If yourschool experience was anything like mine, then your formal education did nothing to prepare youfor financial success later in life. However, there are four critical financialhabits that you need to learn about if you don't want to make mistakesin your young adulthood. I was an economics and finance major in undergrad, workedat a credit card company for four years, and recently graduated with my master'sin business administration. And here are my four criticalfinancial habits for young adults.
The first important habitis to start using credit cards. Not only are credit cards extremely usefulfrom a purchasing perspective, but the critical thing they do is that they help start buildingyour credit history and credit score. Your credit score, sometimes called FICOscore, is a number from 300 to 850 that represents your trustworthinessto creditors or lenders of money. A higher score represents a higher abilityand trustworthiness to pay back money. So the higher your score, the more likely that creditorswill also lend money to you.
The reason whyaccessing credit or loans is so important is because throughout your lifeyou'll probably need to borrow large amounts of moneyto make important purchases. These purchases could be somethinglike a college education, a home, or a car. So each of these thingscould also drastically alter your life. Landlordsmight also request your credit score when determining if they want to rent outtheir unit to you or not. Borrowing money comes at a cost,which is called interest. For example, a bank might lend you $100,but then tell you that you.
Need to pay $110 back in a year's time. The extra $10 that you pay hereis called interest, and is the cost of borrowing that moneyover that amount of time. The higher credit score is the lowerthat interest might be. So instead of paying $10,you might only need to pay $5. So a high credit score is importantnot only to access lenders’ money, but also to reduce the interest thatyou have to pay on that borrowed amount. When you end up borrowing half a millionor $1,000,000 across your lifetime, saving on interest could literally bethe difference between tens of thousands.
Or even hundreds of thousands of dollars. It's important to start using credit cardsas soon as possible, because increasing your credit score is a long processthat takes many years to build up. Using credit cards and paying them ontime is one of the few reliable ways that you can actually increaseyour credit score. So in the beginning, you'll have to apply for startercredit cards that accept low credit scores and those who are still in the processof building their history. Discover and Capital One are two companies.
That are known for being starter creditcards and also offer student offerings like their Discover It Student Cashbackand Savor One student cards. The Discover It card offers 5% cashback onrotating categories every three months, which are usually pretty expansive categorieslike Amazon purchases or gas stations. The Savor One offers3% cashback on other desirable categories like restaurants,streaming services, and groceries, and it offers relatively high rewardmultipliers in these categories, which is fantastic for a student cardor starter card.
Both these cards can remaina useful part of your wallet long after you graduate from low scoresand student cards as well. And if for some reasonyour credit scores are already high enough, feelfree to try to apply for the normal versions in order to get less restrictionsor potentially higher credit lines. As you can tell from these examples,using credit cards in themselves can also be quite lucrative from all the rewardsyou get through spending with them. Improving your credit score means accessto even higher tiers of credit cards and rewards.
So this is another reasonto start using credit cards early. Eventually,you'll be able to access the premium cards like the American Express Platinum,the Chase Sapphire Reserve, or the Capital One Venture X,and these can give you access to luxury perks like airport lounges, hotel status,and discounted first class airfare. Truly mastering the credit card game can potentially earnyou thousands or even tens of thousands of dollarsper year. A word of warning, though.
Credit cards can also start losing you a lot of moneyif you rack up a balance on them and don't pay them off in timeevery month. If you only pay the minimum amountthe credit card requires, then the leftover balance startsaccruing interest of up to 30% a year. This instantly negates a 2 to 3%you might be earning in rewards and makes credit cardstotally not worth spending with. So to use credit cards effectively, you have to pay off the full balanceeach month, every month.
If you can't do this,don't spend the money. It's that simple. The second habit is to only buy ETFs. Note that this habit only appliesif you're in a position with enough savingsto invest in the stock market. So as always, use your own judgment and do your own researchbefore investing in anything. If you do have long term money to invest,the stock market is one of the quickest and easiest ways to grow that long termcash. It earns much more money than.
