Graduation season is wrapping up. During this time of year, many parents in that stage of life feel a sense of pride, exhilaration and anxiety all wrapped up into one package. I am lucky enough to have four kids, but I won’t experience those feeling for another decade or so. Our two boys and two girls range in age from two through nine. Recently, I asked myself this question: “Fast forward ten years, what financial advice would I give to my kids (assuming they wanted to hear it) as they begin to leave the safety of the nest?” These are the first ten pieces of advice that came to mind:
- Spend less than you take in. Most call this a budget, telling your money where to go, etc. I don’t really like the B-word because it has a negative connotation of limiting our financial freedom. Admittedly, I am not good at sticking to a detailed budget. Never have been. It’s not for lack of effort as I’ve tried multiple times. I’ve read Dave Ramsay’s books, listened to his radio program and even attended a live event of his many moons ago. I prefer to have the first two line-items in my expenditures every month go to my church and my savings account. Then I know I simply have to live on the rest. Ultimately, find what works best for you; as long as you are spending less than you take in. Give yourself some grace though, as you likely won’t get it right the first few go-arounds.
- Mitigate lifestyle creep. This ties in with the first point and is incredibly difficult in practice. Delayed gratification goes against every natural human tendency, but for those who can master it, the rewards are immense.
- It’s not always a spending issue. Sometimes it’s an income problem. The income side of the equation can be boiled down to one word: rare. People, both customers and employers, will pay a premium for something that is uncommon. Find that “something” in your life and you will most likely increase your income. Here are some things that fall into the category of rare:
- Strong work ethic. At minimum, this will help you keep your job. In all likelihood, this will make you stand out among your colleagues over time.
- Willingness to take risk. Business owners tend to do very well financially as compensation for the amount of both up front and ongoing risk that they take. Employ vs employed.
- Education. There is a reason doctors get paid extremely well (not to mention this field has a wide moat around it against the DIY trend). Very few people have the discipline to handle another seven to ten years of post-undergraduate education. Of course, an internship, certification or graduate degree will also apply here.
- Sales. People don’t like to hear “no”, let alone hear that word 20 times a day. Those who can handle it, move on and say, “who’s next” have an increased probability of earning six-figures.
- Build up a liquid cash cushion. Most guru’s will say anywhere from 3-12 months of expenses. The biggest reason for the wide range is that it depends on your personal circumstances. The more volatile your employment situation, the more you will need in savings.
- 401k match. It’s free money. If you don’t contribute at least up to the match, you are throwing away a guaranteed 100% 1st year return on your money (or whatever the match happens to be).
- Start investing in your early 20s. 60-year-old self will thank you. Returns on your money early on are not nearly as important as getting the snowball rolling for later use. Compound interest will blow your mind, but not in the first ten or twenty years.
- Allocation. I am a big believer in equities over the long term. Assuming my kids start investing in their 20’s, they may have several decades to put their money to work. In addition to that, when you first start investing by dollar cost averaging into the market, equities make even more sense. The single best-case scenario could be that the market absolutely tanks for a few years, allowing them to start accumulating shares at a discount. There is no need to get too complex out of the gate either. I would simply encourage them to avoid home country bias and invest a portion of their funds into international equities.
- Avoid carrying an ongoing credit card balance like the plague. By paying off your credit card balance, you are saving the 15-20% annual interest rate you would otherwise be paying to the card company. I don’t know of anything else in finance paying 15-20% annual return.
- Go into marriage eyes wide open about the financial behaviors and situation of your potential spouse. When in doubt, look to their parents as a leading indicator – after all, your spouse has had two (or more) decades of exposure to their financial habits. Every other piece of financial advice hinges on this. You don’t have to be on the same financial page as your spouse, but you certainly must be reading from the same book.
- Be grateful. Understand where your financial resources have come from. Be a steward of those resources and do not hold onto them too tightly. Money should be a tool. Master it; never let it master you.
One of the benefits of writing thoughts like this down is that I can revisit them in another 10 years and see how they might have changed over time. Who am I kidding anyway? When my kids are ready to spread their own wings, they’ll be too smart to listen to their parents anymore.