When I was a young adult, I made about every financial mistake a person could make. Now I’m 51 years old, I have been a financial advisor for the past 26 years and I have two children of my own who I hope will avoid the same mistakes I made. This article is for them as well as anyone else who knows a young adult needing some financial guidance.
As an advice-only financial advisor I’ve had several parents reach out to me to help their young adult children not make the same mistakes we made. It’s hard as a parent to give advice in a way that their child will listen (What do we know?). Advice as to help their child develop sound financial habits, help them get out of a financial pickle or assist them in getting started with an investing plan. As an unbiased financial expert this is where I come in. This is an area I really enjoy. It’s like turning back the clock on my own life and seeing the results of not making the same mistakes. If you can develop great financial habits as a young person, then I know you’re going to benefit greatly from those habits throughout your lifetime.
“It’s like turning back the clock on my own life and seeing the results of not making the same mistakes.”
Here are several “Must Do’s” (or DONT’S) if you are a young adult just getting started in your career, life, and financial journey.
1) Stay away from Debt wherever you can
Credit card companies will come at you with offers from all directions. And they’re gonna look good. It’s going to be enticing to charge that purchase that you want but don’t have the cash for. Credit cards aren’t evil if you know how to use them.
Buying items on credit cards and paying off the balance at the end of the month is a great way to accumulate sky miles or bonus cash back while building credit. Buying items with no plan in place on how to clear the debt is the start to digging a whole it can be hell to get out of. The problem is that without discipline, your credit card balance will continue to grow with interest which can be higher than 20%. Before you know it, paying off the card becomes a high mountain to climb.
The Solution: Either pay cash for everything or pay off your card at the end of each billing cycle. Get to know the difference between a want and a need. If you can ask yourself before each new purchase “Do I really need this or is it something I simply want?” then you might be able to talk yourself out of some silly purchases and a bad financial decisions.
2) Don’t buy new cars
With all the bells and whistles a new car brings, it will also come with a lofty price tag and a steep short-term depreciation. Now it’s not tragic if you buy a new car and you are the type of person that is going to drive until it dies. That’s getting your money’s worth. Where the problem occurs is when you start thinking you need a new car every few years. With how fast new cars depreciate, you will lose a lot of money.
The Solution: Buy used and pay cash. People see a vehicle as a status symbol thinking the better looking, the more expensive a car is somehow it makes them equal or better than others. This can’t be further from the truth. A vehicle is designed to get you from Point A to Point B in a safe, reliable manner. Do your research, negotiate the price down and enjoy your “new to you” car.
3) Save at least 15% of your earnings
Right now is the best time to develop some great saving habits. Setup an automatic withdrawal from your checking account to move 15% of your income to a separate account. Set or adjust your budget to live without it. This is a great way to build a financial cushion (emergency fund) for things that will pop up unexpectedly and there will be a lot of unexpected expenses.
The Solution: Pay yourself first then set your budget. Make financial decisions on what you have coming in after you have put away money in savings. Having a nice cushion and savings will give you better options in the future.
4) Invest in low-cost Index Mutual Funds
Spend some time learning how to invest your own money. Taking control of your own money will save you thousands of dollars in fees over your lifetime. Like I always say, “Nobody cares more about your money than you do.” Do some research and learn how to invest on your own.
The Solution: Acquire the skills to invest your own money. Take a portion of the 15% you are saving from your earnings and invest it. Even if you just put the money in a low-cost S&P 500 index fund, you’ll learn from the experience and gain the confidence to expand your portfolio in the future. Set your investment on an auto-draft each month so you don’t even have to think about it.
5) Take advantage of your company’s retirement plan
If your company is matching your contribution into a 401k plan, then take advantage of the free money. Many 401k plans will match 100% up to the first 3% you contribute. That’s a 100% return on your money which is free money in my book. Even if the match is lower, grab as much of the match as possible.
The Solution: When you join a new company, learn about any retirement benefits they offer. If they don’t offer a match, then it’s still a benefit to contribute some money into. It will lower your gross income at the end of the year and supply another income source in retirement.
6) Open a Roth IRA
You’ll soon find out that the government doesn’t give us too many tax-free options. A Roth IRA is a retirement account that does not offer you any benefit now, such as it being a deduction on your taxes, but it offers a huge benefit as tax-free income when you retire.
The Solution: Start a Roth IRA as soon as you can and fund it with a low-cost index mutual fund. Invest for growth because you’ll have many years before you can access your earnings.
7) Don’t play the compare game
(AKA Keeping up with the Joneses) Focus on you and living your best life. Don’t care what your neighbors or friends have. Trying to outspend and out-do to make yourself look better is a fool’s game. What you’ll learn along the way is that many people who have the shiny new toys, a big new house or fancy cars are broke. And most are playing the same game you are. If you find yourself being pulled into this game perhaps it’s time to find new friends. Real friends with their priorities right in life.
The Solution: Focus on what you are doing and be grateful for what you have. Pay no mind to the fakers.
8) Keep a budget
Most people have a “pretty good” idea of how much money they spend each month on fixed expenses such as housing and transportation. What I have found though is that everyone has a black hole in their spending. This is where money is disappearing and is unaccounted for. That might be lunches, the $5 latte’s every day or some other small expense that is adding up each month. Without tracking every expense, you’ll have no idea what is going into your black hole.
The Solution: Get a budgeting app for your phone and input your expenses. Another way is to put all your expenses on one credit card (Be sure to pay it off within the billing cycle) so that you can track spending this way using the transaction statements… as well as earn some sky miles or cash back at the same time. You can also do the same with a bank debit card and leverage the monthly statements as a record of all your spending. The App approach may be faster and quicker, but anything that helps you track your spending is a slam dunk.
9) Live within your means
If you’re making $40,000 a year, you can’t spend $45,000. (unless you’re the government) Develop a plan based on how much you are earning so you know how much you can save/invest (remember to pay yourself first) and how much you can afford for rent, utility bills, groceries, etc. Always err on the side of caution and base your decisions on being need-based versus want-based.
The Solution: Stay well within the bounds of what you are earning and what you can afford. Lean a more frugal style of living. Again, think through what you really need versus what you simply want. Your future self will thank you over and over again.
10) Know your numbers
You’re going to get busy with your career and a family and along the way your relationship with your money will become a little more distant. Do not let this happen.
The Solution: Spend time each month reviewing your bank statements, retirement plans and investments. Keep debt to a minimum and on a need only basis. Know what your income is after your pay yourself. Build assets that don’t depreciate. Establish a lifestyle that fits within your budget.
Great habits become second nature when established when you are young. Your future self and your money will thank you.
Please share this article with any young person who’s launching off into the adult world.
Live free and teach your kids to live free my friends,
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Investment Advisory Services offered through Shankland Financial Advisors, LLC, Registered Investment Advisor