Financial Advice for Today: What I Would Tell Financial Newbies Now

by Kevin on September 29, 2011

I have a friend that has a new co-worker who is out on her own in the real world for the first time. She lives in another state and called me for advice on where to point her. This financial newbie is looking to set up a checking and savings account for the first time, get a credit card for businesses expenses (to be reimbursed), and overall needs pointers on how to get off on the right foot financially. I thought it might be beneficial to share this type of advice with my readers.

If you are a financial newbie — young or old — congratulations on reaching out on your own for the first time. Furthering your knowledge of money will serve you well no matter your income level. Let’s get started.

Core Concepts:

There are three core things I think everyone must understand to be successful with money.

Spend Less Than You Earn

If you spend more than you make it doesn’t matter what your income level is, you are broke. Make $50,000 and spend $55,000… you’re broke. Make $500,000 and spend $550,000… you’re broke. All financial advice is built upon you spending less than you make. Sometimes that means painful sacrifice, but not always. Avoiding a few fees here and there and cutting back on things that aren’t important to you can give you enough cushion to make a difference in your financial life. How you monitor how much you spend is up to you. I prefer budgeting, but some people hate that term. Whatever works for you — just track your money. Period.

Have Goals

It’s hard to get motivated to do anything if you don’t have a place to go. Likewise, if you know that extra $35 you just paid in overdraft fees is taking away from your ability to go on vacation this year or to buy a home next year you will suddenly find motivation to wise up. Short, medium, and long term goals are important mile markers in your race for success. Use them.

Live Off Last Month’s Income

I called this the core financial concept that changed my life, and that is still true today. Building in a month’s cushion into your finances makes dealing with any hiccups along the way a lot easier. You don’t have to make a panicked decision when an emergency pops up — you have a few days or weeks to make some tough decisions and move money around.

Accounts to Get + A Handy Checklist

If your are just starting today, you need to get:

  • a checking account: With no fees and a debit card; preferably with high interest through a rewards checking program. Big banks are convenient, but credit unions or community banks will serve you better and not screw you with fees.
  • a savings account: Even if your savings account pays 0% interest, simply setting up savings and building the habit of regularly contributing to it is a great step. ING Direct is a great choice because it pays industry-leading interest and allows multiple “sub-accounts” so you can save up for your goals — that vacation, home purchase, and wedding could all have different accounts
  • a credit card: Yes, I think financial newbies should have a credit card. They should also treat it like a dangerous weapon and learn how to use it. If you treat your credit card like a debit card you will never pay a dime in interest. If you can’t handle a credit card then stop using it. Building your credit score is important, and a credit card is a simple way to do that.
  • a retirement account: Hopefully your workplace has a 401k or 403b for you to contribute part of your pay to automatically. Contribute as much as you can. In future years you can get educated on Roth IRAs and beefing up your retirement savings.

That’s it. You can add things onto the list forever, but those are the core things you need in terms of accounts.

Also, be sure to:

  • get direct deposit: Have part of your check automatically go into your savings account for those future goals. If you don’t have to think about saving money it will automatically be easier.
  • set up automatic bill payment on everything: Setting this up on your credit card is of the utmost importance so you don’t get dinged with a late fee and ridiculously high interest rates. But don’t forget your cable bill, utilities, student loans, car payment, cell phone… automate everything so you don’t have to think about paying the bill or not. (Now you just have to focus on making sure your account balance never gets close to zero — again, spending less than you earn.)
  • get your employer’s 401k match: Never turn down free money. Never.

Again, there are layers of complexity you can add to this… but these are the basics. Do these things and you are automatically ahead of a majority of your peers. Good luck.

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