Wednesday, February 27, 2008

Financial Lessons I Learned Early

Now, I started to realize that maybe it sounded like I was pretty clueless in my 20s, with regards to personal finance. While there are definitely some things I wish I did differently, I did pretty well…all things considered.

So in contrast to last week’s post about Lessons I Wish I Learned Earlier, here is a list of what I did that worked:

1. Know your income and expenses. I’ve never lived wildly out of my means. As the result of a few Top Ramen Weeks, I learned different ways to make that salty stuff taste better. OK, yes, I have debt, but that’s not from me continually saying “Next round’s on me!” too many times, or spending when I knew I couldn’t afford the purchase or living on my credit card because my checking and savings accounts had negative balances. My debt just gradually crept from low to higher, and much of my current debt is travel-related (“Oh, well I have the money for this plane fare in my savings account, but I’ll just put it on my credit card and then transfer the money in a couple weeks” … and then I wouldn’t transfer the money, for one reason or another). The debt was also accrued by using my credit card as an emergency fund (e.g. dental work in college, when I didn’t have dental insurance).

2. Pay the bills first, and on time. I was a master of this one (and I now have a spectacular credit score). Of course, I occasionally slipped and sent things late, though I never did anything drastic like intentionally “forgetting” to pay a bill for a few months. My electricity or phone service was never disconnected, and I’ve never received collection calls from my credit card or student loan providers. Generally though, I paid more than the minimum every month.

3. Save at least a little bit of money. I’m pretty obsessive about always having some cash savings on hand, and I’ve been like this since I’ve been on my own. I’ve never liked the idea of using my credit card for emergency expenses. Though, I didn’t always “pay myself first” and I often had maybe $15 to put in my savings account. Regardless of the amount I saved, I saved and made it a habit to save at least a little – even if I had to take it out two weeks later. The point was that I saved and prevented at least one little purchase going on the credit card.

4. Build a good credit rating. I did this in spades! I paid more than the minimum (usually) on my debts, and I paid them on time. Occasionally, I would pay a debt off in its entirety. Yes, the credit issuers love me!

5. Save for big expenses. I’ve done this repeatedly, and it’s a wonderful feeling when you achieve a financial savings goal. While a fair chunk of my credit card debt is from travelling expenses, those were generally extra expenditures when I was already somewhere – I always saved for my tickets and the basic day-to-day expenses in advance.

6. Learn. I learned from the mistakes I made early on (taking a cash advance on a credit card to help bail a boyfriend out of his own financial mess=bad idea), and I tried new things when I had more money. Though I didn’t start saving for retirement until I was 29, I knew that it was something I should be doing. I learned how credit cards worked, and I learned how to manage my debt (and build my credit rating).

7. Read about personal finance – even if you don’t actively practice it. I’ve read personal finance articles in magazines for years and years, I’ve read the occasional personal finance book, and I’ve been following personal finance blogs for a while now. Even when I “didn’t have enough money” to invest, I had a pretty good idea of what was out there and what I would do “if/when I have enough money to invest.”

8. Create a budget that works. Early on, I realized I needed some kind of budget for my money and I usually had some kind of loose budget, and I tended to stay within it most of the time. Sometimes, my budget just consisted of me figuring out what my bills were (for a particular paycheck), on the back of the envelope the paycheck came in. My budget worked in keeping me from the poor house, but I didn’t budget so I wouldn’t be in the poor house in the future. Just goes to show that you accomplish what you set your mind to…and you might be poor in the future if you just handle your finances for the immediate present. My budget was always a guideline – sometimes I was under-budget, and times I was over-budget. They generally balanced out, so I wasn’t too concerned about the times I spent more than was allocated for that week or month. I knew what my budget was and where I should be, and that’s where I aimed.

9. Don’t settle. This is actually quite important. When I had jobs that weren’t enough, I changed. When I had a job that didn’t pay enough, I found a way to make some cash on the side. There was a point, during my first quasi-adult job, when I thought “there has to be more than this, because this is not my future.” That motivated me to pick up my college studies again, and I eventually left to become a full-time student. I make significantly more money, and I have exponentially more job satisfaction today. So yeah, that "hobby degree" in Creative Writing really did pay off!

10. Recognize debt is bad. I knew debt was bad, I just didn’t know exactly how to eradicate it. I didn’t want it to be a regular, “accepted” part of my life, but I didn’t know how to get rid of it on the salary I was making. While now I can make a list of debt reduction strategies that work, it took me a while to learn what those strategies were so that I could begin my journey out of debt.

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