When you read financial advice, so much of it focuses on what not to do, like overspending or buying lunches out every day or wasting cash on lattes. But what are some good decisions you can make that will set you on the path to financial success?
There are plenty of big and small decisions you can make now that will make managing your financial life a lot easier, and maximize your chances of being successful with money in the future. Here are five great choices to make when it comes to your money that will go a long way toward setting you on a solid financial path.
1. Work hard to build a good credit score
Your credit score affects almost every aspect of your financial life. It will determine if you can borrow to do important things such as buying a house. It will affect your interest rate on any loan you take out. It will control whether you can get a good credit card with generous rewards and a low rate. Even your auto insurance costs and your ability to get a job could be affected by your credit since insurers and potential employers often check your credit report.
So commit now to taking the steps necessary to build a good credit score. This means paying all your bills on time, keeping your credit use below 30% of your available credit, and avoiding opening too many new credit cards at one time. Not only will taking these steps help you earn a credit score you can be proud of, but you'll also avoid late fees and be way less likely to get into serious debt.
2. Shop around before you take out a big loan
If you're borrowing for a house or a car, taking out private student loans, or getting a personal or business loan, the interest rate you pay will make a huge difference in your total loan cost. Say for example you're borrowing $15,000 to be paid back over five years. If you can qualify for a loan at 8%, your monthly payment would be $304, and you'd pay $3,249 in interest charges. But if you borrowed the same $15,000 for five years at 15% interest, monthly payments would go up to $357 and total interest costs would be $6,411.
To make sure you're getting the best possible deal on your loan, always shop around and get quotes from at least three different lenders, and preferably more. You can consider online lenders, local banks, and credit unions for your borrowing. If you find you're consistently being offered loans at a high rate, look into getting someone with better credit or more income to cosign for you. While your cosigner becomes legally responsible for your debt, they won't have to actually pay it back as long as you do -- and their good credit could help you to save a substantial sum on your loan.
As you shop around, look for lenders that provide rate quotes without a hard credit check, as each hard check puts an inquiry on your report that stays there for two years. Too many inquiries can hurt your credit score. And be sure you're comparing apples-to-apples. Fixed-rate loans should only be compared to other fixed-rate loans, for example, as variable rate loans usually start at a lower rate that climbs over time.
3. Automate your savings
Saving money is extremely important, but it can be really hard if you have to be responsible every month and force yourself not to spend so you can transfer money into a savings account.
You can avoid this by automating transfers to savings accounts right on payday as soon as the money is deposited into your account. If you don't ever get your hands on the money, you'll simply have to live on what's actually available in your accounts. It's especially helpful to start this practice as soon as you get a raise, as you can transfer the added funds from your salary increase to savings before ever getting used to living on them.
You should automate transfers of funds to a retirement account, such as a 401(k), as well as to other savings accounts such as an emergency fund, down payment fund, or big purchase fund. Then just leave the money alone until you need it for its designated purpose.
4. Start saving young -- even if you have to start small
The younger you are when you start saving, the easier it is for you to build a big nest egg with small monthly contributions. If you start saving $300 a month at age 25 and keep that up until you retire at 65, you'll end up with $1.05 million, assuming an 8% return on investment. But you'd have to save $1,775 per month to end up with the same $1.5 million if you didn't start saving until age 45.
The sooner you start saving, the more time you have for compound interest to work and the easier it is for small monthly contributions to turn into a huge pot of cash. Don't make your future life more difficult -- save at least a little bit when you're young, because the magic of time makes that little bit go a long way.
5. Just say no to high-interest consumer debt
Sometimes you have to borrow, and taking out a student loan or a mortgage often makes sense because a home and education can help you build your net worth. But high-interest debt -- such as debt from credit cards, payday loans, and even some personal loans -- can make your life much more difficult. If you borrow today, you're committing a portion of your future paychecks to paying back interest. This is money you can't do anything else with. And it will make it harder to live within your means in the future because your money will be going to creditors.
Unless you're in a dire emergency -- like you need to put food on the table and have no way of getting cash -- just don't let yourself get into high-interest debt. There's no purchase that's worth robbing your future self of the ability to do what you want with your money. And if you're already in debt, make a debt payoff plan now and commit to staying out of debt in the future.
Make these money decisions today
If you commit to focusing on your credit, avoiding high-interest debt, and saving as much as you can as soon as possible, you will set yourself up for a lifetime of financial success. Promise yourself today that you'll start living by these priorities, and you'll be very glad you did as you see your accounts grow and have the peace-of-mind of knowing you're on track for a bright financial future.