Can Grief Become a Disability?
Let’s face it. Unless you fancy yourself an economist, neither high school nor college prepared you.
For what, you ask?
For the financial jungle that awaits anyone entering the real world.
“But I am still in my 20s,” you say, “Why bother with getting ‘all financial’ now?”
Because it is one the smartest choices you can make at an early age—a choice that allows you to live a life chock full of future options.
Here are three financial concepts that explain what “growing up” really costs.
Compound Interest
To fully understand compound interest, an example is more powerful than a definition. This example comes from Dave Ramsey’s How Teens Can Become Millionaires.
At 19 years of age, Jenny invested $2,000 every year for eight years. She chose investments that returned 12 percent interest. At 26, she stopped investing. She invested a total of $16,000.
At 27 years of age, Tom invested $2,000 every year until he turned 65. He chose investments that also returned 12 percent interest. Tom, however, invested 23 more years than Jenny. He invested a total of $78,000 over 39 years.
When they both turned 65, who had the better investment?
Tom’s total was $1,532,166. Jenny’s total was $2,288,996. She invested less money but started earlier.
That’s compound interest.
The lesson to learn when it comes to compound interest is to start saving early. Even if you only put away $25-$100 per month, your future self will thank you.
Credit Scores
Credit scores are extremely important to sound finances. If you plan to borrow money or use credit, these scores can be the determining factor in whether or not a financial institution lends you money and at what interest rate.
Teaching teenagers about credit, credit scores, and credit cards is vital. So many young adults only have a credit card to develop credit scores. Nonetheless, they use them because they have them.
Most young people will only pay off the minimum each month and by only paying the minimum or not paying off the full amount each month, debt can accumulate quickly as interest kicks in.
Wise Piggy provides a shocking example of the damage of minimum payments: “Say you charge $1,500 on a credit card with an interest rate of 19 percent and your minimum required payment each month is four percent of your outstanding balance. Even if you refrain from future use of this card, it will take you more than seven years to pay back.”
It’s like your parents always told you, “Don’t use a credit card if you can’t pay off the entire month’s balance on time and in full.”
Be sure to prioritize debt and bills. Set a budget every month and make sure to get those payments out of the way before buying that new pair of jeans. Cash is king, so stick to a “cash only” diet. It will make you more conscious of how much you’re actually spending.
Investing For Retirement
As someone entering the real world, retirement savings are usually the last thing on your mind. Why begin saving for life after work, when work has just begun?
One lesson about financial concepts that is not emphasized enough to young people is to begin retirement savings early.
If the company you work for offers a 401(k) plan, sign up for it. Most employers will match a certain percentage of their employees’ contributions. This means free money!
At the end of your career, you earn more with a 401(k) plan than if you had just been putting money away in a regular savings account.
Here’s a 401(k) scenario: If you begin saving at the age of 25, investing $2,000 a year for 40 years, you’ll have $560,000, assuming earnings increase eight percent a year. If you were to begin investing $2,000 a year at the age of 35, and earnings still increase at eight percent, you’ll have $245,000 – which is $315,000 less than what you would’ve saved if you had begun a decade earlier.
Educate About These Financial Concepts
Learning how to manage money is something every young person needs to accomplish before they enter the “real world.”
Unfortunately, the majority of Millennials are lost, wandering around in this money-crazed world.
While neither your parents nor school may have given you the right tools to understand financial concepts, it is your responsibility to seek information and get educated. Whether you dream of starting a family or traveling the world, or doing both, being fiscally secure is a must to make these dreams a reality. Your future self will thank you.
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