10 Financial Lessons You Need To Know Before You Hit 40
Learning to manage money and make good financial decisions does not come naturally to many people. Young adults are often tempted to put off these lessons until some future date, assuming they have many years ahead to earn an income and actually prepare for the future.
Most of us have made some financial missteps along the way, but below are ten financial lessons everyone should learn before their 40th birthday. If you have not yet learned these lessons, now is the time to gain control of your financial situation.
1. Learn to Budget –
Adhering to a budget gives you control over your financial situation, better enabling you to meet your needs and plan for the future. Learn to distinguish between needs and wants. Keep track of spending habits, and carefully monitor your spending to ensure it does not exceed income. Managing a budget will make it easier to make other financial decisions along the way. Use our free Budget Builder tool to help you build and manage a realistic budget within minutes: www.onlinebudgetadvisor.com
2. Build an Emergency Fund –
Save a portion of every paycheck to build a strong emergency fund. Your savings will equip you to pay for unexpected expenses, such as a major home or car repair or unexpected health expenses. An adequate emergency fund will also allow you to weather the storm should you lose your job or be unable to work. Aim to save enough to cover your expenses for at least four to seven months.
3. Start Saving for Retirement Now –
Start saving for your future early by participating in your employer’s 401k plan or investing in an IRA. Investing in these funds early will allow your money to multiply over time thanks to compound interest. The more you can take advantage of compound interest, the less principal you will have to save. Waiting to save for retirement means you will have to contribute more or work longer.
4. Understand Housing Costs –
Housing costs are typically the largest piece of an individual’s budget. Purchase or rent only what you can afford. If you do choose to purchase a home, do your research and know all of the costs associated with homeownership. There is more to the cost of a home than the down payment and mortgage payments. Do not overlook the costs of maintenance and repair costs. Be honest, and only commit to what your budget can truly afford.
5. Purchase Health Insurance –
It is tempting for young, healthy people to opt out of health coverage. Unfortunately, your health is not guaranteed. Even a single accident or illness with a trip to the emergency room can end up costing thousands of dollars. Research all of your options and purchase what makes sense for your budget, but do protect yourself by insuring against unexpected health costs.
6. Protect Your Assets With Insurance –
Take the time to learn about the variety of products you can use to help protect your personal and financial assets. Homeowners, renters and auto property policies provide protection for your physical assets including your home, personal belongings and your vehicle. Property coverage allows you to withstand even a catastrophic loss without facing financial ruin. Auto liability and personal liability policies help protect your financial assets in the event you cause injury or loss to someone in an accident. Forgoing liability insurance can put your financial future at risk.
7. Build and Maintain Good Credit History –
Safeguard your credit, and know what factors impact your credit score. Many people ignore their credit score until they apply for a home loan or other financing, only to find out their credit score is too low to qualify. Maintaining good credit is vital in preparing for your future. Always pay your bills on time; even one late payment can have a significant adverse effect on an otherwise good credit score. Take the time to monitor your credit report for signs of identity theft, or sign up for an identity theft monitoring service.
8. Know When To Use Debt –
Credit is readily available, but should really only be used in certain situations. It typically makes sense to use credit for large purchases such as a home, car or your child’s college expenses. For these types of loans, ensure you only borrow what you can easily repay over the term of the loan. Never allow yourself to accumulate credit card debt, as this comes at a steep interest rate and will also drive your credit score down considerably. If you use a credit card, track your spending and only spend what you can pay off each month.
9. Set Clear Goals –
Set clear goals, and regularly review those goals. Look ahead to the future and plan for a home purchase, your child’s college and a comfortable retirement. Knowing what you want your future to look like will make it easier to follow the other financial lessons. Plans and circumstances can change over time, so it is important to reevaluate and adjust your goals as needed. Stay on top of your financial situation, and prioritize the actions you need to take to reach your goals.
10. Understand Tax Implications –
Understanding the basic principles of income tax can help you make better financial decisions. Learn about your different savings and investment options and how these accounts will be taxed. Know which loan interest payments you can deduct to lower your tax bill. Basic tax knowledge will help you compare your options and their impact on your bottom line.