bank that suits your needs. Your best financial strategy may be a combination of money-market funds, savings and loans, credit unions and banks to help you achieve your financial goals. When considering your options, keep the following in mind. Make sure your emergency money is insured. You may opt for uninsured accounts for non-emergency funds, if they result in more earnings as a reward for the additional risk you take. Be aware of the interest rate and understand how interest is compounded. Don’t forget to ask how and when ATM and bank fees apply. Also inquire about penalties that may incur if your balance falls below a certain amount. And remember, you’ll need banking hours and locations that are convenient for your lifestyle.
ATMs are very convenient. However, easy access to ATMs may lead you to spend money unnecessarily or prevent you from achieving your financial goals. Also, remember the importance of privacy when operating an ATM. Police have reported on ATM scams where a criminal observes you inputting your ID number and later pick-pockets your card.
Shopping for Credit
When shopping for the best credit card, get the answers to the following questions:
- What are the fees? These may include annual fees, transaction fees, and debt consolidation fees, among others.
- What is the interest rate on an unpaid balance?
- How is interest accrued? From the day you make the purchase, or from the following payment due date?
- What is the grace period?
- Are purchases made with the card insured against theft, loss or damage?
- Are there rebates at the end of the year?
- Are there additional benefits, such as rental car insurance, hotel or airline credits?
- How much are you responsible for if your credit card is misused or stolen?
Managing your credit and debt
The following tips may help you in managing your credit and debt.
- When it comes to credit cards, remember “less is more.”
Having too many credit cards can work against you–even if you rarely use them. A large available credit limit may cause a potential lender to think you are over-extended and result in the denial of a future loan request.
- Try to use credit cards for convenience, not for credit.
If you pay off your balance each month, you will develop a strong credit history which will help you to secure a mortgage or a large loan in the future.
- Use your credit card wisely.
To protect yourself from credit card fraud, be careful when you give your credit card number over the phone. Always request and then destroy your carbons to avoid the chance of a counterfeit card being made. Carefully record your credit card numbers and store this information in a safe place with the telephone numbers you will need to report a lost or stolen card. Also, don’t give your credit card numbers over cellular phones or cordless phones, because eavesdroppers can listen in.
- Consolidate your debts into one loan to make them more manageable.
You’ll get a longer repayment period and a lower monthly payment. If you must resort to consolidation loans, however, recognize that you may be paying more interest over the term of the loan than if you worked to pay the debt off in a shorter term. For student loans, you may want to consider a graduated repayment plan. Some banks offer this option, in which the amount of your monthly payment increases over time. If you opt to go this route, however, you may pay more in interest fees. Keep in mind, most student loans allow a six-month grace period after graduation, so you have some time before your payments come due.
- Use the two-credit-card strategy to control debt.
Shop for a credit card or bank installment loan with a low interest rate to use for debt- consolidation purposes. Then find another card without an annual fee to use for regular charges. Pay off this second card each month. To help you pay the second card off each month you should make a “reserve” in your checkbook every time you make a charge by subtracting the amount you charge from your checkbook balance. When the second card’s bill is due the entire balance on the account will not be more than your “reserved” amounts. When you balance your checkbook, treat any uncleared reserve amounts as unrecorded deposits.
Eliminating debt and avoiding high interest rates is a sure-fire way to put you on solid financial ground. If you have a lot of credit card debt, consider using your savings to knock it down. The interest rate on credit cards is generally higher than the rate you would earn in a typical savings account. If you carry credit card debt on an on-going basis, you should manage the interest on those accounts by periodically “shopping” for special low interest rates. Call your credit card company. Ask if they are running any low rate specials for balance transfers. You’ll be surprised at how you can significantly reduce the interest you pay.