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My nephew recently started reading this blog and it got me thinking. What would be valuable information for him as a reader? What do I wish I knew when I was younger?
He’s almost 20 years old and he just started a career in construction probably close to a couple of years ago. At his age, I know I wasn’t very smart financially. Don’t get me wrong – I thought I was, but looking back, I made some stupid decisions.
So, like any old man, I almost feel obligated to pass along some of the knowledge I wish I knew back then to help him out. And yeah, 43’s not that old, but I’m not getting any younger!
Do you remember The Game of Life board game? The modern version of the game’s been around since 1960 and it’s still a fun game we love playing together as a family.
In it, you decide right off the rip if you’re going to go the college route or straight to a career? If you go the college route, you have a longer path in the game before you actually start a career and you’re stuck with some mean old Sharkies (loans) that you have to pay off. If you go straight to a career, you skip all that and start making money sooner.
He chose the latter path… straight to a career. I’m not someone who thinks that the college track is for everyone and I’m proud of what he’s doing. He’s in a career he enjoys and he’s jumped right into making good money – especially for a kid his age!
However, that has the potential to also be problematic – at least it would have been for me. I needed the time to understand money better before I started making a lot of it or I would have caused some even bigger headaches in life!
So, based on what I know now, I thought I’d present some thoughts that would be good for him to build his financial future. At the same time, I don’t want to impart words that he’ll throw out the window because I’d be squashing too much of his fun right now.
Remember, I’m not a financial advisor, so please consult one to determine what might be best for your individual circumstances.
Here are the 8 things I wish I knew when I was younger…
1) Compound interest is paramount
If there’s one thing you take away from this post, it’s how critical compound interest can be for your future.
Realizing just how much of an impact this can have on your finances is more important than any other point I could possibly make. They call it the magic of compound interest for a reason.
If you’re not familiar with the concept, it’s pretty simple. Let’s say you put $2,500 into a savings account earning 2.20%.
As a side note, if you’re not using an online savings account (I use Ally), you’re probably earning around 0.01% at your bank – that’s 220 times less!!!! Get an online savings account ASAP!
Anyway, assuming the interest is compounded monthly, that 2.20% means you’ll earn $55.56 that first year. That’s not too bad for money that you’re no longer working for – it’s now working a little bit for you.
The next year though is where you start to see something interesting. The interest you earn is not another $55.56 – it’s now compounded on your current balance of $2,555.56 that includes last month’s interest.
So at the end of year two, you receive $56.79 in interest. It’s not an incredible difference, but it’s still more money for doing nothing. And the compounding continues over and over.
Ok, that’s not too shabby, but here’s where the excitement comes into play. If you leave that money alone and the interest rate never changes (though it will likely go much higher over the years), that $2,500 would be worth $4,834.06 in 30 years!
That’s the magic of compound interest! And, that’s with you not even putting another dime in the account. If you put in just $25 extra per month (money you’d never miss), your small $2,500 would be worth $17,565.29.!!!
Think about this. That’s only $2,500. If you can squeeze out a little more money than that, you’ll really be golden!
Time is the most valuable asset you have on your side right now. Compound interest needs time to make your money grow. Even if you can put a little bit aside and keep adding to it, you’ll set yourself up for success.
And this example is just with a simple savings account with a tiny interest rate. With money invested in the stock market, the average return over time has been 10%!* Without adding another dime, that $2,500 could be worth $43,623.51!!!
This isn’t guaranteed and neither example talks about the cost of inflation or taxes, but the point is that you’ll likely come out much further ahead than a savings account in the long-term.
You can never get back time to make your money grow. Putting money aside later is staggeringly less valuable than if you put that same amount aside today. The more you can put away now, the less you’ll need to save later – tremendously less!
That’s the biggest thing I wish I knew and understood when I was younger.
2) Keep your investments simple
When I started my career in IT, I enrolled in the 401(k) plan there. At the time, I knew you invested money that gets socked away for retirement. Other than that, I didn’t know anything about how it worked. And to be honest, I didn’t really care… retirement’s a long time away.
But I should have cared.
It’s not important to understand all the intricacies, but having a little bit of knowledge in the area can save you cash and, in turn, earn you buttloads more money. Yes, I used the word “buttloads.” Not only that, but I’m standing by my use of it in this post.
I picked a handful of funds to invest in at the time. Why did I pick those specific funds? Couldn’t tell you – maybe they sounded like they’d make a lot of money and the historical returns looked pretty good.
