By Emmie Martin
You don’t have to be an expert to handle your money well. Even a few easy tweaks to how you save, spend and invest can help you build wealth.
To get you started, CNBC Make It rounded up five simple facts about money, all of which have been vetted and endorsed by experts, that can help you manage your finances like a pro in 2019.
Start investing in your 20s if you can
The earlier you begin saving and investing, the better off you’ll be. “The truth of the matter is, you should be investing more in your 20s than you do in your 30s if you can,” personal finance expert Suze Orman tells CNBC Make It. That’s because the younger you are, the more time your money has to compound.
Compounding means that, in addition to earning money on your contributions, you also earn on returns on those returns over time. Because of this, your money grows exponentially. So if you invest a small amount and let it grow for decades, it will generally amount to much more than if you had invested a larger amount later.
Orman gives the example of a 25-year-old who invests $100 a month in a Roth IRA for 40 years and earns a 12 percent annual return. When that person retires at age 65, their investment will be worth just over $1 million. If the same person were to start investing $100 per month at age 35, they’d only have around $300,000 by the time they reached 65. “Those 10 years cost you $700,000,” Orman points out.
All investments carry some risk, and you’re never guaranteed to earn a 12 percent rate of return. But even at lower rates, the difference between starting at 25 and 35 is significant.
Don’t focus too much on saving
If you’re just saving and not investing, you’re setting yourself up to lose money in the long run, says Danielle Town, author of “Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad).” That’s because inflation causes prices to rise, which makes money less powerful over time. While a $20 bill will always be worth $20, what you’re able to buy for that amount dwindles.
If you had stuffed $1,000 in cash under your mattress 50 years ago, today it would have the same buying power as only $137.45 did in 1968. However, that same amount invested with compound interest would have grown to about $20,000, assuming a 6 percent rate of return. Even if you only earn a 4 percent rate of return, it still grows to around $7,000.
Although experts advise having three to six months’ worth of living expenses stashed away in a liquid savings account, it’s smart to put any extra cash to work. “The antidote to losing money on inflation is investing,” Town says. “You’ve got to do something with your money.”When the market tanks, stay calm
The stock market has had a volatile year. But for the average person, shifts in the market, even dramatic ones, shouldn’t be cause for panic. In fact, legendary investor Warren Buffett says that the best thing you can do when the market tanks is to ignore it.
“The money is made in investments by investing and by owning good companies for long periods of time,” the Berkshire Hathaway CEO told CNBC in 2016 amid wild market fluctuations. “If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.”
Billionaire Ray Dalio agrees. Though it might be tempting to sell when the market drops, he says, you shouldn’t base your investing decisions on fear or emotion.
“You can not possibly succeed that way,” Dalio said at the Harvard Kennedy School’s Institute of Politics. “You’ve got to do the opposite. It’s when you’re not scared you probably want to sell, and when you are scared, you probably want to buy.”
Realize you don’t need a perfect credit score
If you want to get the best rates on mortgages, car payments and other types of loans, you need a solid credit score. But you don’t need to worry about earning a perfect 850.
“Once you’re above 760 you’re getting the best rates,” says Greg McBride, chief analyst at Bankrate. “That’s why obsessing over a score of 800 versus 820 is largely a waste of time.”
For John Ganotis, founder of CreditCardInsider.com, the number to aim for is 750. Anything above that will “likely qualify you for some of the best rates and offers.”
Earning an “excellent” score that’s higher than 750 or 760 makes a difference. You could score a lower interest rate on your mortgage or qualify for the best credit cards. But stressing over a score of 780 versus 800 isn’t worth the effort.Understand how debt holds you back
Debt doesn’t just cost you money. The side effects of being in the red can affect other important parts of your life, keeping you from earning more and getting what you want professionally, says Suze Orman.
“When you are in debt, you feel it,” she says, and “your boss can feel that,” too. In essence, “you render yourself powerless.” Carrying debt can make you feel out of control and dependent on other people: “You walk into an interview and you need that job because you have to pay for your debt.”
That’s why Orman advocates making debt repayment a top financial priority. Once you’re out of debt, you exude confidence, she says: “You attract people to you. And guess what? Then you attract money. So get yourself out of debt and stay out of debt, the sooner the better, if you ask me.”
This article was first published by CNBC https://www.cnbc.com/2018/12/14/5-ways-to-be-smarter-with-money-in-2019.html and is republished with its permission.