Personal Finance in Your 20s & 30s For Dummies. Eric Tyson
protection: If you wouldn’t be able to make it financially without your employment income, do you have adequate long-term disability insurance coverage? If you have family members who are dependent on your continued working income, do you have adequate life-insurance coverage to replace your income should you die?
Liability protection: Do you carry enough liability insurance on your home, car (including umbrella/excess liability), and business to protect all your assets?
Identifying Common Financial Mistakes Young Adults Make
Your financial checkup is complete if you’ve been working along with me since the beginning of this chapter. The results should help you best understand where you can get the biggest return on your time invested elsewhere in the book.
One motivation for reading the rest of the book is to reduce your chances of making common mistakes. Your 20s and 30s are decades where lack of financial knowledge is exposed and reflected in the beginning of costly money mistakes such as
Spending excessively and accumulating consumer debt: Too many young adults leave home being experts in spending without having learned much about living within their means and saving and investing. Many things may tempt you — the never-ending stream of gadgets and electronics, cars, restaurants, bars, nightclubs, new clothing, concerts, sporting events, and so on. Check out Chapter 5 for information about reducing your spending on items you don’t need.
Defaulting on student loans or other debts: This problem is often the consequence of the preceding problem of spending too much and accumulating too much debt. Being overwhelmed with debt, which may be exacerbated by a job loss or unexpected expenses, can cause folks to fall behind on their student loan or other debt payments. Given the ridiculously high cost of college these days, the amount of student debt that some young graduates have accumulated is also ridiculously large! See Chapter 3 for information on paying down debts.
Experiencing failed relationships that damage your credit rating and financial health: You know what they say about love being blind sometimes, right? Well, one of the things many 20- and 30-somethings don’t think about when in a relationship is how the things they’re doing are going to work out or not work out should the relationship fail. Sharing bank accounts and bill paying may not present glaring problems when everything is going well, but you can quickly end up with a tarnished credit report should your love boat run aground. See Chapter 8 for info about relationships and money.
Falling behind on tax payments and violating tax laws: Filing your annual tax return and making quarterly tax payments if you’re self-employed aren’t enjoyable tasks. In fact, you may find these chores downright intimidating and stressful. But if you fail to complete them correctly, or complete them at all, you could get socked with hefty interest and penalty charges and possibly do some jail time in the worst cases. Check out Chapter 6 for a complete discussion of paying taxes.
Making poor investments: You work hard to earn money and then to save it. So you should do your homework to ensure that you invest it well. Don’t rush into making an investment you don’t understand, because you have a lot to lose. There are plenty of slick-talking salesmen who will sell you an investment that helps to line their pockets but not yours. You also don’t want your money sitting around for years on end in a low-interest bank account, which is what often happens to folks who don’t know how to invest. Go to Chapter 10 for more in-depth information about investing your money.
Neglecting to secure proper insurance coverage: Most young people don’t spend a lot of time thinking about risks. After all, most young adults are healthy and energetic. So things like health insurance or disability insurance seem unnecessary and for older folks. The good news is that insurance costs less when you’re younger because you’re less likely to suffer a major illness or disability than someone decades older than you. See the chapters in Part 4 for all the details about insurance.
Being taken and duped by biased and/or shoddy advice: Many companies and people have something to sell. Some of what they’re selling is good stuff, much is mediocre, and some is downright awful. You don’t need to pay high commissions or end up in the wrong type of investments or insurance. Check out Chapter 18 for what you need to know about dealing with professionals.
Chapter 2
Budgeting, Goal Setting, and Valuing Saving
IN THIS CHAPTER
Unless you’re the offspring of wealthy parents or grandparents who have left you a sizable sum of money, you need to save money to accomplish your personal and financial goals. Early in your working years, saving money can be a challenge, of course, especially since you’re likely not earning a super-high income.
When you’re first starting out, your salary is probably somewhat low, and after fixed expenses (such as rent/mortgage, food, insurance, cell-phone service, and other payments that you can’t easily get rid of), you may not have much money left for “fun” discretionary spending, let alone additional savings. Remember, though, that when it comes to building wealth, it doesn’t matter what you make — it’s what you spend and, therefore, are able to save. Many wealthy people didn’t get rich based exclusively on their big salaries, but through disciplined savings and wise investing over time.
In this chapter, I discuss smart budgeting strategies and the tremendous and surprising long-term value that comes from regular saving and investing.
Developing a Savings Mindset
People typically learn their financial habits, both good and not so good, at a young age. During childhood, most people are exposed to messages and lessons about money, both at home with their parents and siblings and also in the world at large, such as at school; with their friends; and through society and media, including social media. In fact, social media presents a challenge to the savings mindset and has taken center stage in marketing to young adults on ways to spend their money.
The expression “You can’t teach an old dog new tricks” has some validity, at least for our four-legged friends, but even then, the expression actually requires some modification to be accurate. It should be, “It’s hard to teach an old dog new tricks, but how hard it is depends on the dog.”
My experiences have shown me the same to be true for people and their financial habits and decision making. For most people, spending money is easier and more enjoyable than earning and saving it. Of course, you can and should spend money, but there’s a world of difference between spending money carelessly and spending money wisely.
I show you how to save money, even if you haven’t been a good saver before.