“You must gain control over your money, or the lack of it will forever control you,” says Dave Ramsey, founder of Ramsey Solutions.
Being smart with money isn’t a choice, it’s a critical life skill that decides a person’s future financial resilience. A person’s commitment to becoming financially resilient doesn’t just affect them, it affects their family as well.
A person in their 20s may find saving a tangible amount each month challenging, especially given they may just have started their career. Nevertheless, it’s important to realize that money works like karma. Delaying gratification can pay off big time.
5 Smart money moves for future financial resilience
The power of financial resilience lies in an individual’s own hands. The path may not be all hunky-dory, but the rewards are worth the effort.
It doesn’t have to be all about compromise though. A person can still enjoy their 20s without jeopardizing their future financially. This article talks about 5 smart money moves that can help individuals gain better control over their finances.
Invest with a goal in mind
Knowing the goals is the first step towards building a money-management strategy. A person should try to answer why their current financial position should change, and by when they would like to achieve this change.
For most, the why will include goals such as financial freedom and building wealth, while some may just be looking to get rid of debt. Naturally, both goals require a different approach. Let’s circle back to debt reduction, and focus on financial freedom and wealth building first.
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Investing can feel overwhelming for someone who’s just entering the wicked world of investments. Therefore, having a financial advisor goes a long way. They can help investors build a balanced portfolio based on risk appetite, time horizon, and goals.
However, for most people in their 20s and 30s, the portfolio will consist of high risk, high return assets like equities and even cryptocurrencies. There are no two opinions about how nerve-wracking cryptocurrencies are. One day, they reach for the skies, and the next day they wipe out half the investor’s wealth.
That being said, they still have the potential to outperform other asset classes in the long term. For those who consider themselves risk-tolerant, cryptocurrencies offer a lucrative opportunity. Some cryptocurrencies tend to be far less volatile, though.
For instance, USDC is a stablecoin pegged to the value of USD and tends to be much more stable than Bitcoin or Ether. Investors can buy USDC with a credit card through a cryptocurrency exchange within minutes. Cryptocurrencies also help further diversify an investor’s portfolio since they aren’t correlated with any other asset classes.
Investors that have vowed never to onboard the crypto craze, can add equities to their portfolio. Though still considered risky, equities aren’t as ruthless as cryptocurrencies and tend to outperform most other asset classes over a longer time frame.
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Investing is key to multiplying wealth. The secret sauce here is to start early and let compounding work its magic. Invest aggressively, but be sure to have some professional guidance to avoid mishaps.
Set up an emergency and retirement fund
Whether it’s the 2008 financial crisis or covid, one thing they all taught the world is that emergencies come unannounced. Those that aren’t building a lifeboat right now are going to see tough times when things start to go south.
Insurance helps, but it makes sense to insure only against risks that can’t be managed or mitigated. Therefore, everybody still needs an emergency fund even with life and health insurance in place. A good rule of thumb is to have at least 6 months’ worth of income in the emergency fund; the more the better.
While it’s smart to invest the emergency fund somewhere, it should strictly be invested in risk-free assets. Investing the emergency fund in equities makes little sense given how risky they are. Instead, invest them in a term deposit or liquid debt fund that has no exit load and minimal interest rate and risk.
Remember, the focus here is the preservation of capital while earning a little something, not chasing above-average returns.
Meanwhile, one should continue to put some money into a retirement fund too. Every person needs money for when they won’t be able to work anymore. Increasing medical costs, a higher insurance premium for seniors, and lifestyle expenses all need to be covered with a retirement fund.
It doesn’t have to be extremely difficult. Just put away a little each month and let the returns compound. These savings should turn into a huge corpus by the time a person retires.
Again, these commitments aren’t easy. It may not be the easiest thing to do to put away a large portion of earnings. Rest assured though – it gets better as time passes.
Double-down on debt
Student debt and credit card debt are among the worst destroyers of wealth. While often the only option to finance higher education, student loans require over a decade to pay off.
It may be difficult to pay off student debt entirely at once as a fresher. However, as a person starts to gain traction in their career, any surplus cash should be first put towards paying off debt early.
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Let’s run some numbers to put this in context and see how paying down debt faster can contribute to a person’s long-term financial strategy.
Assume that a person, at age 24, is about to start working with take-home pay of $4,000 a month. They have $30,000 in student debt that accrues interest at 10%. Currently, the person pays $396.45 towards the loan each month given a 10-year loan term.
On the contrary, let’s say the person manages to become thrifty and pulls off saving up $760 each month to pay towards the student loan. By increasing monthly payments by just $265, a person can pay off the loan in less than half the original term.
The reduced term loan isn’t the only benefit, though. Notice how the total interest drops from $17,574 to $6,522. That’s over $10,000 saved in interest. Amazing, huh?
Embrace frugality
If there’s one thing common among billionaires, it’s their frugal approach to life when they had just begun their careers. Some upgrade their lifestyles later, but a lot of those billionaires continue to live a frugal life to this day.
The best example? Warren Buffet. He has some surprisingly frugal habits. Although the little things people spend on don’t seem like a huge amount at first, over time those expenditures can pile up. Throw opportunity cost on those expenditures into the mix, and it becomes one giant figure!
A giant figure that could have otherwise been used to pay down debt or invested in a high-return asset class.
Start trimming on luxuries. Go a step further by looking for deals on groceries. Use coupons when you can and buy in bulk. Make saving money a second nature.
Boost the credit score
This isn’t something that directly affects a person’s wealth. However, it gives an individual easy access to cheap money. Let’s say a person has saved $100,000 for purchasing a house, but another house, though costs $30,000 more, is priced attractively.
In this case, someone with a good credit score can obtain a loan for the additional $30,000 at a much lower rate of interest than someone with a poor credit score. When the amount is large, even a one percent increase in interest rate can cost a fair bit.
Of course, there is also the chance that someone with a poor credit score is denied a loan altogether.
There is one caveat for building a good credit score, though. A person must have some credit history to have a decent credit score. This could be from a loan or credit card. However, one could also become an authorized user on a friend or family member’s credit card.
People who are averse to the idea of credit cards entirely can use Experian Boost. This free tool allows users to link positive events such as timely payment of phone, utility, and electric bills to boost their credit score.
For those who do decide to get a credit card, remember that the best way to boost the credit score is by using the card regularly and making timely payments. Also, ensure that the credit utilization ratio (i.e., amount utilized divided by approved amount) remains below 30%.
Having a good credit score lets borrowers negotiate better terms for their loans. Although a good credit score doesn’t directly translate into extra cash in the bank, it’s a great way to ensure access to cash whenever an opportunity (or an emergency) presents itself.
Ready to adopt a laser-sharp focus to secure the future?
These smart money moves, hands down, are easier to talk about than implement. It’s not easy to watch a friend cruise in their new Ferrari while being stuck with a Honda. While buying a new car may provide a sense of accomplishment, it could just as easily be an obstacle to the achievement of financial goals.
Now, it’s not that nobody should buy a Ferrari. If someone makes enough to buy a Ferrari, by all means, they should go for it – provided their insurance, retirement, and investments have been taken care of. It’s all about prioritizing the expenses. The Ferrari may last 10 years and sell for peanuts, but the investments a person makes will grow with time.