This week we have a guest post from Aaron at Personal Finance for Beginners. Aaron started his blog to help young professionals, recent college graduates, and other “newbies” learn more about personal finance. On his blog, he shares basic principles and strategies to help those that are new to the world of personal finance. Aaron is excited to share his own insights and experiences and as he pays down student loan debt, sticks to a deliberate budget, and invests for the future. Please show Aaron some love by checking out Personal Finance For Beginners.
Start Your Financial Journey With These 4 Easy Wins
If you spend just a couple minutes browsing personal finance blogs, it doesn’t take long before you find headlines like “How I became a millionaire in 5 years” and “Learn how I retired at 35.”
With specific instructions for financial independence or early retirement condensed neatly into a 1500-word article – complete with infographics and bulleted lists – it’s easy to forget that financial independence is a process that will take you years to accomplish.
While your path toward financial independence will be unique to your own circumstances, one thing is true no matter who you are: becoming financially independent takes patience.
In this article, we’ll take a look at four “easy wins” for beginners just starting their financial journey.
Why offer these shortcuts right after preaching that financial independence could take decades for you to reach?
Earning quick wins is critical for reinforcing new habits, understanding what success looks like, and remaining motivated along the way.
1. Check your credit report for free
Your credit report is a “personal scorecard” that impacts many aspects of your financial life:
- Your ability to qualify for a mortgage.
- Your interest rate on any of your loans.
- Your insurance premiums.
- Your access to selective credit cards with the best perks.
The distinction between “excellent credit” and “poor credit” can be the difference of thousands of dollars in paid interest. With so much riding on this credit report, it’s important to monitor your credit and make sure everything is correct.
You can request your report from each of the three major agencies – TransUnion, Equifax, and Experian – once every 12 months by visiting AnnualCreditReport.com.
There are three main steps to requesting your report:
- Provide a few personal details such as your name, birth date, social security number, and address.
- Choose the credit reports you want to receive (if you just choose one, you can review the others later in the year.)
- Verify your identity by answering a few specific questions.
After accessing your credit report, there are a few basic questions you may want to ask yourself as you review the data:
- Is all of my personal information correct?
- Are all of the balances and my payment history correct?
- Do I recognize all of the past credit inquiries on my report?
- Is there any other suspicious or unfamiliar activity?
It only takes 3-5 minutes to request your credit report. You can likely review all of your credit information within 15 minutes. This means you’ve accomplished your first “easy win” in less time than it takes to watch an episode on Netflix!
2.Turn your tax refund into an emergency fund
Every spring, advertisers from businesses create ads on TV and radio as they look to cash in on your tax refund.
“Did you get a tax refund this year? Why not turn that money into a brand new car?”
(Or a cruise to Mexico, laser hair removal, or big screen TV.)
It almost goes without saying, but there are much better ways to spend your tax refund if you are serious about prioritizing your goal of financial independence.
Turning your tax refund into an emergency fund makes sense as an “easy win” for most beginners.
It’s one of the first goals for many individuals just starting to focus on their finances. Everyone should aim to save three to six months of easily accessible money that could their cover personal expenses in the case of an emergency or unforeseen circumstances.
Although a tax refund may not be enough to completely build up your emergency fund, it’s usually enough to provide a great start. (And Uncle Sam has already shown you don’t need that money immediately by holding onto it for you!)
3.Move debt to a 0% interest card
Reaching your long-term financial goals can be difficult when you are paying dozens – or even hundreds – of dollars in credit card interest each month.
If you are carrying a balance on your credit cards month after month, you can reduce the amount of interest paid by transferring the balances to a credit card with a 0% introductory rate.
Typically, you’ll pay around 3% of your balance as a transfer fee. If you’re currently paying a 24% APR on your current credit cards, this is a small fee compared to what this debt would otherwise cost you if it’s going to take you months to pay off the balance.
To save money by implementing this strategy, you’ll need to:
- Apply for a credit card with a 0% introductory rate for 15-18 months and no annual fee
- Pay the 3% transfer fee to consolidate all of your credit card balances on this card
- Don’t add any new purchases to this credit card (and try not to rack up any new debt on your existing cards)
- Automate equal monthly payments on the 0% interest card to make sure it’s paid before the introductory period ends (consider paying a little “extra” to pay the balance a month or two early)
It’s important to pay the full credit card balance by the end of the introductory period or you’ll end up accruing all of the original interest charges. Be sure to read the fine print on your cardholder agreement.
4. Set aside (part of) your next raise for retirement
If you want to fast-track your journey to financial independence, you may need to develop a different mindset about what to do when you get a raise.
It’s tempting to raise your standard of living as a reward for getting a raise. Choose to avoid this “lifestyle creep” by maintaining the same level of spending as before.
Setting aside your next raise toward retirement or other long-term financial goals can have a huge impact over time. Turning a $2,500 annual raise into additional 401k contributions could increase your portfolio value by over $250,000 over 30 years.
This can shave years off your retirement timeline – with money you even notice you’re missing!
Creating a life of financial independence won’t happen overnight. While it’s important to maintain a long-term perspective on your money goals, you can use easy wins for a positive psychological (and financial) effect.
By deciding to implement some of the tips above, you can develop a sound financial foundation, build momentum that will encourage other positive behaviors, and stay motivated to reach financial independence even if you’re just getting started.
What “easy wins” have helped you stay focused and motivated on your journey toward financial independence?