Starting Young

How to start off on the right foot

It’s an example that should challenge every talented and brilliant person: You owe it to yourself and to the world to actively engage with the brief moment you have on this planet. You cannot retreat exclusively into ideas. You must contribute. - Rusticus 

This note is applicable to those that are in their late teens to early twenties and for those with loved ones in that age range. Avoid making some of the most common mistakes early in life to ensure financial freedom later in life.

1. Higher Education

One should not feel compelled to pursue higher education. Until relatively recently only 13% of all high school graduates pursued higher education in the form of a four year degree. Don’t go to college just because you feel like you need to to get ahead or to learn valuable skills. There are myriad options available today - trade schools, community colleges, apprenticeships, and entry level work designed to help you progress within the company. Before you commit to an expensive educational path, find out if your desired career field requires it.

2. Not building credit

Everyone should have established credit by their early 20’s. Sign up for a secured card if you haven’t started yet. Credit is key to getting any loan you’ll need. Pay on time, increase your borrowing limit every six months, and keep your balance below 30% of your borrowing limit, and don’t apply for loans too often.

Your credit score is based on how good you are at paying off debt. If you don’t have any debt, don’t have many forms of debt, or don’t have a long history with having debt, the bank doesn’t know if it should give you a loan (or credit card). Someone who makes minimum wage and has two personal loans, five credit cards, a mortgage, and a car loan that they pay in full, and on time, is going to have MUCH better credit than someone who makes $100,000 but has only had one credit card with a $500 limit.

3. Going into debt

After you get some credit cards, stay on top of them. It’s easy to buy things you can’t afford and be stuck with a big bill at the end of the month. Set up automatic payments and don’t miss a payment. Keep $1,000 in savings for emergencies, but use the rest to pay off any debt with an APR of 8%+. If you have a mix of savings and debt, you should aim to pay off as much of your high-interest debt as possible. The interest rate on your debt is almost certainly higher than the interest rate on your savings account, so you should use most of your savings to pay off debt.

4. Not tracking your money

Learn your spending habits and know where your money is going. You may be spending more than you think. Those little expenses add up.

Use the 3Rs: Revise yearly, Review monthly, and use Rules (of thumb) daily.

It’s tough to strike the right balance between making sure that you are using your money wisely and enjoying your money at the same time. There is no right answer to how often you should think about your money, but we suggest employing the 3Rs: Revise Yearly, Review Monthly, and use Rules (of Thumb) daily.

Revise: Once a year, revise your budget and general financial strategies.

• To do this, sit down once a year and map out your financial situation. Figure out how much you’re spending and how much you can save. Once you have the numbers sorted out, automate as much of the process as possible. Turn on autopay for your credit cards, bills, and savings accounts. That should keep you largely on track month to month. You are free to spend anything you have left over on the things you like.

Review: Once a month, review your accounts to make sure that there are no problems.

• Example: Use a budgeting app like Mint or Clarity and just check in once a month to make sure all your accounts are current and your bills are paid.

Rules: Pick one rule to reduce expenses that you will follow every day.

• Examples: “I won’t spend more than $10 on lunch,” or “Only take an Uber if it is going to save me half the time it would take to walk; if that’s not the case, just bike, walk, or take public transit.”

5. Buying a new car

A brand new car is a waste of money. You don’t need the newest model to get you from point A to B. Buy a reliable well maintained 3-4-year-old car and save yourself thousands of dollars.

Keeping your car a long time is a smart financial decision

My car is 10 years old this year, and I bought it brand new in 2007 with a modest loan. I rushed to pay down the debt, the first loan I ever had, and made the final payment about two and a half years later. In the nearly decade since, I have never made a car payment. When I met my wife, she was in a similar situation and owned her car outright.

That got me thinking about what other people typically do with their cars. We have paid exactly zero dollars in car payments for so long, it is easy to forget that many people rush to get the latest model with the flashiest features. But those buyers pay a lot of money for the latest and greatest. The average monthly car payment on a new car is $504 per month for a new loan and $412 per month for a new lease, according to data from Experian.

