Four Basic Steps To Jump Start Your Financial Future

Published 12/12/07 (Modified 3/8/11)
By MoneyBlueBook

I had dinner with a good friend of mine not too long ago and the subject of jobs, aging parents, and financial planning came up. My friend knew that I had this personal finance blog and decided to share with me some personal information to get my advice. After listening to him talk about his income and how he stashed all of his accumulated money in his checking account, I realized that he had no clue about the basics of financial planning and the need to put his money and investments to work for him.

I ended up explaining in great detail to him about the power of compound interest and why it was so important that he immediately jump start his financial future today and not delay any longer. To give my newbie friend the spark he needed to start his way towards fiscal growth and responsibility, I provided the following basic tips:

1) Pay Off High Interest Credit Card Debt As Soon As Possible - Fortunately for my friend, although he used credit cards regularly, he had no outstanding balance that he was paying high interest or fees on. His FICO credit score was also thankfully a pristine 750. For a great number of people though, credit card debt is a serious problem since credit cards almost always have higher interest rates (10-30% APR) than any other type of debt.

In my opinion, credit card balances must be tackled before anything else, including worrying about retirement concerns. One can't possibly plan for the future if he or she is struggling to keep above the financial waters, especially when the unpaid balance continues to accrue interest. If you are unable to immediately pay everything off, you have a few options. If your FICO credit score remains undamaged, I would suggest temporarily shifting the credit card balance to a 0% balance transfer card, but keep in mind that you absolutely must pay off the minimum balance on time every month or you will get hammered severely with an interest and penalty spike.

If you cannot qualify for the zero percent balance transfer option, and are seriously unable to pay it off on your own, try to see if you borrow from your parents (presumably interest free) if that is a reasonable option. Just remember to be a good child and pay them back as soon as possible. Try to cut back on other personal expenses and find ways to chip into the principle balance. Desperate times require desperate measures but bottom line is, pay off that credit debt as soon as possible without delay!

2) Open a High Interest Savings or Money Market Account - The majority of the basic checking accounts that are available out there provide little to no interest earning opportunities. I highly recommend that you open a high interest rate savings or money market account with your local bank. Although current interest rates are dropping due to recent Fed rate cuts, 4% or 5% APY accounts may still be available. Learn to access your bank accounts online so you can shuffle needed money back and forth between your high interest savings account and your active checking account when you need it.

3) Open a Roth Investment Retirement Account (Roth IRA) - Once your credit card debt if any is resolved, invest for your future immediately. Open a Roth IRA to take advantage of tax deferred investment growth. Your deposits can be invested in stocks, bonds, and mutual funds and grow tax-free until you retire. You can open a Roth retirement account with any major brokerage, including Fidelity, Vanguard, TD Ameritrade, Etrade, or Charles Schwab.

With the Roth IRA, you are limited to a maximum contribution limit of $4000 for 2007 and $5000 for 2008. You can open the Roth IRA anytime, but for current year contributions you have to make the contribution by April 15 of the next year. So for 2007 contributions, you'll need to open the Roth IRA as soon as possible and make the initial contribution by April 15, 2008. Don't let it slip away because once it's past you won't be able to use that year's contribution limit again.

4) If You Are Financially Responsible, Stop Using Credit Cards That Offer You Nothing - Use Reward Credit Cards Instead - If you are responsible enough to use credit cards, I highly recommend that you maximize your money by taking advantage of credit card rewards. If you are struggling with debt, than stick with cash. Not everyone can handle the responsibility, but if you can do it, it's one of the easiest ways to earn free cash back and reward points using convenient reward credit cards for buying things you were going to purchase anyway.

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4 Responses to “Four Basic Steps To Jump Start Your Financial Future” 

  1. E.C. says:

    What would you recommend for those of us who've diligently followed the other three steps but are not yet eligible for step 3? There are some quirky rules that mean that fellowships don't count as earned income, even though they may well expect you to spend X hours a week doing a specific task to get the money. It's supposed to be an advantage by saving us from having to pay FICA taxes, but it's kind of a drag when it comes to saving for retirement.

  2. Raymond says:

    Yes that is quite an unfortunate earned income predicament. I presume you're not married because if you were you could still contribute to a Roth if the couple filed jointly (assuming the other spouse had earned income).

    Unfortunately if you don't have the requisite earned income, you can't contribute to a Roth. I would recommend just putting the money in a savings account or investing it wisely - to get that compound interest started.

    At the very least I am glad that you are actually thinking about saving for the future so early in your life. Good job!

  3. Philip Brewer says:

    It's not necessarily that hard to come up with some earned income. Basically, you just have to get someone to pay you for doing something.

    It may be hard to find someone who will pay you enough to support yourself, but just earning a few hundred (even a few thousand) dollars doesn't have to be that hard. Find some contract work. Find some seasonal work. Work in a family business, if any family members have one. Talk to people in your department and explain the rules about Roths, and see if anyone has any work that needs doing that they'd be willing to pay you for. (Maybe they'll pay you a small amount to write grant proposals, with an understanding that they'll hire you if the grant gets funded.)

    Worst case (because you need to be careful to dot your Is and cross your Ts), if there are any relatives that are giving you money, arrange for them to pay you instead. Be sure to actually do a reasonable amount of work for the money (and document the work that was done), to cover everyone with regard to the tax man, but it's legal as long as the pay is for work.

  4. Sherin says:

    That a thought. Excellent presentation and you are really appreciated on this fantastic article. Well done !!!

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