6 Things Wealthy People Understand About Money By The Time They're 25
Make wise financial decisions now so you can retire in style.
Brooke Cagle | Unsplash Many young adults make easily avoidable financial mistakes that cause distress for years to follow. If you’re wondering what you can do to manage money to set yourself up for a life of financial success, check out these things that wealthy people understand about money in their mid-twenties.
Here are things wealthy people understand about money by the time they're 25:
1. Start saving money sooner rather than later
Interest can help your money work for you, so the earlier you start saving, the better. If you tuck away $4,500 in a retirement fund each year starting at age 20, you’ll end up with over a million dollars by the time you retire. If you wait until you’re 30, though, you’ll struggle to catch up!
Also, create an emergency fund. This stash should ideally contain 3-6 months of necessary living expenses, as supported by a study in the Journal of Family and Economic Issues. Don’t link this emergency fund to your checking account or debit card. This way, you’re less likely to take out money for frivolous wants.
2. Invest money in both life insurance and disability coverage
insta_photos via Shutterstock
Few people enjoy thinking about worst-case scenarios. However, if you wait until you’re sick or injured to seek coverage, most insurance companies will reject your application for disability benefits.
If you’re supporting yourself paycheck-to-paycheck, you risk losing everything if an injury or chronic illness prevents you from working. So, don’t skip out on disability coverage if at all possible.
You should also do this with life insurance. Since these policies require a medical exam, starting young can help you out. Additionally, a whole life insurance policy builds cash value on a tax-deferred basis, meaning you save more of your money.
3. Debt can cripple you, so skip the credit cards
It’s tempting to max out those credit cards on a shopping spree but trust me, you’ll pay for it later. If you do need some revolving credit, get a credit card with travel rewards or cashback offers. Also, only use credit cards for purchases you can afford to pay off immediately so you don’t fall into a cycle of debt.
Money coach Pegi Burdick explained, "How we spend money and why is not random. It comes from issues in our childhood. Some of these are visible, such as never having received an allowance. Others are more subtle like messages about feeling unworthy.
"Feeling undeserving is one of the biggest distorted belief systems we inherit. And when you consider that, it’s not surprising the number of choices we make based upon false information. Like 'You need this now.' The underlying, age-old scars that push you to buy things you don’t need are tough to sort out, let alone heal."
4. Remember your credit score matters a lot
You can argue that it’s unfair for an agency that risked customer data in a severe breach to determine whether you can buy a home or a car. However, this doesn’t change the fact that credit scores matter.
Take advantage of a free copy of your credit report each year and look closely at the data. If you notice any discrepancies, file a police report of identity theft and report the error to all three bureaus. This effort will save you money in the long run.
5. Formal education isn’t necessarily a path to prosperity
Jelena Stanojkovic via Shutterstock
If you’re struggling financially, you might think, “I’ll just go back to school.” For-profit colleges want you to buy into this myth. However, earning a degree doesn’t necessarily equate to higher pay.
Low-income students are more likely to drop out of college due to outside pressures. You still have to repay any loans you took out — but you lack the degree hanging on your wall. Even if you do graduate, there’s no guarantee you’ll find a job that pays you for what you’re worth.
Instead of investing in an entire degree, consider taking courses through sites like Udemy. This allows you to increase your skills without a significant financial burden.
6. Home ownership can secure your future
Unless your job requires frequent relocation, buy a home if you’re able. When you pay rent, you acquire no equity in the property, meaning you’ll still have a housing payment in retirement.
If you own your home, though, you will eventually eliminate this monthly bill. You can even secure a home equity line of credit or a reverse mortgage to pad your golden years further.
Many 20-somethings struggle financially, but you don’t have to. If you start making wise financial decisions now, you can retire in style when the time comes.
However, be aware of your relationship with money as life coach Ed Latimore advised, "Money is a foundational tool. It allows you to build a structure for your life, but it’s not a substitute for doing the work of developing character, skills, and relationships.
"While I think most people know this and don't argue that point, I think many people pursue money far beyond the point of diminishing returns and at the expense of other areas in their lives that need work.
"The ideal situation is simple: get enough money to where you don't have to think about money, but not so much that you can't stop thinking about it. Everyone has their number, but if you're like most people, you've probably overshot it for what you need."
Stay mindful of your finances and follow these simple tips. Trust me, you’ll be glad you did when you find yourself financially secure in your 30s and 40s.
Kate Harveston is a writer who focuses on millennials, self-care, and money.