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It’s that time of year again. Many of you in the Class of 2017 have walked across the stage and are starting the next phase of your life. It’s surreal, scary, and incredibly exciting at the same time. Welcome to the real world. We have cookies.
As you transition to the real world, you will suddenly have more responsibility and opportunities with your own money. How you approach money will play a major role in determining the course of your life. It isn’t something to ignore or put off until you’re older. (You want to start figuring out your approach to money before you’re married, buy a house and car, have kids, and so forth.)
Whether you’re faced with the task of paying down what’s likely over $30,000 in student loan debt or are just trying to create a budget to save some extra cash, here are five money tips that will get you started on the right track.
Save on the big purchases
It’s common for people to advocate saving money on smaller expenses like food (making your food at home vs. eating out) and coffee (don’t splurge on that triple-shot caramel venti iced vanilla mocha every day), and that’s not a bad place to look to save some extra change. But you should start with your biggest expenses, which will likely be one of these three things:
Housing (rent)
Transportation (car payments, gas, insurance, and so forth)
Student loans (this varies per person, obviously)
Cutting down your costs in these areas will have the biggest impact on the amount of money you’re able to save on a regular basis; it can save you hundreds of dollars each month. Getting a roommate or housemate is one of the easiest ways to save on housing. Depending on where you move after you graduate, you might be able to put off buying a car and use public transportation instead. Or, if logistics demand that you buy a car, stick with a used car that’s more affordable. Here is more on how you can hack your car costs.
As far as student loans go, make it a priority to pay your debt down ahead of schedule. If you’re able to save on other big expenses like housing and transportation, put most (or all) of that extra cash to paying down your student loans at a quicker pace. The sooner you free yourself of debt, the sooner you will have more freedom and flexibility in your own life.
In the words of entrepreneur Mark Cuban, “The greatest obstacle to destiny is debt, both personal and financial. The more people you are obligated to, the harder it is to focus on yourself and figure things out.” Make it a priority to pay off your debt sooner rather than later.
Get a credit card
Getting a credit card might sound counterintuitive coming in an article about being wise with money and avoiding debt. It’s good to be cautious with credit cards, but credit cards aren’t all bad. When used effectively, credit cards can help you save money on everyday purchases and build up a credit score. A credit score plays a key role in your financial life because companies and financial institutions will judge your score in various cases, including:
Obtaining a loan for a car or house
Renting an apartment
Determining a payment plan for a cell phone
The better your credit score is, the better terms and rates you will get on these sorts of big-ticket purchases. And building a history of responsible credit card usage goes a long way toward boosting your credit score over time.
In addition to helping build your credit score, credit cards also double as being more secure than debit cards and offering a variety of points and rewards for everyday purchases. (Here are some of our favorite credit cards that have good rewards and don’t charge annual fees.)
But, that brings us to our next point…
Do NOT go into credit card debt
If you think student loan debt is bad with interest rates typically ranging between 4% to 6%, credit card debt is downright dangerous with interest rates commonly hitting 15% or higher.
The key with spending money — especially if you’re using a credit card — is to not spend more than you have in the bank. If you can’t pay for an expense within that month, tread cautiously. There’s a good chance you’re not ready to make such a big purchase.
Credit cards only make sense if you’re able to use them responsibly. Use your credit card like a debit card; don’t spend more than you can afford to pay off each month. Don’t carry a balance and you will never have to deal with those brutal interest rates.
Recognize that cash is not an investment
A Bankrate survey from 2016 found that Millennials favor cash as an investment more than any other demographic in the U.S. 43% of people between the ages 18 and 25 listed cash as their preferred investment, with 32% of people between 18 and 35 years old overall opting for cash.
It’s nice to have cash in the bank — and having a “rainy day fund” with the equivalent of, say, three months’ worth of expenses isn’t a bad idea — but cash itself has historically been a terrible long-term investment. Due to inflation, the value of the dollar — its purchasing power — goes down over time. What $100 would have purchased 10 or 20 years will typically buy a lot less today.
Put in other words, today’s $100 bill won’t be able to purchase as much stuff in 10 or 20 years. Even if that cash is in a savings account earning interest, with today’s low interest rates you’d be lucky to earn more than 2% a year. That means you’d essentially be treading water and the actual value (or purchasing power) of your savings wouldn’t increase over time. Thus it becomes clear why cash is a lousy investment.
Invest for the long term
When it comes to investing, most people (especially millennials) are drawn to cash, real estate, or precious metals like gold. A Bankrate survey shows most adults still think that these are the best places to invest money for 10 years or more:
That’s unfortunate, because all of these have historically been mediocre long-term investments. Unless you’re a financial masochist, you should be looking to invest in stocks rather than real estate, cash, or precious metals. The S&P 500 — an index fund that tracks 500 of the largest companies in the U.S. — has generated average annual returns of about 10% since 1928. That’s a far superior long-term return compared to housing/property, cash, or precious metals. When it comes to the expansion of wealth over the long term, the stock market is at the head of the pack.
Why does a long-term time horizon matter so much with investing? Because the biggest advantage you have as an investor is time. If you’re graduating this year and are in your 20s, you likely have decades ahead of you to invest in the stock market. And don’t worry about having “enough” money to start investing — just getting started is more important than the amount of money you’re starting with.
Investing in stocks can sound intimidating. It shouldn’t be. I started investing when I was 12 years old. If a 12 year old can do it, you can do it!
Here is our complete overview of why you should invest, and here are four practical steps to start investing in the stock market. You don’t need to wait. Get started today.
The Bottom Line
As you adjust to life in the real world, remember that no one will care about your money more than you. It’s up to each of us to structure our lives in such a way that we’re responsibly saving, investing, and planning for our respective futures. Thankfully, at its core, the formula for success with money is pretty darn simple:
Spend less
Save more
Invest over the long term (10+ years)
Our mission at The Vantage is to help you along the way, since it doesn’t always feel as easy as those three steps.
Originally published on The Vantage
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Photo Credit: Getty Images
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