You’d be surprised how little you know about managing your own money when the time comes to start saving and investing. Unless you took a personal finance class in high school or majored in something in the business school during college, odds are you were never taught much about what to do with your money when you’re finally earning it. Isn’t it crazy that there’s not some basic class that we’re all required to take to call ourselves adults? It should include taxes, writing checks, choosing credit cards, everything on retirement, paying your mortgage, understanding interest rates, and even investing. Of course, there are professionals out there that consult laymen on the topics discussed above, but not only do you have to trust them with your money, but you also have to pay them simply to make decisions. When you’re dealing with a large sum of money, it might be in your best interest to seek help from someone within the industry, but if you’re dealing with the basics, it’s best to educate yourself on how to handle your money. While it’s best to dig deep in this type of research, here are a few tip of the iceberg topics you should be at least familiar with.
Know how much your making
There’s no way you can even begin to manage your money if you’re not sure how much you’re making in the first place. If you are on salary and don’t work overtime or have a part-time job, that number is a pretty reliable estimate of what will be paid out to in your name for the year. One thing that so many people forget to account for before they begin dispersing their money into different expenses and accounts is that a large chunk of that salary is going to be paid to the government through taxes. Depending on what tax bracket you fall in, you’re looking at anywhere from a 10%-50% cost. It’s easy to estimate that 30% of your income is going to go towards taxes for budgeting purposes. If you don’t work on salary, you need to keep track of your income each time you get paid. If this means you have to keep track of your money with an excel sheet, so be it.
Once you know what you’re making you need to write out a budget and stick to it. List your significant expenses and designate a proportion of your income that you’re willing to spend on each. Some of these significant costs will be your rent or mortgage payment, health insurance, car payment and gas, food expenses, entertainment, retirement savings, savings in general, or emergency fund. You might have other significant expenses like student loans, which you’ll need to factor into your budget. Even if you’re cutting it close, you always need to put money into your savings account. If for whatever reason you have to leave your job or become unable to work, you’d rather be safe then sorry when it comes to money.
It’s never too early to start saving for retirement. The earlier you begin to save, the more money you’ll have once you’re done working. The most basic retirement accounts are 401Ks and IRAs. 401Ks are offered by many employers and is withheld from your weekly or bi-weekly paycheck. In many instances, your employer will match what you put into your account up to a specific monetary value. IRAs are a little different and have rules limiting how much money you can put into the accounts each year. There are also penalties if you choose to withdraw money from the accounts before retiring. Different IRAs have different taxation, so it’s important to do some in-depth research before deciding which is right for your situation.
If you just put your money into a savings account with a less than 1% interest rate, you’re never going to watch your money grow. Instead, you can look to invest your money in mutual funds, hedge funds, CDs, bonds, or even the stock market. When it comes to investments, it’s always best to consult with a professional in the industry. People market their funds and companies as great investments because they need the money for their venture, but these opportunities aren’t always in your best interest. Professionals know how to invest your money in a way that limits the risk and maximizes the return. This is why people who work in roles like hedge fund administration make the big bucks. If you do it correctly, you can see incredible returns on your investment, on the other hand, it’s possible to lose all of your money with a poor and hasty decision. There’s no way to predict how a fund or a stock will do, but there are ways and people who know how to estimate their value and potential growth.
Buying a home
It’s in your best interest to sit down with a professional about paying off your home before you choose a bank or a 15 vs 30-year mortgage. Higher interest rates can nearly double the amount you’re going to pay for your home over the course of the mortgage payments, so looking for the best deal is key to saving money. You’re also going to want to consult with someone about your initial down payment and the length of time you’re going to pay your debts over. Typically, if you choose a more extended stint of time, your monthly payments go down. However, since you’re paying those low payments over many more years, you end up paying more total. This is something to consider if you can afford to pay the slightly higher payments now and save later.
There’s no textbook answer to what you should do with your hard earned money. The more you know about your situation and the options you have financially, the better off you’ll be in the long run. While many people are trustworthy in the industry, why not learn a little for yourself first?