The financial advice I wish I’d been given
When deciding to start writing this blog, one of the visions I had in my head was of some teenager (perhaps one of my nephews) stumbling upon it and realizing what was possible early enough to have an amazing life, even if they didn’t come from amazing circumstances.
You see when I look back to my younger days, I now see that I didn’t have much intelligent financial guidance. I got a few great tips here and there from teachers and relatives. Some of that advice included:
- Never carry a balance on a credit card
- Only have one credit card at a time
- Never use store cards
- Always pay cash for cars
- Only use credit for emergencies, houses and education
- Always balance your checkbook
- Never charge more than the amount you have in the bank at any one time
- Don’t be tricked by sales into paying interest on a card
And so on. All great advice and for the most part I did very well by following that guidance. In fact people who don’t have basic ability to manage their finances in this manner have no business even contemplating pretirement. Unfortunately that advice, as great as it is, is as basic as being taught to read. Reading is important, but if you want to, say, be a scientist, you need to learn much, much more. There are those very special people out there who figure out the puzzle on their own, but for most of us average folks, we have to decode this mystery on our own. If we’re lucky, we’ll figure it out before we’re too old to benefit.
So here then is the advice I wish I’d been given before I was out of high school. I’ll frame this somewhat as a life-path just to make it a little more concrete. (Oh, and I definitely would recommend all the bulleted advice above.) So let’s take a look. Jjust for fun we’ll say that we’re starting out at 16 years old.
16 years old – total savings: $500 (I’m assuming you’ve saved up some birthday gift money or can at least sell of some of your accumulated crap.)
Congratulations! You can now drive a car. The thing you want most right now are wheels! Caution – Hazard Ahead! Spending money on a car could screw up your next few years. So let’s do this the right way. If your parents are nice enough to buy a car for you — take it! But if they ask you to pay for your own insurance, politely decline and save your money. If they are paying your insurance for you, great! But, guess what? You get to drive your car rarely and only to support family errands — hey they bought you a car, the least you can do is a few errands! All that gas money gets saved!
Now if your parents didn’t buy you a car, then you have really awesome parents! It also means you won’t be tempted to show off by driving it to school and wasting tons of money on car bling and other garbage. The bus should work just fine and you’ll come out way ahead later.
Personally I’m a fan of kids who are in school working only during the summer. You shouldn’t really need the money and you should be focused on doing great in school at this point. But we’ll assume you work a summer job and make a little money here and there over the course of the year and can make a bit of money, say $2,000.
17 years old – total savings $2,500
You have a little more experience under your belt now, so you can start doing a bit more work for extra money this year. You’re still minimizing the driving and still excelling in school. Keep saving up. We’ll say over the course of the year you’re able to save up $4,000. Do whatever it takes to make that number, except for sacrificing school performance.
18 years old – total savings $6,500
For your last year of high school*, you’re going to need to start planning for college. We’ll assume you’re going to college because you want to give yourself the maximum options for your future. There are way too many options for me to outline all of them for you, but a couple thoughts:
- I’m a big fan of community college. It’s a great way to beat the system and get ahead of the game
- I’m also a big fan of taking a year off after high school before you start college. Make some money, decide what you want to do. If you want to go to a school out of state, that year can be spent establishing residency so you can score in-state tuition rates.
Meanwhile, you’ll be doing even more work, while still staying focused on schoolwork. You save up $5,000.
*Obviously the month of your birthday can determine how old you are during which year of high school. My birthday was at the beginning the school year, so I laid out this timeline to match. Adjust as needed for your own.
19 years old – total savings $11,500
You’ve passed the $10,000 savings barrier. It’s time to start investing! You can do your own homework on where to invest, but basically you should plan on trying to hit a 6% yield on your investments. Some will argue it should be a higher or lower yield. I say since you’re young you can go higher than the 3-5% safe zone, but you don’t want to be foolish either. Now that you’re out of school, a million paths lay before you. Just to keep it simple, let’s say you decide to take a year off before starting college. I don’t necessarily recommend this to everyone, but it may make sense for some. You work at least one job this year (two would be better) and you stay living at home if you’re allowed. Stay car-free if at all possible. Basically don’t spend a single dime that you don’t have to spend. We’ll say over this year you manage to save up at least $10,000.
20-23 years old – total savings $22,500
Time to go to college. Again, taking on debt for college is something I support. BUT ONLY IF NECESSARY! Do whatever you can, including going to community college first, to stay out of debt as long as possible. Since you’re going to be focused on school, though, we’re going to cut back your working hours, so you only need to save $8,000 per year while you’re in school.
Meanwhile you’re going to keep investing your saved money. By the time you’re out of school, you should have already have around $63,000 invested. At 24 years old, you’ll have assets that generate more than $260/month without you doing a thing!
24 years old – total savings $63,000
You’ve done a great job being frugal. Reward yourself with a brand, new car! Take out a loan on a new Mercedes and live it up! Ha ha, just kidding. You wouldn’t be that dumb, would you? Unless you’re lucky enough to live where a car isn’t needed, it is, however, time to spring for that vehicle. (When you think about it, by rearranging your life in certain ways, you can build a lifestyle that doesn’t need a car. Don’t be afraid to challenge what everyone else is doing.) Get something clean and reliable and keep it under $6,000. We’ll assume you were snatched up by an employer right out of college (told you that studying would pay off!) and are able to start getting serious about your savings. Start by saving just $20,000 or so off your new salary. Can you do it? It won’t be possible for everyone just getting out of school, but for many it’ll be easy. Even if you make just $40,000 per year, by being careful, you could save $18,000 per year. Keep in mind, you won’t be able to keep up with your fun-having friends. No toys, no going out, you have roommates, it may not always be super fun.
25-35 years old
I won’t outline every year now that you’re deep in your career. But let’s say you save in the coming years an increasing amount. From the 18,000/year you started with, to $20K, to $25K, to $30K, to $40k, $50K, $60K and on up to $75K and $80K. Again, your mileage may vary. With that basic schema, however, you would be able to buy a house at age 32 and make the payments with your investments or keep saving and be a millionaire by age 37. Wow!
It’s time, then, to pause and think about we managed to do. By powering your earnings into investment income, you outsmarted all the suckers. By starting early, you were able to buy your freedom from corporate America while the wage slaves are trapped under mountains of debt. By investing those funds effectively, they were able to exponentially grow to power your pretirement forward.
From then on, it’s up to you what you do. Keep working and get super rich or stay home and raise a family. Volunteer, travel, it’s up to you. But unlike most of us old guys who were distracted from this path by the lure of consumerism, you’ll be sitting pretty living the life most people only dream about.