As young professionals looking to make 2021 better than 2020, some of the decisions you make can have a huge impact on your overall net worth and ability to achieve your financial goals. In case you’re not quite sure where to start, here are some of the best money decisions I’ve made that have had a positive influence on my finances.
1. Learning the basics of personal finance. Dedicating time to learning the basics of personal finance has paid off much more than I can even imagine. Learning the importance of spending less and saving more has helped me gain self-control, live below my means, and set up an emergency fund. Understanding the different retirement accounts and the need to invest money has put me on track to retire early and have a high net worth in the not-so-distant future.
2. Deciding to get out of debt. This decision was a life changer. Before I realized that becoming debt free was so important, I had a substantial amount of credit card debt, a car loan that I was paying the very minimum on, and enough student loans to make your head spin. Once I realized that having these monthly debt payments was drastically decreasing how much money I had left in my pocket each month and once I saw how much I was paying each month in interest on all of this debt, I decided to make a change. Less than 2 years later, I paid off the credit card debt and car loan. Because I paid off this debt, I had more money left over from each paycheck and was able to use that extra money as an emergency fund and contribute more to my retirement fund. If you, too, decided to get out of debt, I’m confident it will have a drastic improvement in your net worth as well.
3. Living with a roommate. To be honest, this was a tough decision for me to make. As a doctor who was in her late 20s and moving to a new city, I really wanted my own space. I had lived with roommates for almost a decade and wanted to have something of my own. Although I could certainly afford my own apartment, deciding to live with a roommate saved me so much money! I was able to spend $600 per month less on rent which amounts to savings of over $7,000 per year. With this extra $7,000, I was able to invest a substantial amount of money and pay off my credit card debt and car loan relatively quickly. Although there were times that I wanted to have my own place, learning to live with another person allowed me to decrease my debt and build my net worth much faster. Take time to consider if this is something that might work for you as well.
4. Setting up a spending plan. When I started learning about personal finance, many of the books I read mentioned the importance of having a monthly budget. Although I tried to have a budget, I felt it was too restrictive. I started to get anxious whenever I had to purchase even one thing that wasn’t in my budget. Because of this anxiety, I scrapped the budget and set up a less restrictive “spending plan.” In my spending plan, I had a certain percentage of my paycheck invested for retirement, another percentage that automatically went to a savings account to help me pay off debt and save up an emergency fund, and another chuck of money that went to checking account I used solely for paying bills. Any money that was left over after those allocations, I was free to spend how I saw fit. This allowed me to enjoy my life a little more without feeling so restricted. If you also find that budgets are hard to follow, consider setting up a spending plan.
5. Buying a slightly used car. As a young professional who needs reliable transportation, I needed a car. Although I was tempted to get a brand new car that looked nice and had all of the newest features, getting a new car was going to cost me a lot of money. Paying for a new car meant I would have to finance the car through the bank or car dealership which meant I would get into tens of thousands of dollars in debt and have a substantial car payment every month for the next 4-6 years. Although I could have afforded the payment, buying a slightly used car instead of a new one, was going to save me so much more money. Since buying a slight used car that was only 2.5 years old cost almost half as much, I was able to save a substantial amount of money each month and use that savings to invest, travel more, and save up for retirement. Buying the used car also added a dose of humility and reinforced the importance of living below my means. If you’re considering buying a new car, I’d encourage you to consider getting a slightly used car instead. The cost savings could be significant.
6. Contributing money to retirement early. As a young professional with a lot of uses for money from each check, I seriously contemplated not contributing towards retirement. I was in my later 20s at the time and thought “I’m many years, if not decades, away from retirement. Holding off for a few years probably won’t make that big of difference.” Thank God, I changed my mind. One of the most powerful indicators of how much money we make investing is time. The sooner we invest, the more money we make in interest and the sooner that money starts to make even more money for us in return. This concept of compound interest is key to the overall value of our investment portfolio and net worth. If a person starts investing in their late 20s vs their late 30s, the person who invested earlier will have exponentially more money and a drastically higher net worth because of compound interest. If you are on the fence about investing toward retirement, I’d encourage you to make the decision to start today.
Now that you’ve read about some of my best financial decision, think about some of the decisions you’ve made. Which decisions have had the largest impact on your net worth? What things could you change in the future?