Parking your savings in a bank accountor investing in money market or CDs. But of course the risk is greater too. So what is an ETF or exchange traded fund? ETFs are shares that can be boughtand sold just like your normal stock. But instead of representing one company,it's a whole portfolio of companies. This way your investment is diversified,so if one company does poorly, it's very likely another company will do betterand offset those losses. But you might ask, “why not just go all inon one stock that you really believe in?” While true, if that stock goes wayup, you'll be doing really well.
But the likelihood isthat it's not going to and you'll be exposing yourselfto a lot of unnecessary risk. “But then why won't this happen?” you might ask. It's because there's very little chancethat your faith in the stock is based on exclusive knowledge that only you haveand that others haven't thought of before. Imagine, there's thousands of professionalsout there and AI algorithms that you're competingwith when you're betting on whether a certain stockwill go up or down.
What are the chances that you really knowbetter than them versus you're just falling victimto a bias that you have? And even the pros don't get it right most of the time.My finance professors in business school loved to tell us all the timehow these professional fund managers did no better at choosing stocks than monkeysthrowing darts at a dart board. Don't let your stock investmentslose to a monkey. On average, it can be assumed that any stock is fairlypriced and represents all of the available public knowledgeout there.
But still, I might not have you convinced onwhy you shouldn’t just YOLO on everything. After all, no risk, no reward right? Well, it turns out that choosing individual stocks is evenmathematically proven to be too much risk for too little reward. Without goingtoo much into exact mathematical detail, the idea isthat every stock has two sources of risk: systematic risk and specific risk.
Specificrisks are tied to a singular company, while systematic risks are tiedto the macro economic condition overall and effect all companies.Financial mathematicians and academics figured out a long time agothat diversifying your investments allows you to maximize your returnswhile minimizing your risks. Specifically, diversifying can't get ridof your exposure to systematic risks, but it can, in theory, eliminateall of your specific risks. That's why it's unwiseto invest in individual stocks. You get a return, but it comes with bothsystematic and specific risk.
On the other hand, diversified investmentslike ETFs can give you that comparable return, while only exposing youto systematic risk. Some of the top ETFs worth consideringout there include SPY, QQQ, and VTI. Even if some ETFs might be countryor industry specific, they at a minimum still allow you to beinvested in a wide range of companies. The third financial habitmainly applies for when you start working, but it's to start savingfor your retirement through your employer's 401k planor your own IRA. The specific terminologyI use here only applies.
For those living in the United States,but saving for your retirement would be a wise thingto do for anyone in the world. 401Ks and IRAs are investmentaccounts where you can invest money in stocks, bonds and ETFs to accessfor when you retire. This essentially means that the money in these accounts are locked awayuntil you're 60, because withdrawing from themearly will incur large penalties. 401Ks are funded when you elect have to havea percentage of your paycheck.
Each pay period withheld to be placedwithin one of these investment accounts. IRAs are retirement accounts,so you can add your own money into at any time similar to a bank accountor brokerage account. But there are also limitsthat are set by the U.S. governmenton how much you can add per year. The question becomes, of course, why would I lock away moneythat I can't use until I retire? Why not put that money into just a normal investment accountand have the possibility of using it now?.
These are all valid questions, of course,and if your financial situation isn't that strong,it might actually be a good idea to use that money nowinstead of locking away for the future. But if you have goals of retiringand are in the financial position to start saving some money,it would be extremely wise to do so. This is because contributions to your401k and IRA have extreme tax benefits that will save you immense amountsof money in taxes, potentially hundreds of thousands of dollarsor millions of dollars over the course of your whole life.
So how do these benefits workand how do you start saving on taxes? First off, depending on your employer,your company might have a program where they'll match your contributionsto your 401k. This means that if you elect to contribute4% to your 401k, your employer can match this 4% amountas well, and this exact percentage will be dependent on your company. Even in this illustrative example,this is effectively a 4% salary increase. And for that 4% investment you made,you instantly made a 100% return. This dwarfs any expected returnyou can get from the stock market.
By a magnitude already. Not only this, but you can also decideto pay taxes on your 401k or IRA before putting it in. And this is called a Roth 401kor a Roth IRA. The advantage of paying taxes nowis that from then on, all the investments in those IRA or 401k accounts can growtax free and you won't have to pay any capital gains tax when you withdrawfrom those retirement accounts. On the other hand, you can also electto do a traditional IRA or for 401k plan. This allows you to contribute moneyinto your retirement accounts.
