There’s so much financial advice out there that it’s near impossible to follow all of it. But missing the most important – and often most basic – words of wisdom could end up costing you big time.
To help out, Business Insider has rounded up the best money advice from financial planners, bestselling authors, and one of the richest people in the world, that will help you save and earn the most money.
Below, check out the 10 pieces of money advice you simply can’t afford to ignore:
- Pay yourself first
“People still don’t grasp the fact that they need to save a dime out of every dollar,” author and self-made millionaire David Bach told Business Insider. He said the average American who’s saving money is saving just 15 minutes a day of their income, when they should be saving an hour.
A research from the Federal Reserve that revealed nearly half of Americans wouldn’t have enough money on hand to cover a $400 emergency. Yet, millions of those people will buy a coffee at Starbucks today and expect to buy the new $800 iPhone next year. Americans have money, but aren’t saving it, Bach says.
The best financial advice according to Bach is to automatically save an hour a day of your income. “When that money is moved before you can touch it, that’s how real wealth is built,” he said.
- Beware of lifestyle creep
There’s a lot of pressure in your 20s and 30s to keep up with your friends. Maybe they’re buying a nicer car or a bigger house, but if you’re not in the financial position to keep up, don’t try.
“I always refer to it as ‘lifestyle creep’ because one of the big things that people can do – that’s an advantage to them – is keep their fixed expenses somewhat stable and reasonable for what they make,” Katie Brewer, a Dallas-based certified financial planner who founded Your Richest Life, told Business Insider.
Planning for your recurring costs – like mortgage, rent, a car payment, and insurance – ensures that expenses won’t creep up on you and derail your financial future. Of course, Brewer said, if you’re making good money you should have the freedom to spend it how you wish, as long as your lifestyle doesn’t overtake your income.
2. Invest in the stock market, just don’t try to time it
“No one can time the market, so know that if there is a decline, it’s going to bounce back. Over time, being in the market pays off more so than staying out of it,” Michael Solari, a certified financial planner with Solari Financial Planning.
A smart play is to put your money in a low-cost target date retirement fund, according to Solari.
Sometimes known as “set it and forget it” investments, these diversified funds automatically adjust their asset allocation and risk exposure based on your age and retirement horizon. Early on, when the need for that money is still a couple decades away, the fund will adopt a more growth-focused strategy. As you ripen toward retirement, it dials back the risk.
You may not get the average annual return of 11% in your target date fund – given you’ll be invested in a blend of stocks, bonds, and alternative assets – but if you get even 6% per year, an original $10,000 investment will be worth more than $32,000 in 20 years without you having to do a single thing. Compare that with $12,200 in your high-yield savings account or $10,020.20 in your traditional savings account.
3. Build an emergency fund
No matter how well you plan or how positively you think, there are always things out of your control that can go wrong. People lose their jobs, their health, their spouses. The economy can go sour, the stock market can drop, businesses can go bankrupt. Circumstances change. If there’s anything you can count on, it’s that life is filled with unexpected changes.
Most financial planners suggest stockpiling anywhere from three to nine months worth of expenses in an emergency fund that you can turn to when in need. If you don’t have savings at the ready, you run the risk of having to rely on family or friends for help, or worse, falling into debt.
4. Pay off your credit card balance in full every month
Sometimes a credit card can feel like free money, until you’re slapped with the bill. Even then, most credit cards only require you to pay 1% to 3% of your balance each month, which can be an alluring prospect if your budget is tight. But consistently paying the minimum could cost you a fortune in the long run, damage your credit score, and affect your ability to qualify for a loan, for example.
Farnoosh Torabi, a financial expert, author, and host of the “So Money” podcast learned this lesson the hard way. Not only did she swipe her credit card with no reservations and adopt the bad habit of paying just the minimum amount – Torabi said she once forgot to pay the bill all together.
She remembered incurring a late fee that showed up on her credit report and gave her a true “wake-up call.” The incident happened before she “realized the power of automating” her bills, a practice that can save you money on late fees and relinquish you from remembering due dates and the embarrassment of missing a payment.
5. Don’t sit on too much savings
Saving money is important but if you’re saving too much, you may be keeping yourself from building wealth.
Though you’re “never going to kill your financial future” by accumulating money, Brewer says, “you’re losing out on opportunity costs by having money sitting around … especially if it’s sitting in an account making barely anything in interest.”
If you’re risk-averse, one way to manage savings overflow is to move your money into a high-yield savings account, where you could be earning 1% interest on your money, rather than the 0.01% earned in a traditional savings account. Or, as earlier mentioned, stick it in a low-cost target date fund and see your returns balloon over time, with little to no work required.
6. Pay off high-interest debt first
Sallie Krawcheck, a former Wall Street executive and the founder and CEO of Ellevest, says paying down high-interest debt should always be prioritized, even above building an emergency fund.
She explained the math in an article on Ellevest:
“Say you have $5,000 of credit card debt at an 18% interest rate. Say you happen upon $5,000 of money. If you take some of the advice out there, and split the use of that $5,000 (half to establish an emergency fund, half to pay down credit card debt), you still have $2,500 of credit card debt and $2,500 of money sitting in cash.
“The $2,500 of credit card debt at an 18% interest rate costs you $450 a year. The emergency fund earns almost nothing in interest. So you’re out $450.”
Bottom line: You’ll save more paying off the debt than you’d earn if you invested it, whether in a high-yield savings account or the stock market.
7. Always be insured
Signing up for insurance should be “your No. 1 financial priority” because it’ll protect you from unforeseen accidents or illness, and prevent yourself or your family from going bankrupt in the case of an emergency.
8. Track your spending
The best, most critical first step you can take to improve your finances is to track your spending.
Keeping tabs on where your money is going, whether fixed expenses like rent or mortgage payments and transportation costs or discretionary spending like dining out and travel, is a crucial part of mastering your money. It allows you to make cuts where necessary and even set you on a path to early retirement.
9. Be patient
When bestselling author and motivational speaker Tony Robbins asked billionaire Warren Buffett a few years ago, “What made you the wealthiest man in the world?” Buffett replied, “Three things: Living in America for the great opportunities, having good genes so I lived a long time, and compound interest.”
“The biggest thing about making money is time,” the investor, who’s now worth more than $76 billion, said in a recent HBO documentary about his life. “You don’t have to be particularly smart, you just have to be patient.”
In his latest letter to Berkshire Hathaway shareholders, Buffett announced that he was on his way to winning a $1 million bet he made in 2007 that his investment in an S&P 500 index fund would outperform five hedge funds over a decade.
Source: Business Insider