SINGLE WITHOUT CHILDREN: Carla Butler
When you’re young and on top of the world, long-term finances might be the very last thing on your mind. You might rack up huge credit card debt. Or you might decide not to contribute to your retirement fund until you’re 30–a move that could torpedo your future nest egg.
Just ask Carla Butler, who admits she did many things wrong early in her financial life. The 29-year-old social worker from Tampa, Florida, says she dug herself into a big hole. “With my first taste of independence, the prospect of having a credit card for every store was just too attractive.â€ Consequently, Butler racked up $10,000 on multiple cards during her college years.
With that hefty sum hanging over her head, Butler realized she was going down the wrong path, and finally hit the wall in early 2007 when she started thinking about buying a home. A mortgage lender pulled her credit reports, and told her she needed some serious financial first aid, or else face high borrowing rates for the rest of her life.
With the help of a financial planner, Butler started overhauling her financial life. She began using only cash to fund her living expenses and perks such as vacations. Butler also disputed some items on her credit report, and started paying all her bills on time. She has boosted her FICO score from 599 to 679 in less than a year.
“Now I’ve paid off all of my delinquent debt,â€ she says proudly. She has also opened a 403(b) retirement plan at her job, devoting 5% of her pay and reaching $2,000 so far. Her car is paid off, and she recently closed on a Tampa, Florida, townhome for $125,000.
So how do you instill good habits early on, before that hole is dug? Experts suggest paying cash. “Credit cards and debit cards will always get you in trouble,â€ says Michelle Oliver, financial planner and head of the Oliver Financial Group in Richmond, Virginia. “But when you use cash and have to take the money out of your wallet, you’ll spend much more wisely. And learn to think on a yearly basis, not a daily basis: If you’re buying coffee five times a week at $5, that’s $100 a month, that’s $1,200 a year. The small things add up.â€
Start contributing to your company 401(k) or a Roth IRA while you’re young, even in small amounts——say 2% to 3%——which you can then boost by a percentage point every year. “Even if you start early and stop altogether, you’ll still have more retirement money than if you only start in midlife,â€ says Oliver.
Most of all, set the table for your adult life by learning financial skills early on. When college is over, and you do start to earn more money, you’ll be prepared for how and when to spend and invest. “Develop good money-management skills right away, because the decisions you make today will affect your life tomorrow,â€ says Freeman. “That way, you won’t dig yourself into a hole you can’t get out of.â€
Creating a Budget
Wondering how to make the numbers work every month? Here’s a sample budget breakdown by Harrine Freeman.
35%Â Â Â Housing (mortgage, rent)
15%Â Â Â Transportation (car payments, insurance, gas)
10%Â Â Â Savings (retirement, emergency funds)
15%Â Â Â Debt (credit cards, student loans)
25%Â Â Â Remaining expenses (groceries, clothing, entertainment)
— Get financially literate. Knowing the basics of proper budgeting and investing, right off the bat, will prepare you for a lifetime of smart money moves.
— Avoid common pitfalls. Massive credit-card and college bills could cripple your financial dreams before you even get started. Don’t saddle yourself with debt that’s too heavy to bear.
— Start saving for retirement early. Time is on your side, and starting a 401(k) or IRA now could be the difference between a meager retirement, and a luxurious one.
— How To Get Out of Debt: Get an “Aâ€ Credit Rating for Free Using the System I’ve Used Successfully With Thousands of Clients (Adept Publishers; $19.95): Tips on eliminating debt and repairing credit scores, by credit counselor Harrine Freeman.
— www.mymoney.gov: The U.S. government’s Website for financial education, teaching the basics about saving, budgeting, and investing.
— The True Cost of Happiness: The Real Story Behind Managing Your Money (Wiley; $24.95): A book by Stacey Tisdale and Paula Boyer Kennedy that profiles people who have successfully managed their money.