Without paying any taxes and only paytaxes on that money after you withdraw it. Given that you're young and your careertrajectory is on the way up, it's usually smarterto take the Roth route and pay taxes now. This wayyou avoid paying taxes in the future when you'll likely be at a highertax bracket. In either case,you save massive amounts on taxes because you either avoid paying some of itor you delay paying a portion of it while it makes money for you. Given that income taxes in the U.S.
Are somewhere between ten and 35%,even on the low end, just the tax savings themselves would rapidly outpace the gainsyou would have made had you just invested in the stock market. So if your financial situationcan afford it now, not only is it wise to investfor your future retirement, but there are also massivefinancial benefits to doing so. Rest assured, in the case that you havea medical emergency, plan to buy a house, or plan to pay for some school tuition,you can still use the funds in your accountwith limited or no penalty.
The last habit I have foryou all is to keep all liquid funds you need in a high interest bearingchecking account. You'll always need cash on handto pay your monthly and near-term expenses like your rent or credit card bills. In this case, it'd be ill advisedto keep these funds in the stock market, which can constantly go up and down. And so you don't want to be in a position where you have to pay near term billswhen the market is on a downswing. However, cashjust laying around doesn't make any money.
Either, especially for a lot of thesechecking accounts out there which have abysmalor no interest rates at all. This has recently changed though,with the rise of interest rates worldwide. Now, there are tons of products out thereto save your money with that effectively act as checking accounts and also haveinterest rates of up to 5% per year. This is an incredibly high returnfor effectively no risk while also maintaining accessto your liquid funds. These accounts are more commonly calledcash management accounts, but for all intents and purposes are basicallychecking accounts in function.
This means that you can holdand store your money for free, have ATM access, pay bills from your account or set up direct deposit, and also connectto apps like PayPal and Venmo. The liquidity and feature setis what differentiates cash management accounts from other things like high yieldsavings accounts, which often have comparableinterest rates, but many more restrictions, which makesthem not worth it for me personally. Two good options out there are the Fidelity Cash ManagementAccount and Vanguard Cash Plus Account.
I personally love and use the FidelityCash Management Account. Because being on the Fidelity platform, it easily integrateswith the whole brokerage environment in case you also want to managestock on the same account or in case you have a retirement accountwith fidelity as well. On top of that,Fidelity is a large established financial player and so you have robust customer supportand you won't have to worry about the business collapsingany time soon.
Unlike potentiallysome of these smaller players that are trying to get into the cashmanagement account space. For Fidelity, the annual interest rate on cash justparked in the account is actually 2.7%. So in order to hit that 5%,you'll actually need to move your money into a money market fund. Money market funds aren't FDIC insured,unlike bank balances. But the truth is, their riskprofile is almost exactly the same since the moneymarkets are mostly invested in U.S. treasuries.
And the word of the US Treasury iswhat's backing the FDIC insurance. So it's extremely unlikelythat you'll lose money investing in moneymarkets, even in poor economic situations. An awesome feature of Fidelity's Cash Management Accountthat mitigates this need to buy money market funds is that anything invested in moneymarkets are treated as liquid cash so you don't have to sell and wait for itto settle in order to use that money. This means that every time you pay a bill, make an ATM withdrawal,or send money on Venmo.
It just directly subtractsthat balance from your money market funds. An extra trick that I use is that I invest in fundsthat are completely comprised of U.S. treasury bonds, like FDLXX. This way, the interest that you earn are exemptfrom state taxes, which might range from 4 to 11%, making the effective returnon this cash even higher for money that's usually just sitting arounddoing nothing. This is where you want to storeyour emergency funds,.
Which is also a very smart thing to have. I know I covered a lot in this videoand each individual topic is honestly worth a videoand research session in itself. However, I hope this videogave you ideas on how you can get started on building great financial habitsand improving this aspect of your life. For more self-improvement ideas,check out my other videos and let me know down belowif you have any other cool financial tips.