What a new car every three years costs

If you want to get into a new vehicle every three years, you are most likely better off leasing over buying. But that means you will always have a payment. As long as you lease and don’t own your car, truck, or SUV, you have to pay every month, just like if you were renting an apartment or other home.

With the average cost of a new lease coming in at $412, that is $4,944 per year in car payments. At nearly $5,000 per year, that is more than a couple of trips to Europe, almost enough to max your Roth IRA, or start a business. Me, personally, I prefer to put my spare cash in a combination of savings and retirement investments.

If you work 40 years and lease a vehicle for your entire career, that is $197,760 in car payments! But that doesn’t take into account interest you would have earned if you invested that $412 per month. If you factor that in, assuming 7 percent interest and monthly compounding, new cars cost you $1,081,423 over your career. That is not a typo. If you know someone who always has a new car, they are throwing away over $1 million to do so.

Keeping your car for 10 years saves big

I drive a reliable car. I’ve never had to do more than standard maintenance and have very low insurance rates as a married father with no moving violations for nearly as long as I’ve owned the car. I always treat my car well and want it to last a long time.

I could easily see myself driving this car at least five more years, but let’s just say that 10 years is my limit. In that case, car ownership is still a lot cheaper than leasing and upgrading every few years.

At the start of 2017, a new car cost $34,968, according to averages from Kelley Blue Book. If you are able to buy your car outright with no loan, that is an instant $14,472 savings compared to leasing a new car every year, or an average of $1,447 per year. It might not seem like much, but factoring in interest and the time value of money, we know that you ultimately save a lot more than $1,447 per year, not that nearly $1,500 is anything to sneeze at.

Forget about the Joneses

Everyone wants to drive a sexy, flashy car or have the best new features, but is that really worth the cost?

In high school, I was at a sports fundraiser and we went around the room and said an interesting fact about ourselves. I’ll never forget the older gentleman, in his 70s, who shared that he still drove the first car he ever bought. I didn’t realize it then, but he was sharing a smart financial lesson.

6. Not shopping around or comparing quotes

Don’t settle for the first price you get. You can save a lot of money by shopping around for the best deals on cars, cable, insurance, etc.

Not all retailers, insurers, and banks are alike. There are myriad options available if you are willing to do a bit of research to find the best offerings. Platforms such as Nerdwallet, Consumer Reports, and Mint are great resources to use while conducting your research.

7. Not networking

“It’s not about what you know, it’s about who know” Having a strong professional network is extremely powerful. When you’re just starting out in your career, it helps to know people.

Make yourself available.

It’s much easier to say “yes” to a personal ask than it is to show up at a random event. Speaking works the same way. If you volunteer to talk at a conference, people already know what you’re thinking about. They’re able to approach you if they have similar interests.

Set a goal: Have one good conversation.

If I find myself at an event, I set a goal. I view any experience as being worthwhile if I have one good conversation. I don’t need to meet everyone in the room. I don’t need to stay the entire time. I don’t have to exchange contact information. I just need to have one good conversation, and then I’m done.

For me, this goal works because I find the conversation rewarding. Some people like to use “talk to three people,” but that leaves me tired and unfulfilled. It also gives me permission to leave conversations that aren’t working and move on.

Sometimes even that goal is too daunting, so I’ll do some research of attendees in advance to find someone I really want to talk to. Then, I’ll email them and ask if we can meet at the start of the event. I look forward to it more because I know where I’ll be starting. Similarly, I’ll invite someone that I want to get to know better to an event I think we’d both enjoy.

8. Neglecting your retirement

Retirement seems far off when you are young, so it’s easy to put off. However, not saving is one of the biggest mistakes you can make. When you are young both time and compound interest are on your side. Take advantage of it.

For most people, retirement saving is something that you “learn on the job” — often without a lot of guidance or help. Whether you are someone who seeks professional advice or likes to research and make decisions on your own — below are a few common retirement saving misconceptions that I wish someone had told me about when I started investing.

“I can start saving after I pay off my debts and get a house.”

