First Step #1 in becoming Financially Literate: Goals, Goals, Goals
Yes, I've talked about this already. But it's that important. What are the goals that you want to achieve? They don't have to be "have x amount of dollars by 35 years old". It could be as crazy as moving to Italy for a year. Retiring by age 45. Or quitting your job and starting a personal finance blog. No matter what, those goals will have a financial aspect to them. Define your goals and what the related savings needs are. Then you can make a plan to achieve those needs. To give you an example, my wife and I are hoping to purchase a house next year. What are the financial aspects to that decision? There are many, but two include making the down payment and affording the resulting monthly mortgage payments. We have an idea of how much house we should afford, and are expecting to pay 20% as the down payment. So we calculated the value of that 20% and we know how much time we have. Awesome right? Every month we contribute to a savings account that we titled "Down Payment or Bust". Checking that box, here we come! I can't stress how important defining your own goals are. Without a defined end, you have no plans.
First Step #2 in becoming Financially Literate: Track your income, spending, and saving
Yup, talked about this one already, too (I Love Spreadsheets). You get the idea. How are you doing with it though? I only had one person tell me they were signing up for Mint.com. I hope others did or are nerding-out with spreadsheets right about now! (Today was actually finance-tracking day. Got November's done! If you'd like the template I created, let me know and I'll pass it along)
First Step #3 in becoming Financially Literate: Ditch your bank
You heard correctly - ditch your bank. Unless you already have. No, I'm not talking about stashing your money under a rock or mattress. I mean ditch your brick-and-mortar bank. Create an online savings account. I will write about this in detail next time. But this is something you should absolutely do right now. I use ING Direct and have loved it. I earn 10x as much interest as what Wells Fargo pays. Why? Because online banks do not have the added costs of buildings or personnel. They pass those savings onto you, the customer. They work beautifully - link your existing checking account and transfer money online. It takes a few days to settle, but planning a week ahead won't kill you. If you like, I can send a referral to open an account. If you contribute $250, you get $25 to start. Boom 10% return! Full disclosure, I would get $10 as a bonus. I have only a limited number, so let me know sooner rather than later!
First Step #4 in becoming Financially Literate: Squirrel away FREE money from your employer
How many of you non-students are working? How many are contributing to your 401k? A 401k is a retirement account through your job. For some, retirement sounds like a long ways off. You may be only 25 years old, but that's no excuse. The earlier you start, the better. Compounding interest, duh. But even better - so many times an employer will "match" your contributions up to a certain amount. That's right, free money from your boss's boss. They're helping you fund your retirement vacations. Sound nice? It is. They might "match 100% up to 6% of your salary". This means that if you contribute 6% of your salary to your 401k, they'll give you another 6%. If you only contribute 5%, you'd only get 5%. If you don't already contribute to receive your full match, your missing out on a guaranteed return on your investment. I would advise that the only situation where you wouldn't contribute to get the match is when it would put you in undue financial hardship, like not paying off your monthly bills or credit card.
First Step #5 in becoming Financially Literate: Start saving. Worst-case scenarios first!
The last, first step to take is starting your savings. More specifically, create an emergency fund. What's that? Exactly what it sounds like. It's savings that will provide some breathing room in case an "emergency" happens. Pretend your car breaks down, you lose your job, or you break your leg; everyday "emergencies" that you can buffer against. Those funds should be enough cover your monthly expenses for an extended period of time where you don't have normal income coming in. You'll see recommendations from as short as one month, to as long as an entire year. There isn't a magical length of time, but there are such things as not enough or too much. That determination is up to you. The important thing is to have even a little bit saved. We have our 3-month's worth fund sitting in our ING account, earning lots of interest and staying safe.
Hopefully you've found these 5 First Steps easy enough to begin right away. They're simple, but will get you moving down the correct path. I wish you the best of luck, though. Ultimately, you are the only one who can take the first step. It requires discipline and courage, but once you start, it will become much easier. As always, please pass this information along to others who could benefit or would be interested!
Money talks, so we better start listening
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