I learned over time, however, that I was over-complicating this. I was also paying way too much in hidden fees.
Instead, I wish I knew these simple guidelines when I was younger:
- Don’t try to time the market.
- Assuming you don’t want to take the time to understand companies in the stock market, don’t buy individual stocks.
- Watch your fees.
Here’s how I’d recommend investing in the stock market:
- Whenever you have some money, put it into your investment accounts. Don’t wait and don’t even look at how the market’s doing. You have plenty of time and these small ups and downs shouldn’t make any difference for you in the long run. Don’t even look at your statements – just keep putting money in.
- Unless you’re willing to put in the time to research dividend stocks and understand the market more, stick with low-cost total stock market index funds. Instead of putting your faith in one company you’re hoping will do well, buy the entire stock market. As of 3/31/19, VTSAX holds 3,615 companies in it. Some of these companies will fail and some will do great, but your investment performance will always be as good as the market does. Remember the note where I said the market returns about 10% on average over time – yeah, that’s a good return!
- If you follow point the bullet above, your fees will be next to nothing. However, if your retirement plan at work doesn’t offer low-cost index funds, you’ll have to choose something else. If you use a free tool like Empower (formerly Personal Capital), you can use their Retirement Fee Analyzer to sift out what these hidden fees are. Doing exactly that took me just minutes and saved me over $50,000 in fees alone over a ten-year period!
Want more on this subject? Read the Stock Series by Jim Collins. This is a fantastic set of blog posts that break everything down in terms that everyone can understand. Absolutely mind-blowing (at least it was for me!). He took a lot of this content and refined it into a book called The Simple Path to Wealth if that suits you better.
3) Know what you’re spending
Since I switched over to Empower (formerly Personal Capital) from Quicken to manage my finances, I learned something. It’s incredibly less pronounced to be able to see where my money’s going now.
That made me realize why budgeting has never been something we’ve ever done in the R2R household. I could easily see our expenses in Quicken and just know where our money was going – including subscriptions.
In fact, Quicken has a screen specifically for scheduled recurring payments. So at a glance, I’ve always known what’s coming and going. There were no automated payments slipping through the cracks and going unnoticed – it was all just there.
I didn’t realize at the time, but this is a huge deal. Folks who aren’t using something like Quicken to manage their money are probably not realizing all the money slipping between their fingers. I’m talking about subscriptions like Netflix, Amazon Prime, gym memberships barely (if ever) being used, or other unneeded services.
It’s harder to be able to take a step back and see this information in Empower (formerly Personal Capital). We’re in a position where we’re now on top of these sorts of things and don’t need this as much. But for a lot of folks, that makes it harder to see the little things crushing your bottom line.
I wasn’t aware of it when I was younger, but knowing what you’re spending is the key to being able to save properly. If you don’t see the details of where the money’s coming in and going out, how can you know what you’re doing right or wrong?
Not only that, but figuring out what you need to live on can tell you how much you need to have socked away. You might not be thinking about retirement, but you should still be striving for financial independence to secure your future.
Quicken is an awesome piece of software that can keep all your finances in one place. However, I know that not everyone wants to sit in front of a computer to manage their finances. So at the very least, sign up for Mint. It’s free and will let you connect all your accounts. Install the app on your phone and make it a routine to review your finances there once a week and eliminate the crap that’s affecting your savings.
4) Automate it and then have fun
I get it… who wants to think about investing and retirement when they’re not even 20? But here’s the thing that I didn’t realize until later – once you have everything automated, it’s easy. In fact, money becomes something boring and in the background of your life, which is exactly what you want!
If you have a 401(k) or similar account at work, take advantage of it and have them pull out a decent percentage of your income. That’s an easy start to automation and if there’s an employer match, you damn well better be getting every penny they’ll give you for that!
Set up your online savings account I mentioned earlier to pull some money out of your checking account a couple of days after each payday.
Open a Roth IRA at a brokerage like Vanguard, Fidelity, or Schwab. Have that account automatically draw money out of your checking after each payday as well. Have it continually buy shares of a low-cost index fund like VTSAX (or a similar fund if not at Vanguard) and make sure the dividends are reinvested.
That’s it. Start small, but make it hurt a little.
When I left my job, we were at a 60% personal savings rate, but it took me too long to build up to that. If I had done that a decade ago, we would have been financially independent much sooner. I’d highly recommend that you have at least a 20% savings rate, but hopefully much higher than that.
