I have three twenty-something daughters – all college graduates in the past few years. The choices they make now can greatly change their future prosperity. Both their friends, and my daughters, periodically ask for my guidance to help with their early financial decisions. So, here is my advice:
- Debt is your greatest enemy! Taking on debt to buy a house or car is necessary, providing you with a home and transportation. However, avoid bad debt (credit cards). Their allure is tempting — enjoy now and pay later. Credit card companies encourage you to take your time and make only the minimum payments, because it is in their best interest, not yours. For example, if you owe $2,000, and the interest rate for the remaining balance on the credit card is 18.9%, the minimum monthly payment would be $80. Traveling this road, it will take you, at least, 8 years and 5 months to pay off the $2,000 originally charged to the credit card. And, as an added bonus, you will owe the credit card company the interest accumulated, while repaying the $2000 … totaling $1,160. If you do have credit card balances, pay them off as quickly as possible. Stick to my rules: live beneath your means, question every purchase (is it a need or a want?), and, if you cannot afford it, do not buy it!
- Save, save, save. The power of compounding, patience and sound investment strategy, is the best way to accumulate wealth and reach the financial prosperity and independence I wish for you! If you save $50 every week, (the price of dinner and a movie), and invest it in a well-diversified portfolio that earns an average of 8%, for example, in 20 years you will have over $109,000, and in 30 years, over $270,000. You will only have contributed $48,000 and $72,000 respectively.
- You should have four savings buckets. The first is a savings account for emergencies (Mom is not an emergency fund). You should have approximately 6-12 months of living expenses in savings. Your second bucket is for a future goal, such as a new car, a special trip, or a wedding. Your third savings bucket should be your retirement account (i.e. 401(k), 403(b), etc.), usually available through your employer. Many times, your employer will match some of what you contribute … which, when spelled out clearly, is free money. Make sure to take advantage of this. In addition, your fourth bucket is for wealth accumulation and should be invested for the long-term. The fourth bucket could be an IRA, Roth IRA, or an after-tax brokerage account.
I get that it’s hard to know how to invest your money, where to start, and what to buy. I suggest seeking the counsel of several people you know and trust, to guide you in your retirement account, and wealth accumulation buckets. Look for a mutual fund or exchange traded fund (ETF), offering a low cost bundle of securities. The world will continue to grow and you want to own pieces of it all. Your stock investments should include large, medium, and small companies. These companies should be both U.S. companies and foreign companies. Do not forget the emerging economies (Brazil, China, etc.); they will likely be developed economies when you are as old as I am.
Finally, do not travel through life willy-nilly. Set goals, make a plan, and be prepared for change when life throws you a curve ball. Life won’t always be thrown straight through the strike zone. Curve balls happen, and usually when you least expect it.
You shouldn’t plan a trip without a roadmap (GPS), so make sure you have a roadmap for life. Revisit your financial roadmap at least once per year; celebrate the places you have traveled (literally and figuratively), and all of your accomplishments. And, at the same time, continue to plan for the places you still have to go.
All comments and suggestions are welcome.
Suzanne M. Antonelli, CFP®