“If I had only known….” is a phrase that has been repeated multiple times in the recent months from Wall Street to main street America. The wide-spread credit and housing crises continue to unfold market fluctuations, housing downturns, and in some cases, bankruptcies and foreclosures impacting Americans and global economies. Many are disheartened with a feeling of fear that permeates the atmosphere. Greed has reared its ugly head, and now, we are facing a crisis that is epic in proportion. According to Alan Greenspan, the U.S. is suffering a "once-in-a century" type of financial crisis.
Now is the time to act. The last thing you want to think is “If I had only known…” after it’s too late. As a single adult, one of the benefits of learning now is to the same secret to successful saving and investing…START EARLY! Don’t wait until you’re married, have a job that pays more, or any other “significant start” in life to get your finances in order – the time to start is now, regardless of where you are on your life’s journey. The way we manage our financial household can even have a larger impact on the global economy.
The single years provide a unique time in life for further education and personal development. Personal finance should be a part of that foundation you are laying for your future and it will have lasting effects. The following are three basic financial principles to start working on today:
Be Debt Free
There are many benefits and freedoms we enjoy from being debt free. Many people don’t realize that your credit score can not only affect the ability to get loans and the interest rates you will pay, but it could also be the deciding factor for future employment. Many employers today pull credit reports during the hiring process because they see credit reports as an indicator of your integrity and trustworthiness. Keep in mind that some professions which require a security clearance require a good credit score. A poor credit history can put your future career in jeopardy.
Realize there are long-lasting consequences of poor credit. For example, bankruptcy stays on your credit report for the next 10 years. Even missing just one payment on a credit card will show on your credit report for years and will have a negative impact on your score. Also, when the time does come for marriage, be aware that you are not only taking your spouse’s name but also their credit history. Once joint accounts are opened and a joint credit history is established, your credit becomes one as well. Chose wisely!
Now is the time to take charge of your finances and become debt free regardless of your marital status. Make a list of all your debts; write down the balance owed and the interest rate, then decide which debt you will pay off first. You can either choose to pay the debt with the highest balance or the highest interest rate first. Either way, if you learn to pay more than the minimum monthly payment, you’ll be surprised how quickly you can reduce the debt. Know that regardless of your marital status, being debt free offers many freedoms and prevents many communication problems in future relationships. Start today!
Spend Wisely
We’ve all heard “spend less than you earn”, but we find that in today’s fast paced world where mixed messages and targeted marketing is the norm, it is hard to focus on the difference between our needs and desires. It often seems that everything becomes a need: the newest, the fastest, the best. In a time when credit is instant to obtain and where every shopping venue accepts plastic, we can purchase anything we want with the touch of a button and the swipe of a card. However, this doesn’t mean we can afford it.
Several years ago, I was teaching a financial counseling class where a handful of the students were from Spain. During a discussion about some required reading, one of the Spanish students raised her hand and said, “We cannot relate to your American spending habits. If we want something in our country, we save for it or go without”. I quickly realized we see the world through our own experience; it is important to realize that regardless of the marketing techniques or sales schemes, our spending habits are learned behaviors. Recognize the principle of sacrifice in your spending habits especially as a single adult. As an old country song states "We've been so busy keepin' up with the Joneses, four car garage and we're still building on, maybe it's time we got back to the basics of love"[1]. If you want something, save for it.
First, make a list of your goals. Where do you want to be next year? In 5 years? In 10 years? In 20 years? Record your goals then recognize the financial obligations you will need in order to achieve them. Some will be short-term while others will take longer to obtain. When you have written down your goals, you will be better able to distinguish between your needs and your wants. This will help you stay motivated as you begin to make changes financially. You will also want to include a savings for unexpected and/or unplanned events. We know that regardless of our continual effort to plan the future, we can’t always anticipate what the future will hold and therefore, we need to save for the unexpected, both good and bad.
Next, there are three things to do to get a handle on your finances:
- Record everything you spend for three months.
- Look at the data you have gathered and decide where you can cut costs and save.
- Create a spending plan and follow through to realign your spending habits to meet your goals.
Regardless of where you are in your education or professional pursuits, you can save and need to begin today. If you can learn to manage a $500 budget, you will be able to manage a $5 million budget.
Save for the Future
Saving today for something tomorrow might seem too far off and difficult, but the benefit is great. An advantage to youth is time. Money makes money; the principle of the time value of money rewards those who save now for the future. For example, if you were to start at the age of 25 saving $150/month invested at 8%, you would have over half a million dollars by the age of 65! If you decide to wait until 45 to start saving, assuming everything stays the same, you will only have $88,000 in the same account. The secret to saving and investing is to start young and save often!
To stay motivated and encourage saving, keep your list of goals where you can see them. These goals should be specific plans for saving, such as a car, down payment on a house, education, or a wedding. Categorize your goals according to the proper time horizon: short-term (1 to 2 years), mid-term (3 to 5 years), and long-term (more than 5 years). Each time category should be invested in the proper investment vehicle. Speak to a financial planner or a trusted and knowledgeable friend or family member about your appropriate investment mix. It is also wise to get two or three opinions to make sure you are comfortable with the investment mix and appropriate advice.
There are also specific saving vehicles to utilize during various stages of life. For example, a Roth IRA is a great tax saving vehicle for those who have a long-term time horizon and are currently in a low tax bracket. The money in a Roth IRA goes in after-tax and comes out with tax-free earnings. Another benefit is that you can use the principle at any time without incurring a penalty.
For shorter-term goals, separating money into various savings accounts helps you stay focused on the specific goal and encourages saving. Automatic monthly or bi-monthly deductions can be a fool proof way to help you remember to pay yourself first. No matter how you save or what vehicles you use to save – Do it!
Conclusion
The single years can provide a unique time to practice the principles of sound financial management. Remember the time to start is now and it’s never too early to start taking responsibility for your finances by getting out of debt, spending wisely, and saving for your future.
