In 2020, 64 percent of graduates took out student loans. The average amount of debt those students accrued totaled about $30,000. Total federal student debt as of last year amounted to more than $1.6 trillion.
The push to force U.S. taxpayers to assume this debt is popular among left-wing politicians (and no doubt among many students who owe tens of thousands of dollars they’d love not having to pay), but it’s no long-term solution to young people’s financial woes. And all that money still has to come from somewhere!
Thankfully, young earners don’t need meddling from Congress in order to achieve their own financial freedom. If you’ve just started getting a regular paycheck for the first time in your life, there is no better time than now to make smart personal finance decisions. Here are five things you should do today to achieve financial freedom in your life.
1. Learn to Live within a Budget
A budget is not a constraint but a plan to help you take control of your finances. You can create a weekly, monthly, or yearly budget. Since most people get paid monthly, a monthly budget is the most common. A typical budget should have three components: income, expenses, and savings. The income section tracks your monthly take-home pay, and the savings section is where you pay yourself first by setting money aside for rainy days.
The expense section should have two categories: discretionary and non-discretionary. Non-discretionary expenses are the things you have to pay regularly no matter what, such as monthly rent and a car payment. Discretionary expenses are the things you can live without, such as your daily coffee run at Starbucks or a golf outing with friends. Discretionary spending is where you have the most flexibility, and it is where you can make adjustments to ensure you live within your means.
Creating a budget is easier than most people think. Here are the top five best free budgeting tools for 2022. Keep in mind that a budget is only helpful if you stick to it. That’s why I have a fourth section in my budget, titled “reward.”
I set between $50 to $100 aside each month to reward myself for spending less than I budgeted. The reward section motivates me to watch my expenses, find creative ways to save money, and give me something to look forward to at the end of each month.
2. Create an Emergency Fund
About 44 percent of Americans said they wouldn’t be able to cover an unexpected $400 emergency expense because they have no emergency savings. So when setting your savings goals, having an emergency fund should be your top priority.
Open a savings account for your emergency fund. To make saving easier, set up a direct deposit so a small amount out of each paycheck will be deposited into your savings account automatically before you have any chance to spend it. Your savings goal is to have enough money in your emergency account to cover two to three months of non-discretionary spending.
3. Build Credit Intelligently
A person’s credit represents one’s ability and willingness to repay debt. In the United States, Equifax, Experian, and TransUnion are three main credit bureaus that collect information such as a person’s borrowing and repayment history and outstanding debt and produce credit reports on each individual who has a credit history.
Federal law gives you the right to get a free copy of your credit report every 12 months from either one of the credit bureaus. So you should check your credit report once a year to make sure it is accurate.
All three credit bureaus calculate a credit score for you based on the credit report they have. In addition, Fair Isaac, a data analytics company, relies on credit bureaus’ credit reports to produce credit scores, commonly known as FICO scores, on individuals. Most credit scores range between 300-850, and the higher your credit score, the better credit you have.
A credit score affects your borrowing cost when applying for credit cards, auto loans, mortgages, or any other form of borrowing. It may also influence the level of your insurance premium, whether you will be able to rent an apartment, and even your potential employment. Some employers will check a job applicant’s credit score and report before making hiring decisions.
Getting a high credit score can be challenging for a young person who doesn’t have a long credit history or hasn’t borrowed much. Using a credit card can help you build a good credit history, but you have to be smart about it. Here are a few tips.
Don’t spend an amount you cannot pay back at the end of the month.
Keep your spending below your credit limit. Spending up to or exceeding the credit limit will hurt your credit score.
Pay your credit card on time, because late payments will negatively affect your credit score.
Pay off your monthly credit card bill. If you cannot pay it off, try to pay more than the minimum balance.
Check the monthly statement for accuracy. If you discover any fraudulent activity, contact your credit card company and one of the three credit bureaus at once.
4. Save for Retirement
When you are young, retirement is usually the last thing you worry about. Yet now is precisely the time you should start saving for retirement. Meet your new best friend, compound interest — the interest you earn on interest. Albert Einstein called compound interest the most powerful force in the universe. At an annual rate of 7 percent, your money will double every ten years.
Say you are 20 years old and you want to retire at age 65. Using an online calculator provided by Bankrate.com, if you invest $100 per month and assume an annual rate of return of 7 percent, you’ll accumulate $366,902 by age 65. If you invest $200 a month, your nest egg will increase to $733,804. With time on your side and the magic of compound interest, a small monthly investment will produce significant retirement savings down the road.
Start saving for retirement by making a pre-tax contribution to your company’s 401(k) plan. Your contribution will not only help you save for retirement but also will lower your income tax by reducing your taxable income. Even better, some employers will match 401(k) contributions. For example, if you contribute 6 percent of your salary to your 401(k) and your employer matches with another 6 percent, this will instantly double your money.
Another good way to save for retirement is through a Roth IRA. You contribute to a Roth with after-tax dollars. The benefit is that when you retire, your withdrawal from a Roth is tax-free. Since the expectation is that you will make more money and fall into a higher income tax bracket later in life, it makes sense to pay lower income tax now, invest in a Roth, and watch it grow tax-free. Another benefit of Roth is that the IRS allows certain tax-free and penalty-free early withdrawals from a Roth before you reach the retirement age.
Each year, the IRS sets an income limit and an annual contribution limit for Roth IRAs. You should check the latest IRS rules on Roth before making any contributions or withdrawals.
5. Find a Cause and Support it
Living a fulfilling life means more than reaching for financial success. It is also about finding a purpose in life and choosing early on how you want to engage with others and the world. We all get to enrich our lives by doing good for others.
When you help others, you’re the biggest beneficiary. There’s an obvious financial benefit because many charitable contributions will result in tax savings. But more importantly, studies have shown that doing good for others decreases anxiety and stress, and increases gratitude, motivation, and satisfaction in life.
Therefore, find a charity or a cause you’d like to support and make helping others an inseparable part of your life. As Mother Theresa said, “Spread love everywhere you go.”
By applying these five recommendations in your life, you will be well on your way to achieving financial freedom and long-lasting fulfillment.