Managing your personal finances is a critical skill in life.
Yet many of us simply hope for the best, said Pacific University alumna Kathleen (O’Malley) Celmins ’04, a managing partner of the firm behind the award-winning Stacking Benjamins personal finance podcast and its affiliated website.
Why are fear and avoidance so common when it comes to money matters?
Celmins says it has to do with a lack of knowledge, or financial literacy.
Personal finance isn’t required course in most high schools or colleges, nor is it a topic that’s routinely discussed at the family dinner table. As a result, some of us venture into the world with no real clue as to how to handle our hard-earned money and make financial mistakes along the way.
Celmins has had her own money-related struggles. She describes herself as “a regular person who learned all her money-related lessons the hard way.”
Today, she spends her days developing online content designed to help people get their financial houses in order. We asked her to share a few tips with her fellow Pacific alumni, and here’s what she had to say.
Take control of your future by deciding what you really need and ditching the rest.
“Consumerism can make us feel like we never have enough,” said Celmins, adding “there’s a lot to be said for downsizing,” whether that means moving to a less-expensive house or getting rid of the junk in your closet.
Keeping a lid on your expenses isn’t about sacrifice. It’s about giving yourself more choices in life, Celmins said.
“If your life doesn’t cost that much, you’re giving yourself more options; you can take that nonprofit job,” that doesn’t pay a lot, she said.
Celmins practices what she preaches. She and her husband recently downsized to a smaller home so that he can stay home to care for their young daughter and she can focus on her business, not to mention taking a yoga class every morning.
“Figure out your priorities, so you can live life while you are growing a business and/or a family,” Celmins said.
Pay off your credit cards first.
Many people struggle with how to allocate extra cash.
If you’ve just gotten a raise, for instance, do you put that extra money into an employer-sponsored retirement plan or use it to pay off credit card debt (assuming you have credit card debt)?
The answer is rooted in simple math, Celmins said.
“Credit card interest is around 8 percent at the low end,” she said. Even with the stock market on a tear lately, “nothing else will guarantee you an 8 percent return like paying off your credit card debt,” Celmins added.
What if you have multiple credit cards with balances? From a purely financial perspective, it makes sense to pay off your highest-rate debt first. But from a psychological perspective, it can be more satisfying to focus on the card with the lowest balance.
Paying off an account in its entirety feels pretty good, and that psychological boost may help you stick with your debt-repayment plan. After you’ve made some visible progress, “then you can rearrange your spreadsheet by interest rate to tackle higher-rate debt,” Celmins said.
Aim to save half your income (Yes, you read that correctly.)
Celmins suggests making savings a priority, not an afterthought, as is often the case.
One way to boost your savings rate is to have your paycheck direct deposited to a savings account and withdraw only what you need to cover your living expenses. It’s less tempting to spend money sitting in savings than it is to dip into checking.
“Most people do direct deposit into their checking account and vow to save what’s left. But often there’s nothing left,” Celmins said.
If you aim to save half your income and miss the mark, that’s okay. Chances are you’ll still feel good about the progress you’re making.
“Aim to save half your income and if you don’t make it, you still have saved a lot more than the average person,” Celmins said.
What if you, like many Americans, have credit card debt?
Paying off debt, Celmins said, counts as savings because you are likely to save more in interest costs by chipping away at your debt than you would earn by investing the money. “It’s the only guaranteed return,” she noted.
Get or stay involved charitably.
This isn’t exactly a personal finance tip, although there are tax benefits tied to certain types of charitable contributions.
“We can always afford to give,” Celmins said, adding that supporting a charitable cause can make it easier to count your blessings and gratitude can work wonders in many areas of our lives.
“If you have a mountain of debt, it’s easy to think you have it harder than anyone else, and chances are you don’t,” she said. “Stepping outside yourself and looking past your own nose can help you see that.”