Continuing on from my first post on
things I wish I knew when I started working are things I wish I knew in my 20's.
At this point I was getting a steady paycheck and was in the military. Some topics I really had no clue about include:
1. The key to saving is living on less than you make.
To anyone that practices any sort of frugality you know this one already but I think it is lost on the majority of people in their 20's. Now to be fair I had several bosses that told me to live on my previous salary and save the difference. I mostly heeded this advice but banked the cash only to piss it away on other things later. Plus I was mostly brought up to equate stuff with caring/love. So buy all the things!
To be fair its suuuuuuuper difficult at that time in your life not to blow all your money on stuff. Going out with friends, traveling, eating out, you can finally afford a nice-ish car, etc. Happy to hear advice on how you bypass this stage to pass on to the little ones.
Either way, its true, the key to saving is living on less than you make.
http://www.successwithmoney.com/live-on-less-than-you-make/
http://www.thesimpledollar.com/rule-1-spend-less-than-you-earn/
http://www.mrmoneymustache.com/2012/06/01/raising-a-family-on-under-2000-per-year/
The part that's missing in that advice is to properly do something with that extra money. I touched on this in the previous post about wishing I knew something...anything...about retirement accounts but understanding the power of compounding is also key. After a brief stint with
FirstCommand where I was sold high load funds and life insurance I didn't need I eventually did end up with a Roth IRA in an S&P fund. Unfortunately I put the financial education journey on pause there and really didn't pick it back up for 10+ years.
2. Avoid credit card debt at all costs.
This should be obvious but sometimes it is not. In college everyone is throwing credit cards at you. You need to strike a serious balance between building credit and buying crap you don't need or have money for on credit. It took me many many YEARS to finally get out of credit card debt.
Credit Cards are a tool that can be used to build credit and earn reward but they must be used appropriately and not as a way to buy things you don't have money for.
3. Establishing a budget
What the heck is a budget?! The key to #1 and avoiding #2 is the budget. AKA why I can't have any fun :-)
To be serious though, I never could understand why I made OK money in my 20's (and now good money) but never had any. It wasn't until I started tracking where it all went that I had my answers. T
he One-Page Financial Plan by Carl Richards is an ok place to start. Its very simple, lay it out there and track the money just to see where it goes. Then go looking for things to cut out. When I decided to try to meet with financial planners many of them asked if I had a budget and the better ones would only see me after I had it to bring in with me :-)
If you want some more ammo
Dave Ramsey's books are ok as well. Plus there are tons and tons of resources on this now on the interwebs.
I do this religiously now with
YNAB. The manual part is what works for me but its ok to try a few tools to see what sticks and fills the need.
4. Understand Roth vs Traditional IRAs.
TLDR;
**Do the Roth until you make too much**
Reference:
http://www.investopedia.com/articles/retirement/03/012203.asp
Where to put the money?
- No idea: Target Date Funds via low fee mutal funds or ETFs
- Some idea: Proper mix of domestic, foreign stocks and bonds via low fee ETFs
- Lots of ideas: ETFs and dividend growth stocks (see below)
Also understand lower the management fees the better:
5. If employers do any sort of matching, make sure you contribute enough to get that match no matter what.
You want that free money to accumulate as much as you can for as long as you can.
Relevant blog posts:
http://blog.mint.com/saving/goodbye-college-hello-future-why-retirement-savings-matters-in-your-20s-051215
http://www.bankrate.com/finance/retirement/5-retirement-savings-ideas-for-young-people-1.aspx
http://www.kiplinger.com/article/saving/T063-C006-S001-10-financial-commandments-for-your-20s.html
https://www.millersmoney.com/money-weekly/free-money-for-your-401k
6. Understand dividend growth investing or at least the buy and hold mentality.
-Learn
basic stock analysis
