Money Tip I’d Like to Know Earlier
Remember last week I asked you what money advice you would like to receive first ? You have shared great responses, but many of you said that it’s not when you got the advice, but when you actually decided to take it.
“Pay yourself first”
You’ve probably heard this personal finance cliché: Pay yourself first. Basically, this means that you take your income and channel it towards basic living needs in the first place, and then automatically set aside the rest or channel it towards your financial goals, such as getting out of debt. The idea is that if you “pay yourself first,” you will not give yourself the opportunity to spend money on other things.
As one reader put it:
This is absolutely true. For a long time, I heard this advice and thought, “Yeah, yeah, just another monetary cliché that doesn’t mean anything when you’re broke.” But like most personal finance tips, it’s even more important when you’re broke. I think this was the last thing Wittinheim said that finally made me follow this advice:
You won’t notice that there is not enough money, but at the end of the year you will have a separate $ 960 savings account. And you will notice it!
After college, I had to wrestle with a student loan and work in a not-so-well-paying job. My parents told me to “pay myself first” and save $ 25 a week. I didn’t think $ 25 would make a lot of difference because I was broke, but I figured it was a small price to pay to get them to stop pestering me about it. Therefore, I set up an automatic transfer of savings every week. I completely forgot about this transaction, and a few months later I was surprised to see $ 300 in my account. When you’re broke, $ 300 is a very significant amount. This served as a boost to my motivation, so I decided to raise my goal and save as much as possible each week. It didn’t take me an insanely long time to learn this lesson, but heck, it was a powerful lesson that changed everything when I finally decided to embrace it.
Emergency fund = power
When it comes to power, emergency funds are a hell of a lot of opportunities. When I first read about this concept in his book Dave Ramsey of Total Money Makeover , I thought, that sounds corny. I also thought, “What the hell would I have a spare fund if I can’t even afford to move out of my mom’s house?”
I’ve always thought of this concept as a responsible, grown-up thing, but as one reader explained, I got it wrong:
This is true. When you don’t have an airbag and you find yourself in an emergency, you make desperate, stupid decisions. In Scarcity: Why Too Little Means So Much, researchers Sendhil Mullainathan and Eldar Shafir found that not having enough resources, especially money, can actually make us less polite, more impulsive, and even lower our cognitive abilities. We have tunnel vision, the researchers write, and we cannot take a step back and objectively assess our situation. This is when people take payday loans or put everything on a credit card and hope for the best. It’s hard to step back and look at the big picture when you’re vulnerable, but that’s exactly what an emergency fund is for: getting you out of this tunnel.
A 401 (k) match is like free money
I still mourn this. If you are not familiar with employer 401 (k) matching, now is the time, especially if your employer offers one. Basically, it’s a company privilege where your employer uses a certain amount of your retirement savings. A common scenario is a 50% match of your own contribution to 6% of your gross salary. If you make $ 50,000 a year, that means you can get $ 1,500 “free” from your employer!
There are some caveats in this regard. Most 401 (k) are not that good , and you tend to just want to take a match and then invest in an IRA , which gives you more flexibility to pick cheaper and better funds. After all, the match seems to be for money! This is a great bonus, and especially if you get paid little initially, you will definitely want to take advantage of it.
Me and this reader have almost the same experience:
I was fortunate enough to work with colleagues who took the time to explain how cool this is. However, I was young and had other plans for my money, so even though I took advantage of some advantage in the match, I still left thousands of dollars on the table. Don’t be like me. If your employer offers this match, do your best to support it (because, in the end, this money isn’t entirely free: it’s part of your paycheck).
Your lender wants you to fail
Another really important lesson was taught by one reader to consider:
I think we have all learned this lesson collectively after the housing crisis , and with the worsening situation with student loans, it is worth noting that this applies not only to mortgages: it is the same with student loans, car loans, business loans, personal loans. and so on. While there are some loans (such as hardship loans from credit unions) with better terms to help people get back on their feet, lenders make money on interest.
I learned this the hard way when I tried to pay off my principal balance early and instead my student loan officer applied it to my future interest . This is a tricky move . Instead of decreasing the principal so that you save money in interest over time, they keep your payment schedule as is and channel your extra money in a way that maximizes their own profit.
It took me months of additional payments to realize this was happening. When I finally did that, the lender applied those payments correctly, but this is a good reminder that you may have to act defensively when it comes to your loan. Your lender is not on your side.
One final lesson that we can probably all learn: Don’t get hung up on your mistakes . Research published in the Journal of Consumer Psychology suggests that focusing on your past mistakes may actually affect your current habits, and not in the best way. The study concluded:
… that remembering failure does little to promote self-control, despite the popular belief that one learns from past mistakes. In fact, our results prove that focusing on past mistakes can doom us to repeat them.
As tempting as it is to look back and regret the past, the best thing you can do is share your lessons learned and try not to beat yourself too hard – your current financial health depends on it.