Finance and the Future

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I’m graduating this year, and I’m freaking out. Not about leaving college or about getting a job (well, not mostly about those things, anyway)–what I’m really worried about is managing my money. I want to save for retirement, build credit so that I can buy a house, and so on. But I also know that most Americans are way behind on their savings and don’t necessarily have good credit. Seeing as I know absolutely nothing about how to invest or build credit, I’m really worried that I’ll end up in financial trouble like so many others have!

Written by Martin J. Young, former correspondent of Asia Times.

Saving, investing, and building good credit are important things–and they’re not easy to do. As you point out, many Americans struggle with their finances. Around half of all American households–almost 40 million of them–have nothing saved for retirement at all, studies say. More optimistic studies peg the number at a third of all Americans–but say 56% of those who have saved have less than $10,000.

Saving for retirement is tough. Not everyone is in a position to put money away, and even those of us who are need to muster the self-discipline to keep from spending the cash we should be saving! But while saving for retirement is hard to do, it’s fairly simple to explain. Here’s how it works.

It starts, of course, by spending less than you earn and saving the excess. With retirement savings, you want that saved cash to earn interest. Generally, that means investments like stocks and bonds. When your money earns interest in these investments, you can reinvest that interest–which means that the next time you calculate interest, you’ll be calculating it based on a larger principal! This cycle is called compounding interest, and it’s why saving consistently and early is so important. The money you save early on builds on itself over the years, which is why a dollar saved in your 20s is worth more than one saved in your 60s. Math proves that, assuming a 6% return rate, you can reach $1 million at retirement by saving $361.04 each month in your 20s–or by saving $14,261.49 in your 60s! That’s a big, big difference.

Meanwhile, of course, you have to pay your bills–that’s what building credit is all about. Credit seems complicated and opaque–and, to be fair, the intricate details are. But 35% of your FICO score is simply your payment history: whether or not you’re paying off your credit card debts and loans. Do this, credit experts say, and you’ll slowly build your credit over time. Avoid allowing credit card balances to carry over, pay off loans, and don’t take out loans you don’t need–a car loan or a mortgage is fine, but loans for less important purchases are generally best avoided, as credit checks (triggered by loan applications) are actually considered in your credit score.

These are just the basics of investing and credit, of course–there’s much, much more that you can learn. But while it doesn’t hurt to know a lot about finance, you can get away with knowing only the basics of personal finance if you outsource some work to the experts. Financial advisors tell us that their industry helps about half of all people preparing for retirement. Research suggests that it’s better to be part of the half that advisors are helping: a financial plan may help you gain as much as 250% more in savings than you would without a plan.

“It’s only by not paying one’s bills that one can hope to live in the memory of the commercial classes.” — Oscar Wilde

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