Take Responsibility for Your Finances

Don™t blame others for your money problems. It™s time to own up to your financial situation. If you™ve ever felt bad about not saving money or think it™s too late to start, push those thoughts aside. Stop making excuses now.

First, avoid getting overwhelmed by all the financial advice out there. The media can be confusing with too much information, and some advice, like œcut back on those lattes, doesn™t fit your life as a young adult.

Young people often blame the media or lack of financial education for their investment mistakes. However, the best way to improve their savings is to take responsibility for their own choices. Common excuses, like saying our education system doesn™t teach money management, are not entirely true. Many colleges offer finance classes, but students often skip them.

Overcome Common Excuses for Not Investing

Fear of losing money is a common reason people avoid investing. However, it's often better to take some risks when you're young because you have less to lose. As you get older and have more money, you'll understand better how to protect it. Remember, keeping money in a bank account without using it can lead to its value decreasing over time.

Another excuse is not being able to save $100 each month. But even saving just $1 a day can add up over time. During the 2008 financial crisis, many people panicked and took their money out of the market. They often did this because they had not diversified their investments and ended up buying high and selling low”exactly what they should avoid. Instead of blaming the government or banks, it's important to educate yourself about personal finance and take control of your financial decisions.

Smart Credit Card Use

Knowing how to use credit cards wisely is the first step to saving money and building wealth. We often make our biggest purchases with credit, and those with good credit can save a lot. Credit comes as loans, mortgages, and credit cards, helping you buy expensive items even if you don't have the money right away.

Credit has two main parts: a credit report and a credit score. 

• A credit report shows your credit activities and helps lenders see how you manage credit. 
• A credit score is a number between 300 and 850 which shows how risky it is to lend to you.

A good credit score makes you attractive to lenders, resulting in better loan interest rates. This can save you a lot of money. For example, in 2009, if you had a good credit score (750-850), a $200,000 mortgage over 30 years would cost $359,867, including interest. With a bad credit score (620-639), it would cost $430,427. That's $70,000 more!

Credit cards are the most important tool for building credit. Here are some tips:

• Pay off your debt: Reduce spending and pay your debts on time. On-time payments make up 35% of your credit score. Set up automatic payments to avoid missing a due date.
• Contact your credit card company: Ask them to remove annual fees and service charges and to lower your interest rate. Many companies will agree to these requests.
• Look for the best credit card benefits: For example, the author's credit card concierge helped him get tickets to the LA Philharmonic when they seemed sold out!

High Interest Rates with Zero Fees

Zero fees and high interest rates might seem impossible, but online banks often offer both. They have low overhead costs since they don't spend money on branches or marketing. This allows them to provide better customer service and lower profit margins than traditional banks. As a result, they offer interest rates six to ten times higher than conventional banks.

For example, if you save $25,000 at a three percent interest rate with an online bank, you would earn $750 in one year. In contrast, a regular bank with a 0.5 percent rate would only give you $125. If you saved $50,000, an online bank would give you $1,500, while a traditional bank would offer just $250.

To get the best benefits, you should have at least one checking account and one savings account with an online bank.

Choose the Right Bank Accounts for Your Needs

You need checking accounts for frequent withdrawals and savings accounts for goals like vacations or special events. You have a few choices:

1. Keep both your checking and savings accounts at the same bank (the easy option).
2. Use a local bank for your checking account and an online bank for your savings account (the common choice).
3. Have multiple checking and savings accounts to optimize for different goals (the best choice if you™re willing to put in the effort).

Alternatively, you can keep one and a half months™ worth of living expenses in your checking account and put the rest into your savings account. If managing multiple accounts sounds like too much, simply choose a no-fee checking account at a local bank and a high-interest savings account at an online bank.

Start Investing with Any Amount

Even if you only have $50, you can start opening investment accounts. While saving money in your account is good, investing will help your money grow faster. A great option is a 401(k) retirement fund, which many companies in the USA provide. To set it up, just decide how much of your paycheck you want to go into your 401(k), and your employer will handle the rest. This way, your money will grow over time while you relax.

A 401(k) has several advantages, such as tax benefits because you're agreeing to save money for the long term, potential contributions from your employer if they match your deposits, and it requires minimal effort to manage. After setting up a 401(k), it's a good idea to also open a Roth IRA. Unlike a 401(k), which is provided by your employer, a Roth IRA is funded with your own money.

