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The world of finance is full of daunting terms and big names. It is an industry with detail, and to a 22-year-old recent college graduate, it is like learning a whole new language.
I am working on grasping a basic understanding of the financial world - I am listening to podcasts, watching videos, clicking on interesting headlines, and constantly asking what terms like “ESG and white papers” mean.
Prior to joining Advisorpedia, I knew the basics: save your money, budget your income and spending, and pay off your credit card.
Now, my knowledge has slightly increased. Here are four pieces I have added to my earlier understanding:
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Save your money - The basics of this I understood prior, but what I did not know is the importance of using Roth IRA funds, high yield saving accounts, or money market accounts (MMAs). These accounts focus on earning interest while you keep your money set aside, and all of them impose a withdrawal fee if funds are taken out too soon or too often.
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Know your time horizon - when you want to get things done and by when. If you are investing, do you know when you want to sell your assets?
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Put your money where your mouth is. In other words, put your money in places you care about. You will be more likely to check on your money placement if you have a personal interest in it.
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Know where your money is going. Say you are working hard, but you do not know how to plan and execute your strategy, that hard earned money is not going to be as beneficial to you.
Giving a tip is one thing but knowing how to execute it is even more valuable. Here is how I use each of these to my benefit:
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Save your money – The easiest way I look at my spending and saving is with an excel spreadsheet. I use two tabs, one for spending and the other for my paychecks. In the spending tab, I have each expense broken down into categories – groceries, rent, utilities, gas, coffee, eating out, clothes, travel, books, and miscellaneous items. I enter each expense at the end of the week, which then gets lumped into weekly spending (or saving). These weeks then get put into weekly averages, and into an overall total within each category. In the paycheck tab, I have a column for gross income, then that amount is adjusted for a tax percentage, a net income, how much I want to set aside for savings, and the final income for miscellaneous spending. Mapping this out makes it easier to see what I need to spend less on or understand how much I can spend with my paycheck. As for using accounts for money management, I have researched what works best for my goals and then met with a banker to open these specific accounts.
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Know your time horizon – This is specific to investing assets and falls into three categories: short term, intermediate term, and long term. The easiest way to figure out your time horizon is by considering your current age and then figuring out your target age when you would like to reach your goal.
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Put your money where your mouth is – If you are using investment tools, this tip can go two ways, stocks and personal savings. For example, if I am investing in stocks, I am inclined to buy into a company that I care about, such as a healthcare company or somewhere that aligns with my interest. For personal savings, if I have a goal to buy a house or a car, I am going to be putting my money into accounts where I cannot touch it until I’ve reached my goal. If I have an idea I am often talking about, why not put my money into places that support that idea?
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Know where your money is going – Ask yourself what you spend most of your money on or where it is going. This relates to accounts, savings, investments, spending, reaching goals and every purchase or earning in your life.
The best tip I can give you is to do your research and plan. As an example, I often call my brother, an investment advisor, if I need help understanding what I am reading. I'm not saying you need to have an advisor at beck and call, but you may be surprised at how much the people around you know.
These are basic pieces of knowledge but executing each can make a significant impact on an individual’s wealth, and so far, have had an impact on my own. There is more learning to come, but as a young-adult, I have a good start.
Related: 4 Financial Terms You Need To Understand To Build and Protect Your Wealth Successfully