I’m a Financial Expert: Here Are the 4 Best Pieces of Money Advice That People Hate To Hear
Written by
Adam Palasciano
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Cory Dudak
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Most people would rather not heed money advice and instead just somehow get rich fast. While there’s plenty of money advice that most people don’t care to hear, understanding important financial principles is crucial to protect, secure, and grow your finances.
Business Insider spoke with Rachel Wooten, a CPA and then-finance director at the Flint Group, who explained four tips to help your finances.
Avoid Living Larger (aka “Lifestyle Creep”)
Business Insider described “lifestyle creep” as the common pattern of spending more money as you earn more. The effects of lifestyle creep usually occur after someone finishes paying off a debt, gets a big raise or salary increase, or gets a new job with a higher income.
Wooten explained that “after a salary increase, many people immediately consider upgrading their house or vehicle. However, studies have shown that cars, houses, etc. can become quickly acclimated to, so the uplift in happiness is short-lived.”
She suggested that instead of living larger when you start earning more money or have more cash flow, consider boosting your investments and savings instead. These decisions can reduce your money stress in a big way.
However, while there may be good reasons to spend the extra money on something important such as a medical expense or a home improvement project, it’s important to carefully plan your finances before doing so.
Add as Much Money to Your Health Savings Account (HSA) as Possible
Maxing out your health savings account (HSA) contributions is just as important as maxing out your 401(k) or IRA. It’s explained that an HSA is a tax-advantaged savings account that was created in 2003 to assist those with higher deductible health plans to pay for out-of-pocket medical expenses tax-free. An HSA can also be leveraged as an investing tool.
“The HSA is the only account that allows you to pay no taxes at all on contributions, growth, or withdrawals,” said Wooten. “Invest your HSA funds and avoid reimbursing yourself for those expensive braces or doctor visits, and you’ll come out ahead in the long run.”
She added that you can withdraw your HSA funds for non-medical expenses at any point if you leave your HSA money in your account until age 65.
Start Saving for Retirement as Early as Possible
It can be difficult to put money away for retirement early in your career when you might be earning less money. But, the earlier you can start, the larger the financial impact you’ll have on your retirement later on.
According to Wooten, “it’s hard to convince a person in their 20s to consider the well-being of their older self, but money stashed away early in your career will have the benefit of compounding, doing the heavy lifting for them.”
For example, if two people save $100 per month for retirement, each with a 5% annual compound rate of return, the person who started at age 35 will have saved half as much as the person who started at age 25 by age 65. To break this down further, this would amount to $162,000 by age 65 for the person who started at age 25 and only $89,000 for the person who started at age 35. The additional $12,000 more over 10 years ($100 per month x 120 months = $12,000) that the person aged 25 saved compared to the person aged 35 would mean about $73,000 more by retirement age.
The power of compounded interest is real, and can make a world of difference in terms of how early, easily and comfortably you’ll be able to retire.
Set Up Automatic Investments
Managing your portfolio and choosing investments can be a cumbersome task for most individuals when simultaneously taking care of family, working five days a week and enjoying your free time. An easy way to handle this is to “set it and forget it” with employer-sponsored retirement plans. A simple payroll election is all it takes to get started. You can choose a percentage of your paycheck and investments that you’d like to contribute toward, and it will automatically be invested for you in a 401(k) or other retirement plan.
Wooten expressed that the best strategy is to put your investments in exchange-traded funds (ETFs) or a total market index fund: “Sure, trading stocks is fun and a lot more interesting than this boring strategy, but over the long term, you are more likely to lose money actively trading than to beat market returns.” It’s also possible to set up automatic deposits and investments for an Individual Retirement Account (IRA), as well. This methodology can lead to long-term financial growth with minimal effort or management.
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