COVID’s effect on the economy touches us all whether we lost a job, sold a house, or can’t buy toilet paper. Recovery is going to take years, but you can begin now by auditing some of your basic financial tools like credit cards, insurance, and retirement savings.
Credit Cards
- Is your credit card serving your current lifestyle? If you have a card that pre-dates rewarding you for purchases, then you’ve outgrown it. For example, there are plenty of cards that offer a percentage of cash back when you use them to buy groceries. By the way, it is safer to purchase groceries with credit instead of debit.
- Do you pay your credit cards off every month? Credit card companies usually charge compound interest; billing you both for the principal and for the convenience of carrying a balance. To avoid these charges, pay your credit cards off every month.
- Are you applying for a new credit card? Use a prequalification tool. Applying for credit or a loan temporarily lowers your credit score by a few points. If you apply for multiple cards in a short period of time, that quickly adds up against you. Prequalification tools make soft credit inquiries which have no impact on your credit score.
Insurance
We purchase items when we need them, but you have to buy insurance before you need it. For example, when you rent an apartment, the lease often requires you to purchase a minimum amount of renter’s insurance. This not only protects your belongings, but it also protects the landlord from liability if you pursue a legal claim. If you move out with all your belongings undamaged, then you spent money on something you didn’t use. This can give you negative feelings toward purchasing any kind of insurance. It helps to think of it as buying peace of mind. Since you can’t predict the future, the minimum types of insurance you should consider are health, homeowner’s (or renter’s), short-term disability, life, and auto. For more details, go here.
Retirement Savings
- If your employer offers a retirement plan, such as a 401(k), then consider contributing 10% of your income to it. If they offer a matching plan, then contribute at least as much as they do. If you don’t, you’re refusing to accept free money!
- You need multiple sources of retirement savings. In addition to your employer’s retirement plan you should also have an Individual Retirement Account (IRA), even if you intend to take your Social Security benefits when you are eligible. There are plenty of IRAs to choose from.
- If you’re not interested in managing your money, are intimidated by it, or confused by all the options for short-term and long-term investing, working with a financial planner is a wise choice. Do your research and find out how they make their money, if they are a fiduciary, and whether you need a financial planner or a financial advisor. Here is the difference.
It’s never too early or too late to get back to the basics of personal finance. I hope 2022 brings you prosperity!
What other personal finance basics have I forgotten to mention? Please remind me in the comments.