Who here is guilty of ignoring their finances? *Raises hand*
Paying attention to your finances is like going to the gym: you know you’re supposed to do it, but chances are you’re better at finding an excuse than actually following through. ‘I’ll look later,’ ‘I’m too busy,’ ‘I just don’t want to know’ — red flag phrases of avoidance. But unlike a gym membership, your finances are not something you can cancel. More importantly, they aren’t something you can (or should!) ignore.
One reason I found that I ignored my finances in the past was because it’s tough to be honest with yourself. The fear of missing out (hello FOMO) is a real issue! It might be tempting to put an expensive concert ticket on your credit card just because all of your friends are going, but in the long run, will it be worth that extra debt? Yes, you’ll get to say you had the experience, but if it pushes you into a worse financial situation, that’ll cancel out your fun memories.
Instead of turning a blind eye to your finances and paying the price later, get real now by knowing what steps you can take if you’re financial situation is less than ideal. Basically, get ready to have the #RealMoneyTalk with yourself.
How to Have the #RealMoneyTalk… With Yourself
Ok talking with yourself may sound a bit strange, but hear me out. The only way to set yourself up for success is to get real with yourself now. Start by sitting down solo in a comfortable place, and say to yourself, ‘Listen we need to talk. I know you’ve been ignoring this for a while, but enough is enough and I want to be in a good place with my money.’ Then break out your numbers.
Gather your credit card bills and student loan statements. Or for easy access to all of this, check out your personalized Debt Dashboard in your Turbo app. Ask yourself, what type of financial situation are you in? Should you be focusing on paying off your debt first, or raising your credit score? What are the areas you need to work on?
No matter what the answer is, don’t let it scare or overwhelm you! Getting to the right place financially just takes a little TLC. Pro tip — don’t put off this conversation, because there are several short and long term effects of leaving your finances on pause.
Your Financial Future Will Be Here Before You Know It
What happens when you forget about saving for your life 40 years down the road? Your 401k and IRA are more than just strange acronyms you know nothing about. Let’s break them down quickly.
- 401K: A 401k is a qualified plan sponsored by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pre-tax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.
- IRA: An IRA is an investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.
Traditional and Roth IRAs are established by individual taxpayers, who are allowed to contribute 100% of compensation (self-employment income for sole proprietors and partners) up to a set maximum dollar amount. Contributions to the Traditional IRA may be tax deductible depending on the taxpayer’s income, tax filing status and coverage by an employer-sponsored retirement plan. Roth IRA contributions are not tax-deductible.
Now you’re probably like “this is great, but why should I care about this now? “Well think of it this way, let’s say you’re not a big fan of your job and want to get out of there as quick as possible. Imagine having to stay at that job until you’re 70 or 80 because you didn’t save up for retirement. Sounds pretty miserable, right? If you start planning your finances earlier, it will give you peace of mind in the future to know that you can retire on time or even early because you have money saved up.
Ignorance Is Not Bliss
If there’s one thing you should absolutely not do ever, it’s ignore your debt. As you probably already know, this can have very serious consequences. It’s one thing to miss a payment on your credit card or your student loans, but it’s a whole other debacle to straight up stop paying. Whether you forgot or you’re hiding from the fact that you owe money, this will only make the situation worse, and can result in bankruptcy.
Bankruptcy is basically the legal way you can dismiss all of your current debt. Although this sounds like a dream come true, it’s not the life hack that you think it is. There are two types of bankruptcy you can file for, Chapter 7 or Chapter 13, and each one applies to certain debt scenarios.
Chapter 7 most commonly applies to consumer debt — things like credit card debt, medical debt, or personal loans. According to the U.S. Courts, how Chapter 7 works is it allows for liquidation of a “debtor’s nonexempt property and the distribution of the proceeds to creditors.” Ok that’s a confusing mouthful, but that’s just a fancy way of saying a trustee will sell your belongings to pay back the people you owe money too.
Now if you’re looking to hold on to your belongings, Chapter 13 is a little different. With Chapter 13, the courts will set up a debt repayment plan for you that will last from 3 to 5 years. The main benefit of this course of action is that this chapter can allow you to stop your home from being foreclosed upon. That being said bankruptcy laws can vary by state, so be sure to fully research the specifics that apply to your situation before you file.
Bankruptcy isn’t something to be taken lightly, as it will stay on your credit report for years. Additionally, legal fees may cost several thousand dollars and the legal process can last several months. It’s really not a fun process and sometimes people jump to bankruptcy when it’s not the best option. It can have some repercussions you might not be aware of and long term effects that will take time to bounce back from.
How the ‘B’ Word Lingers
Legally, your employer cannot fire you for declaring bankruptcy. However, since prospective employers may check your credit history before hiring, they might use it as a reason to not hire you (eek!). This is especially important if you’re in a field like accounting where you have to manage company finances, or if you’re applying for a government job. In this situation, a spotty financial history could make you look like a liability.
Many landlords also run your credit before approving you as a tenant, and a bankruptcy filing could scare them off. If you already have an apartment, stay there either until a few years have passed since you’ve filed for bankruptcy or you’ve built up your credit score. This is especially important if you’re in a city like New York or San Francisco where finding affordable housing is already difficult.
Moral of the story — don’t leave finances on pause, take action now. Even the smallest task, like getting real with yourself, can help get your finances on a good track. Ready to have the talk? You can do it! Remember you’re just talking with the one person who truly wants you to succeed: YOURSELF.
*This blog is for informational purposes only, and should not be relied on for tax, legal or accounting advice. Please be sure to consult your own professional services advisors.