What Finance Tips Would you Give to a Friend?

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Credit Sesame provides finance tips for a friend.

Has a friend ever come to you for finance tips claiming to be clueless about money? Or maybe you are that friend. Either way, there are some straightforward go-to principals that help clarify financial decisions. If you (or your friend) is in deep financial trouble, you should seek professional advice. If you just need pointing in the right direction, our finance tips may help.

1. It’s easier to avoid financial trouble than to get out of it

Probably the best of all finance tips is that there are no dumb questions to ask about finance. What’s not so smart is failing to ask for credit advice until you get into trouble.

Financial trouble is hard to get out of because it feeds on itself. Late payments have penalty fees and extra interest added to them. Credit problems stay on your record for years, making it harder to get credit in the future and more expensive when you do.

So ask questions from the start. Generally, the sooner you take action, the quicker you can dig yourself out of a financial hole. Or maybe avoid falling into it in the first place.

2. Using credit can work to your advantage

There are so many stories about people who’ve run into trouble with credit. However, used correctly credit can be tool that works for you. Here are two key ways credit can work to your advantage:

  • It can be a safe and convenient substitute for cash that doesn’t cost you anything extra. If you use a credit card with no annual fee and pay your balance off in full every month, you get the benefit of using plastic instead of carrying cash around and you won’t incur any interest charges. Oh, and those regular, on-time payments will build you a good credit history. That’s a win all around.
  • Using credit for long-term purchases can help you build wealth. Some purchases are too big to afford without paying for them over time, and that requires credit. For example, getting a better job may depend on owning reliable transportation. That may require a car loan. It’s hard for most people to buy a house without a mortgage. Being able to get a home loan can mean the difference between building equity and continuing to pay rent.

3. Using credit can get you into trouble

At the other end of the scale, credit can get you into trouble. Keep in mind the drawbacks. Here are three common ways people get into trouble with credit:

  • Late payments add fees and interest to the cost of your purchases. If you’re having trouble making ends meet, it might be tempting to skip a credit card payment. This is a bad idea.
  • Inconsistent payments hurt your credit score. A lower credit score makes credit harder to get and more expensive in the future. This leads to further financial problems.
  • Borrowing without a repayment plan can result in spiralling debt . I may be tempting to spend now and worry about payment later. However, without a repayment plan you may find there’s no easy way out of the debt you’ve taken on.

To work in your favor, credit has to be used responsibly.

4. Credit card companies maximize their profits, not yours

Remember that credit card companies are in the business to make money. This does not mean they don’t offer a useful service or operate. But is’t worth thinking how the service they offer you benefits the business rather than you. Here are three examples:

  • Easy minimum payments. Credit cards generally require a low minimum payment each month. That’s not to make things easy on you. It’s to prolong the time it takes to pay down your balance, so you’ll pay more interest on it. Always try to pay more than the minimum balance.
  • Raising your credit limit. Congratulations – if the credit card company offers to raise your credit limit it probably means you’ve been using credit responsibly. However, the only reason for raising that limit is to encourage you to carry a larger balance and pay more interest. If you haven’t needed a higher credit limit so far, you should consider turning down the offer to increase it.
  • Generous rewards. Everyone likes to be rewarded, but if credit card reward programs encourage you to spend more, those rewards can cost you, especially if you cannot keep up with repayments. Besides the problem of overspending, carrying a larger credit card balance could cost you a lot more than the value of the rewards you earn.

5. Emergency savings can act like super dollars

If you get hit with an unexpected expense or other financial setback, do you have an emergency fund to tap into. This is the most cost-effective way of dealing with financial emergency. It beats the alternatives:

  • If you have to borrow to deal with the emergency, you’ll add interest expense on top of the initial cost of that emergency. This is especially expensive if you use a credit card.
  • If you tap into retirement savings, you’ll face a tax penalty for early withdrawal. Even if you just borrow against your retirement balance, it costs you. You’ll forgo investment earnings on the money while it’s out of the account, and repaying the loan is likely to reduce your future contributions. If you lose your job, you might have to repay the loan immediately.

In contrast, emergency savings can be earning interest while waiting to be used. So while borrowing or tapping into retirement savings can add to the cost of a financial emergency, setting aside savings can actually help offset that cost.

6. Shop for the best financial products

You shop for everything else – so why not finance products? From credit cards to savings accounts, there are plenty of choices out there when it comes to financial products. And yet, people frequently accept less than the best terms. For example, the largest banks often offer the lowest interest rates on savings accounts. Here are some finance tips about shopping for the best deal on banking products:

  • Don’t feel you have to do all your banking in one place. The institution that offers the best savings account may not have the best terms on credit cards.
  • Look beyond your local bank branches. Online banking gives you access to many more choices, and often offers better terms than traditional, branch-based banking.
  • Compare both interest rates and fees to get the best sense of the overall financial terms.

7. The best time to save for retirement is when you’re young

It’s only natural to start seeking finance advice about retirement saving as you approach the end of your career. By that time though, it may be too late. The best time to start saving for retirement is early in your career. That will help you in two ways:

  • It lets you spread your retirement savings over a greater number of years, making the job easier.
  • A dollar saved and invested when you are young has more chance to grow, so is more valuable than a dollar saved late in your career.

Here’s an illustration of that second point. Assuming a 6% annual return and retirement at age 65, here’s how much a dollar invested at age 25 will be worth when you reach retirement, compared to one invested at age 60:

finance tips

There’s no financial wizardry necessary to grow your retirement nest egg. Time often takes care of it, if you start soon enough. The best finance and credit advice generally isn’t a hot tip or investment secret, but just a matter of using common sense early and often.

8. Retirement plan matching contributions can be the easiest money you’ll ever make

Speaking of retirement saving, one of the easiest pieces of finance advice is to take full advantage of an employer match if one is available.

In retirement programs like 401(k) plans, you get to choose how much of your paycheck you put into the plan. Some employers encourage savings by matching part of what you contribute.

Those matching contributions are compensation over and above your usual pay, but you only get them if you contribute to the plan. So don’t leave any of that money on the table. Contribute enough to get the maximum match available.

9. Don’t let other people set standards for you

A lot of finance and credit advice is pretty straightforward, so why do so many people have money problems?

Often it’s because they get sucked into trying to match someone else’s lifestyle. They feel they may be judged by how big a house they have or what kind of car they drive.

The problem is that your paycheck may not be able to cover someone else’s lifestyle. If you find yourself borrowing to keep up, you’ll be digging yourself an increasingly deep hole. In the end, that will make your lifestyle worse rather than better.

Often, if you look behind the walls of an impressive house or through the windows of that flashy car, you’ll find someone who’s building a mountain of debt to buy those prestige items. Don’t follow them into trouble.

One of the most useful finance tips is, never spend money to impress other people. In the end, the most comfortable lifestyle is the one you can afford easily.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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