Having both a 401(k) and a Roth IRA is recommended because a Roth IRA allows you to invest in a variety of options, like individual stocks and index funds. Additionally, with a 401(k), you use pre-tax dollars and pay taxes on withdrawals during retirement. In contrast, a Roth IRA uses after-tax dollars, so you don™t pay taxes on the interest earned or on withdrawals during retirement.

If you're finding it hard to save up $1,000 to start a Roth IRA, you can choose a management firm like T. Rowe Price, which allows you to open an account with no minimum amount. You can also set up automatic monthly contributions, such as $50, which might be easier to manage and is still a great way to start saving.

Manage Your Spending Wisely

Figure out how much you™re spending, and then direct your money where you want it to go. Remember the last time you felt guilty about buying something but bought it anyway? Next time, you'll be better informed with a Conscious Spending Plan. This plan helps you cut down on spending for things that aren't that important to you and focus more on what really matters. Just save and invest a set amount each month automatically, and spend the rest as you like, without feeling guilty.

You can divide your spending into different categories:

• 60% goes to fixed costs (like rent, utilities, and debt)
• 10% is for investments (such as a 401(k) or Roth IRA)
• 10% is saved for things like vacations, gifts, or unexpected costs
• 20% is for guilt-free spending

Conscious spending means focusing on what matters most to you. For example, Jim, a friend of the author, chose to move to a smaller apartment after getting a raise. Why? Because he didn™t care much about having a big living space, he loved camping, so he decided to spend more on that instead.

Adjust Your Spending with Simple Methods

To control your spending, try using "the envelope system." This method involves setting aside specific amounts of money for different spending categories and putting that money into separate envelopes. When the money in an envelope is gone, you stop spending in that category for the month. You can also use a debit card linked to a special account as a modern version of this system. Each month, load the card with a set amount for certain expenses like social activities. Once the card balance is depleted, no more spending occurs in that category.

Instead of making drastic changes, start by adjusting your spending gradually. For example, if you used to spend $500 a week, don™t immediately cut down to $495. Focus on one or two major spending areas rather than trying to reduce small amounts from multiple categories. For instance, eliminating overdraft fees, which can exceed $1,000 a year, can significantly improve your financial situation.

Automate Your Bill Payments

Paying bills can be a hassle and annoying. If you don™t enjoy handling money, set up an automatic system to manage your bills for you. Use the Conscious Spending Plan along with your bank's services and your spending tracking tools to automate everything.

Contact your bank to arrange automatic transfers and payments. Set up automatic payments for regular bills and schedule withdrawals from your checking account to your Roth IRA. Keep track of your spending by setting reminders for mid-month to check if you™re sticking to your budget. Aim to keep $1,000 as a reserve in your checking account. If you™re overspending, use the next 15 days to adjust your budget.

Consider connecting all your accounts to automate transfers. For instance, have your paycheck fund your 401(k) and checking account. Then, let your checking account pay for your Roth IRA, savings account, credit card, fixed costs that can't be paid by credit card (like rent), and some spending money. Use your credit card for other fixed costs and extra spending.

To automate, set up transfers like this: On the first of the month, your paycheck should go to your 401(k) and the rest to your checking account. On the second, transfer money to your savings account and Roth IRA from your checking account. On the fifth, pay your bills and credit card from your checking account.

Invest Simply Beats Experts

Ignoring experts and investing simply can be a better strategy. Experts often focus on picking specific stocks, but there's a simpler approach. No expert can reliably predict how stocks or funds will perform in the future. Just like a 2001 study by Frederic Brochet showed that wine experts couldn™t tell different wines apart, financial experts aren™t always accurate. For instance, research mentioned by Daniel Solin, author of The Smartest Investment Book You'll Ever Read, showed that 47 out of 50 advisory firms kept recommending stocks from companies that were about to go bankrupt.

Investing can be easier if you use the simplest method: lifecycle funds, also known as age-based funds. Imagine an investment pyramid where different types of investments are stacked. At the bottom, you have stocks, bonds, and cash. In the middle are index and mutual funds. At the top are lifecycle funds. Lifecycle funds adjust their investments based on your age. For example, if you™re 25, a Vanguard Target Retirement 2050 fund might have 90% in stocks and 10% in bonds. By the time you™re 55, it will have changed to 63% in stocks and 37% in bonds.

When you™re young, you can handle more risk, so there™s more in stocks. As you age, the fund shifts to be safer with more bonds. The best part is you only need one fund to manage, and you decide where to put it, like a 401(k) or a Roth IRA.