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Less than half of states in the US require that students at public high schools take a personal finance class before they graduate.
At the end of the day, many of us are never taught money basics – we simply learn through trial and error upon entering the “real world.”
Here are 15 essential money concepts to grasp that may have slipped through the cracks in grade, middle, and high school.
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How to pay for college
“We spend tons of time helping kids write essays on why they want to go to college – we teach them how to apply and get into college, but we never teach them how to pay for it,” says Jean Wilczynski, financial adviser at Exencial Wealth Advisors. “It’s just a black box of financial aid.”
It’s crucial to understand what your debt repayment schedule is going to look like and how long you’ll be paying back loans after college, Wilczynski tells Business Insider: “Think about that in terms of what you think your salary is going to be. If you’re taking on debt to go to college to pursue a particular career, does that amount of debt make sense for what the actual income is going to be for that career field? If not, think about other options of doing work at a lower-cost school. There are other choices besides student loans that we don’t teach.”
Your salary isn’t your take-home pay
Don’t forget to factor in taxes.
“People don’t realize that their salary isn’t their take-home pay,” Wilczynski tells Business Insider. “You have all of these taxes and it can be sticker shock when you get your first paycheck. People make the mistake of thinking, ‘Oh I’m making $50,000, so I should get this amount each paycheck,’ but it’s not even close to that!”
What a credit score is and how to build good credit
Your credit score, which you can check as often as you want through free sites like Credit Karma, Credit.com, or Credit Sesame, is a three-digit number between 301 and 850 based on how you’ve used credit in the past.
Generally, you don’t want your credit score to dip below 650, as potential creditors in the future will consider you less trustworthy and less deserving of the best rates.
While often overlooked or forgotten about, building good credit early on is essential. It will allow you to make big purchases in the future, such as insurance, a car, or a home. Start by selecting a good credit card and then focus on establishing smart credit card habits.
Paying the minimum on your credit card bill isn’t enough
One such smart credit card habit to develop is paying your balance in full. Most credit cards only require you to pay 1% to 3% of your balance each month, which can be an alluring prospect if your budget is tight. That’s why the option is there – if you can’t afford to pay your balance, you can at least keep a record of consistent and timely payments to the credit card company.
However, taking that route will cost you in the long run. Interest rates vary depending on the card, but credit cards charge an average of 15% on unpaid balances. To get an idea of how costly this can be in the long run, check out this chart showing how charging $100 per year and paying the minimum would result in you paying thousands of dollars in interest over time.
You should start investing as soon as possible
When you’re young especially, your biggest asset is time. For nearly every type of investing – including retirement savings – nothing can make up for the effect of compound interest. Plus, if you lose money in the market, you’ll have more time to make it back before you need it.
That being said, “it’s too late to start investing” is not a good excuse to keep your money under the mattress. It’s still better to start late than never – as long as you aren’t tempted into taking unnecessarily high risks to make up for lost time.
Just like in virtually every other aspect of personal finance, you don’t want to rely on investing to “get rich quick.”
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How to invest your money
Investing is crucial. Inflation lops an average 3.87% off your money’s value every year, and investments are one of the only ways to grow your money fast enough to outpace it.
Investing takes on many different forms – from contributing to a tax-advantaged retirement account to buying stocks and investing in mutual funds. Before deciding where to put your money, read up up on the basics of investing.
It’s important to remember that little, if anything, is guaranteed when it comes to investing.
You could earn money or lose it, so if you’ll need quick access to liquid cash in the short term, you probably won’t want to invest. Some professionals say you shouldn’t invest money you’ll need in the next five years because, if the market goes down, you won’t have enough time to recoup those funds.
It’s also important to realize that investing isn’t free. If you’re working with an investment professional, you’ll pay them either a percentage of your portfolio or a flat fee – you’ll want to know if your adviser is “fee-based” or “fee-only” before you sign on.
The online investment platforms known a robo-advisers, such as Personal Capital, Betterment, and Wealthfront, each have their own fee structures – depending on the size of your account, they will take a certain percentage each year. Mutual funds and ETFs also charge fees, which they disclose upfront as “expense ratios.”
Do your research to minimize fees. You can find a fund’s expense ratio, the minimum investment required, and other helpful information about index funds by searching them in the “quote” field onMorningstar.
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How to talk about money with your family
As uncomfortable as they may be, money conversations are crucial, with your partner, parents, and kids.
You’ll want to make sure you and your partner are on the same page before getting married – after all, arguments about money are a leading predictor of divorce – and you’ll want to have open conversations with your parents about their finances, particularly if you’ll be managing their money one day.
If you have kids, you can play a major role in their future financial success. “The right conversations early on can give kids a foundation for financial literacy,” Amy Podzius, financial planner at TIAA, tells Business Insider. “By teaching your children sensible habits about saving and spending, you can set them up to handle money wisely their entire lives.”
After all, the wealthiest, most successful people teach their kids to be rich. As self-made millionaire Steve Siebold writes in, “How Rich People Think,” “The wealthy know that even high-end private schools are limited in what they can teach their students about money, which is why they take it on themselves. Lessons about earning, saving, and investing are common at the dinner table.”
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You have to save for retirement, even when it seems a million years away
A Bankrate survey found that 69% of people 18 to 29 had no retirement savings at all.
