We can sing, hum, and recite Bob Dylan’s iconic lyrics all we want but it doesn’t make it any less false. The matter-of-fact reality is that time is ticking away and dragging us – usually heels first – into adulthood and then (cue tension music) old age.
I’m a believer of staying calm and making a plan (and by that I mean that I compulsively make plans to avoid panicking about real life), so I set about trying to figure out my financial future this week. Interestingly, I came away with a couple of lessons:
a.) (This one is easy) Pay back your school loans or any debt you have as soon as physically possible. ASAP. Yesterday, if possible. Pay them even when they are in deferral because every payment directly diminishes your principal and isn’t being “wasted” on accumulating interest. Even if you can’t pay back your loans ASAP, try to at the very least pay your interest rate as it accrues (this is more relevant for graduate school than for college students). It will entail you making payments during your academic career, but it will avoid you that interest compounding and growing exponentially larger!! As a clarification, compounding (from my limited understanding of finance) goes a little like this. Keep in mind these numbers are totally unrealistic:
Day 1: a 10% interest rate is applied to a loan of $100 Loan. Now your loan becomes $110.
Day 2: a 10% interest is applied to your balance, not original loan. That means that now you are taking 10% of $110. You are paying interest ON THE INTEREST! Now your loan becomes $121.
You can see how over a period of YEARS, this will result in you having to eventually pay a lot of money worth in interest alone.
Short version here is: Try to pay back old school loans quickly, even if you were granted a deferment. Try to pay your interest rates as they build up and do not let them accumulate.
b.) My other big lesson was not to rely on my gut or fantastic knack for guessing. When it comes to money, there is a myriad of tools available to calculate information, so we should use them. Especially since we are young and have not had extensive experience with financial health for the most part, using online calculators and spreadsheets can make any task – from weekly budgeting on Mint to calculating how long it will take you to pay your school loan – seem infinitely more manageable. Don’t be a fool; use these (math) tools. Yes, that’s right, that’s what I just said.
c.) The third lesson was actually learned today and prompted this post. It might come as a bit of a surprise but: start saving for retirement as soon as you can. Your contributions do not need to be significant, but if you can open a retirement savings account through your work, DO IT NOW. The bottom line here is that if you invest for 10 years while you are young and then stop putting money into that account entirely, you will have significantly more money saved away than you would if started saving ten years into your career but put money away consistently until your retirement! Surprised? It’s the compound interest magic again, but this time it works in our favor. I opened a retirement savings account today even though I work at a non-profit people, so if I can do it, most of us can! J Now, if I consistently put money away for a bit, I can stop when I go back to school full-time and my money will just sit there and accrue it’s own interest over time. Having put it there at the age of 24 by the time I retire at the hypothetical age of 50, that money will have been compounding interest for 25 years! For a brief but enlightening example, read this story about two brothers.
Here is a good resource on a summary of what it means to plan for our financial future in our twenties.
My concluding thought is that it’s much better to be safe than sorry, especially as our lives become more complicated. Eventually, someone’s gonna have to buy your prune juice….