I get it — if you’re starting out, you make less money and probably are more focused on immediate stuff like repaying your student loans and credit card debt. But you are likely better off in the long run if you start investing as soon as you begin working. For one, you may be eligible for “free money” in the form of an employer match. And most importantly, the sooner you invest, the more time your money has to grow.

“My employer set the savings rate, so it must be right.”

Many employers set what’s called a default savings rate — that’s the percentage of your salary you save toward retirement, typically between 3 and 6%. You should think of this as a starting point rather than a guideline. Generally speaking, your default savings rate will have no relationship to the amount you should be saving in order to meet your financial goals.

“The market tanked — I’m selling my stock funds!”

It’s human nature to react to financial losses more strongly than we do to slow, steady gains — which unfortunately leads some people to “buy high and sell low” rather than the other way around. The problem with trying to time the market is that you have to correctly time it twice — first, when you sell (to avoid the loss) and second, when you buy back in (to benefit from the gains). It’s extremely difficult to predict these movements in the market, and missing just a few of the top-performing days can really hurt your long-term savings goals. Even during periods of volatility, most of us are better off staying the course.

“Diversification? I guess I’ll take one of each.”

While it’s true that your retirement plan may offer several distinct investment choices, you won’t likely achieve the right level of risk and diversification by simply dividing your money across all of them. Instead, see whether your plan offers a professionally managed solution, like a target date fund. A well-managed target date fund can offer two benefits — one, they are automatically diversified across several asset classes, and two, you can invest in one that correlates to your planned retirement date — so it automatically becomes more conservative the closer you get to retirement.

“I focus on funds that are performing the best.”

It’s difficult to ignore past performance when you’re evaluating where to invest next. Yet there’s a reason why most fund advertisements include the language, “Past performance is no guarantee of future results.” In fact, past performance is frequently unrelated to future results, which is why most financial professionals recommend diversified portfolios over chasing yesterday’s returns.

9. Failing to plan

Have a plan monthly, yearly, and long term. A good financial plan helps you maximize your income and keeps you on top of your money. Know your numbers.

Use tactics like automation, reminders, and accountability.

Leverage a phenomenon known to behavioral scientists as mental accounting. Mental accounting is the tendency for humans to want to put objects in groups and then keep them there. One can use this mental quirk to help stick to a budget.

Once your budget is made, automate your bills, savings, and rent. For everything else, use cash. When you get paid, take out the cash you will need to stick to this week’s budget. Then, label an envelope for each of your budget categories (coffee, lunch, gas, etc.) and put in the right amount of cash for each category. This method is helpful for three reasons. You can now use a debit card or prepaid debit card to do the same practice as it won’t allow you to overdraw.

1. Cash provides a much more salient cue of when and how much money you’re spending than a credit or debit card.

2. It’s much easier to keep track of how much you have spent.

3. It makes trade-offs very salient. Dipping into the family grocery budget just to buy yourself a coffee feels wrong.

To add another level of accountability, recruit a trusted friend or significant other to act as the banker.

10. Not taking risks

While you are young is the best time to take advantage of any opportunities that come to you. See where those opportunities take you. You have little to lose. These are the years to grow, learn, and create yourself. Work on building good habits and never stop learning. You’ll thank yourself when you are older for doing so.

A life without risk is pretty boring. As with a financial investment, low risk yields low rewards, and I’d like to think that most people want to live a rewarding life. The problem with risks is that they’re, well, risks. A risk is a gamble that might not work out as well as you had hoped when you first went into it. Risk-taking is glorified in many social circles, particularly in the tech industry and among Millennials. I think that being positive towards risk, or at least open-minded towards it, is generally a good thing. However, overexposure to the glamorization of risk can create blindness to its downsides.

Don’t take on a risk if you aren’t prepared to deal with the most negative potential outcome. If you want to pursue something entrepreneurial but stand to financially ruin yourself and your family, perhaps it isn’t the best route to take. If you’re in a situation where the worst likely outcome is having to spend a few months on your parents’ couch because you ran out of money, then the risk is a lot more reasonable.