Retirement might seem too far off to start considering, but some experts say that if millennials don’t change their rocky savings habits and start investing, they’ll miss the retirement boat completely. Start by contributing to your 401(k) if your employer offers one, including taking full advantage of your company’s 401(k) match program if one is available (more on that below).
You have options beyond the 401(k) – the most common being the traditional IRA and the Roth IRA, which offer tax breaks similar to the 401(k).
For teenage or millennial earners, there’s a great advantage to opening a Roth IRA. Contributions to a Roth are taxed when they’re made, so you can withdraw the contributions and earnings tax-free once you reach age 59 1/2. Traditional IRA contributions, on the other hand, are tax-deductible when they’re made, meaning you’re taxed on every penny (contributions and earnings) when you withdraw funds.
Another advantage for the young employees: If teens are working a part-time job, their parents can contribute up to whatever their kid makes in income (up to the maximum yearly contribution of $5,500), and the money will grow tax-deferred. For example, if your kid earns $2,500 working a summer job, you could contribute $2,500 to their Roth IRA, certified financial planner Michael Solari told Business Insider.
Read up on more key differences between these two retirement accounts.
How a 401(k) and 401(k) match works
Great, you now know you have to save for retirement and your company offers a 401(k) … but how does it work? Stashing retirement savings in a 401(k) plan is an attractive option: You’ll get tax advantages, the money is automatically taken from your paychecks before you have the chance to spend it, and sometimes your employer offers a 401(k) match, which is essentially free money.
It takes four simple steps to start accumulating your “free money”:
1. Call your HR administrator and request the necessary paperwork to open a 401(k) account.
2. If you have an employer match, calculate how much you need to contribute to get the full match. If you can afford to have that amount taken out of your paycheck and still live comfortably, do it.
3. Set up your account so that the contributing money is sent directly to your 401(k) account, meaning you’ll never even see it in your paycheck. This is a powerful use of psychology to trick yourself into investing – if you never see the money, you’ll learn to live without it.
4. Let your money accumulate and grow over time.
How much money you need to set aside in an emergency fund
The amount of savings you need is highly personal – and it’s usually measured in months of living expenses, rather than a fixed dollar figure.
Many experts, including billionaire John Paul DeJoria, agree that it’s smart to have six months’ worth of savings tucked away. You may personally need more or less depending on your situation.
To get a general idea of the dollar figure you should be working towards, start by determining how much you spend each month and multiply that by the number of months you feel comfortable setting aside money for should an emergency arise.
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How insurance works
Nobody wants to deal with insurance – it’s complex and confusing – but it’s essential to have the coverage that’s right for you.
That means health, renter’s (or homeowner’s if you have your own place), auto, and disability insurance. And depending on your situation, it may mean life or pet insurance. Check out this young adult’s guide to affordable health insurance to get started.
How to save money when bills come in every month
Paying yourself first a simple concept – and arguably one of the most effective ways to build your wealth – yet most people choose to pay everyone else first, David Bach explains in “The Automatic Millionaire“:
They pay the landlord, the credit card company, the telephone company, the government, and on and on. The reason they think they need a budget is to help them figure out how much to pay everyone else so at the end of the month – or the year, or their working life – they will have something ‘left over’ to pay themselves. This is absolutely, positively financially backwards.
You fix this by paying yourself first, which simply means considering your savings as much as priority as the rent or the gas bill. By that logic, if you need to cut back on spending, savings isn’t an area you do it.
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How to negotiate your salary
Negotiation, particularly salary negotiation, is not something we do every day, or even every month, but it’s a critical skill to develop if you want to get ahead financially. Ultimately, if you want a raise, you can’t sit around and wait for one – you have to ask for it.
There’s a right and a wrong way to go about this delicate conversation. Read up on things you should never say in a salary negotiation, know what you’re worth before heading into the meeting, and consider tips from a 28-year-old woman who made a $30,000 leap.
All debt is not equal
“Choosing to pay off the wrong debt may be very costly,” certified financial planner Jordan Niefeld tells Business Insider.
To start, you’ll want to rank all of the debt you owe in order of interest rate – from highest to lowest interest rate charged. While you’ll always want to pay the minimum on your various debts, prioritize the debt with the highest interest rate in order to pay less over the life of your loans. Once it’s paid off, move down your list and tackle the next debt with the highest interest rate.
Note that the alternative strategy is what financial expert Dave Ramsey named “the Debt Snowball“: paying the smallest debt first, regardless of interest, then rolling that money into paying off the next-biggest debt and so on, so you completely pay debts as you go. The advantage here is more emotional than monetary – it feels good to cross a debt off the list, and for many people, that emotional boost keeps them going.
Financial advisers aren’t always on your side
Many of us may not realize that every financial adviser isn’t required to always act in your best interest. If you’re looking to pay for professional financial advice, you’ll want one word in your back pocket: fiduciary.
As Harold Pollack and Helaine Olen explain further in their book, “The Index Card,” “A financial adviser working to the fiduciary standard has a legal duty to act in your best interest and is not getting paid to steer you into buying overpriced investment products you don’t want or need. A majority of men and women offering financial advice don’t work to the fiduciary standard.”
Those not working to the fiduciary standard are held only to a suitability standard, meaning their advice must be suitable for the clients’ financial situation, but is not necessarily in their best interest.
To help sniff out the advisers who are best equipped to help you, you’ll want to start by asking prospective advisers these specific questions.