Now, whatever’s left, pay the bills and then have fun! Enjoy today! Take vacations if that makes you happy, spend time outdoors, or whatever you love to do. Just make sure you’re not going into debt at all. Spend only what you have leftover from every paycheck after you’ve paid yourself first.
Then, you only have one task. Every year, up your contributions to each account a little. And if you’re finding you still have some extra breathing room, it’s time to start looking at other accounts to sock money away. This might be an HSA, traditional IRA, or a taxable brokerage account at the same company holding your Roth IRA.
Boy, I wish I knew this when I was younger. Automating everything is the key to saving for your financial future without even thinking about it. And then you’re free to spend the rest!!
5) Take smart risks
Take smart risks. You’re young and don’t have any dependents. That means you can afford to take on risk more easily than someone with kids. You also don’t have a spouse yet. And with that, the choices, risks, and the rewards are all yours.
Find something you have an interest in and chase that down. Maybe you enjoy what you do and think you could do a better job than your boss. Start your own business.
Maybe buying rental properties is the move to make for you. I look at people like Scott Trench or Drew from Guy on FIRE who are building their own little empires of real estate in their 20’s and I’m in awe. That’s amazing to me – I wish I was smart enough to just buy property after property when I was their age.
Try different endeavors and take some risks – just be smart about it. Don’t just wing it. Read and understand how things work first. Talk to people to understand as much as you can and then jump in – that’s where you’ll get experience and know if it’s right for you.
And if you fail? Who cares?! You’re young enough to bounce back and try something new. Most successful entrepreneurs failed time and time again before they became successful.
6) Marry smart
Ugh, this is a hard one to even say and I’m sure I’ll get some nasty comments on it. Yes, it’s almost impossible to fight true love, but a spouse who’s on the same page as you can financially make or break you.
If you’ve got your eye on a successful financial future and you’re married to someone who loves shopping and spending, you’re in trouble.
When I say I have this on my “I wish I knew this earlier” list, it’s not because I married wrong. In fact, Mrs, R2R and I are pretty simpatico when it comes to spending and saving.
But rather, I’m saying that I got lucky in finding her. I wasn’t thinking about looking for someone who comprehended the important role of money when I was younger. That could have been disastrous if Mrs. R2R or I were big spenders with totally contradictory thoughts about money.
We’ve all seen couples fail and different money habits and financial goals tend to be a root cause in many of these scenarios.
This obviously shouldn’t be the only trait you’re looking for in a partner, but having the same positive financial mindset can set you worlds ahead.
7) Wait to have kids
This is probably a controversial point, but I personally think waiting to have kids can be a smart strategy. That’s not always true and there are obviously plenty of parents who are younger when they have children and everything’s hunky dory.
However, I tend to think that it might be easier to roll with everything if you have kids when you’re a little older. Sure, when you’re young, it’s easier to keep up with the rugrats.
But when you wait, you’re now a little more settled in on your life. And you’ll likely have a financial foundation in place by that time.
And, it’s much easier to take those risks I was talking about when your kids’ dinner isn’t on the line if you make it or break it.
8) Hang with people who are better than you
Yeah, yeah – your mom probably told you that no one is better than you. But guess what – she’s wrong (and probably a little biased!).
We all have things we excel at and things that, well… we suck at.
Your job is to find people who are better than you in the areas that matter and make those people a part of your life.
First, as the saying goes, “You’re the average of the five people you spend most of your time with.” Don’t waste your time with burnouts or dummies. You want that average to bring you up and not the other way around.
People who are better than you at things can inadvertently help you to become better at those skills as well. Find those people who can help you grow and you’ll find that the opportunities around you tend to grow as well.
Second, people who are smarter than you in certain areas help you to make improved decisions. Most successful people realize that they aren’t experts at everything and build a team of people who are experts to help them make the right choices.
Find a mentor. And since this is a financial blog, let’s take it a step further and say to find a financial mentor. This is definitely one point I wish I knew when I was younger. A financial mentor can not only help you explore different money paths, but they can also keep you motivated to be successful.
So there you have it. These are topics that I wish were bestowed upon me when I was younger. I tried to stay away from glaring points like “stay out of debt”, but please stay out of debt!
Hopefully, these tips will be something my nephew and other readers can appreciate as well.
Are there things you think “I wish I knew that when I was younger” that could help our youth get ahead further financially?
Thanks for reading!!
* If you take inflation into account, the return is closer to 7 or 8%, but you’ll have that with any investment. Stupid inflation eroding your savings!