The 4 personal finance tips for people who hate personal finance
When I tell people I’m a personal finance writer, I usually get one of two responses. Either they lean in and ask a money question that’s been on their mind, or they quickly change the subject. That’s because for the latter group, the topic of managing your finances can be anxiety-inducing, intimidating, or just plain tedious. If you’re like them, these four must-do personal finance tips are for you.
1. Save without thinking.
Were you expecting, “Make a budget”? Forget it. Budgets are great in theory, but after a month, no one follows them. Instead, automate your savings. Create a set-it-and-forget-it system that skims money off the top of each paycheck (or automatically transfers it from your bank account) and puts it toward long-term retirement goals and short-term savings goals. A good rule of thumb is to try to save 15% of your take-home pay.
If your employer has a retirement plan like a 401(k), sign up and commit as much as you can—at least as much as your company will match. Some employers will put in, say, 50 cents for every dollar you save in a retirement account, up to a certain amount. That’s an immediate 50% return on your money, which is a great deal.
If you can’t save through your job because, say, you freelance, open a Roth IRA with a low-cost fund company such as Vanguard or Schwab, and contribute as much as you can. (Current limit: $6,000 a year.) Other retirement plans, like SIMPLE IRAs or SEP IRAs, allow self-employed people to save even more.
Now here’s the tricky part: You’ll need to make a decision upfront about how you want to invest this retirement money. Generally speaking, the longer you have until retirement, the more heavily you’ll want to be invested in stocks. Although stocks do go up and down, on average, they have outperformed most other investments over the long haul. To keep it simple, stick with index funds.
In addition, funnel money toward a six-month emergency fund and other savings goals, like a home down payment or next summer’s vacation. Put it into a high-rate online savings account so you can earn some interest on your savings. For a list, go to bankrate.com or depositaccounts.com.
Set this up once, and you’re done.
2. Pay off high-rate debt with savings.
It might sound counterintuitive to raid your savings to pay off expensive debt, but the math bears it out. Say you have $1,000 socked away in an online savings account earning 2% interest. The bank will pay you $20 in interest this year. But say you also have $1,000 in debt on a credit card with an interest rate of 18%. You’ll pay $180 in interest on it this year. That’s a total loss of $160. Now what happens if you instead take that $1,000 out of savings—today—and pay off the entire credit card balance? The answer: Although you wouldn’t earn a penny in interest, you would also not pay out any interest. So, basically, you’d break even. And you don’t need to be a personal finance expert to know it’s better to break even than to lose $160.
Another way to look at it: By paying off a credit card that’s charging you a rate of 18%, you’re earning the equivalent of an immediate 18% return on your money, guaranteed. That’s one of the best deals around.
3. Know your credit score.
Everyone from your landlord to your mortgage lender cares about this number, so you should, too. Why? It sums up how well you pay your bills. The higher your score, the more “reliable” or “creditworthy” you are thought to be and, when you apply for a credit card or mortgage, the better the deal you are likely to get. The average score is a little over 700, but to get the best offers, you should shoot for 760 or more. (850 is tops.) The easiest ways to keep it high: Pay all of your bills on time and pay off your credit card balances in full each month.
Your credit score is derived from the data in your credit reports, so you’ll want to make sure that the information listed is accurate. (Mistakes happen.) You can get free reports from each of the three major credit bureaus at AnnualCreditReport.com. To check your score, visit CreditKarma.com for a free one that will give you a sense of how your credit measures up. Or, you can get your “official” FICO credit scores at myFICO.com for about $60. (These FICO scores may more accurately reflect what lenders see, and could be a worthwhile purchase when you’re thinking seriously about applying for a car loan or mortgage.)
4. Get health insurance.
Yes, this is a personal finance issue. Health insurance can save you and your family from financial disaster in the event of an accident or serious illness. Getting coverage through your job is nearly always the simplest and cheapest route. But if your employer doesn’t offer a policy, you’re self-employed, or you’re job hunting, there are other options. You might be able to get insured through a family member such as your parents, if you’re under 26 (or even older in several states), or a spouse or domestic partner. Otherwise, you’ll need to buy a policy on your own via the government’s HealthCare.gov, private sites like eHealth.com, or directly from individual insurance companies.