In addition to the good advice already offered, I would encourage young people to understand the impact of inflation and compound growth on their ability to build future wealth.
Understand the difference between nominal and real returns and why stocks offer one of the best ways to beat inflation over time. And the corollary: why safe investments earning negative real returns can be risky.
Understand how compound growth builds wealth and why you need a long-term perspective to allow compounding to work for you.
Finally, try to internalize the notion of “long-term” and accept that there is no “get rich quick” in investing.
1) Upon completing education, swallow your pride and live at home (if doing so is an option) with family for at least 6 months. Bankroll your new paychecks – about 4-6 months of net income should be saved minimum before getting your own apartment. This gives you breathing room for the unforeseen events that life can present suddenly..
2) Buy an older but reliable “beater car” from either your folks or a private seller after graduation, (but don’t purchase collision coverage on your car insurance if the Kelly Blue Book value is less than 4K-5K). As an under 25 driver, you’ll be paying much higher collision premiums than older drivers, and if you have saved up 4-6 months of net income by living at home, you could likely buy yourself another beater car with saved cash if the car is totaled in an accident, (i.e. assuming that the crash was your fault). Buying a new car with borrowed money after graduation requires a good sized cash deposit, includes paying loan interest for the next 4-6 years and requires a borrower to maintain collision coverage on their insurance. All this money spent is protecting a depreciating asset. Buying new cars when young is a loser’s game – don’t get sucked into it.
3) Fund a Roth IRA – Start at 50 or 100 / month, if you must – but establish the behavior right away and increase the monthly contribution amount with each raise you get at work.
4) Participate in your employer’s 401(k) plan, at least up to whatever amount the employer is willing to match dollar for dollar. This employer match is like getting a 100% return on your investment…all before the money even gets invested into the stock market. Added bonus: you reduce the amount of your income subject to federal income tax every year by your contribution amount.
5) If you are healthy (most generally are, when young), choose an employer health insurance plan with a higher deductible (1400/yr. or higher deductible minimum), then open up a Health Savings Account (HSA) so you can squirrel away even more tax deductible dollars for future healthcare-related medical expenses. Open your HSA with a company that offers an option to invest your contributions in low cost indexed mutual funds (such as Vanguard). Keep all your eligible healthcare expense receipts (scan and stockpile them, ideally saved by calendar year). Leave your HSA funds invested in the marketplace for a long time. If you can afford it, pay for any prescriptions, doctors office co-pays, deductibles etc. out of your cash reserve fund – not from the invested HSA account money. There is (currently) no established maximum timeline in our tax code for how long you are permitted to wait before requesting HSA reimbursements for eligible health care expenses. You’ll want to get the full benefit of tax deferred growth over a long period of time on the invested HSA money before you start withdrawals, perhaps even waiting until after you retire to reimburse yourself for medical expenses you paid for years earlier with cash.
Rule 1. Spend less than you earn. Rule 2. Pay off your credit card balance in full every month. If you don’t pay off your full credit card balance every month, you violate Rule 1. Rule 3. Open bank savings account and add to it every month until you have $5000 in cash savings. You face life differently when you have at least $5000 in your savings account.
In addition to the good advice already offered, I would encourage young people to understand the impact of inflation and compound growth on their ability to build future wealth.
Understand the difference between nominal and real returns and why stocks offer one of the best ways to beat inflation over time. And the corollary: why safe investments earning negative real returns can be risky.
Understand how compound growth builds wealth and why you need a long-term perspective to allow compounding to work for you.
Finally, try to internalize the notion of “long-term” and accept that there is no “get rich quick” in investing.
Contribute to a lifecycle fund, 8 or 10 percent every time you get paid. By the time your in your late 50’s there will be a significant amount.
1) Upon completing education, swallow your pride and live at home (if doing so is an option) with family for at least 6 months. Bankroll your new paychecks – about 4-6 months of net income should be saved minimum before getting your own apartment. This gives you breathing room for the unforeseen events that life can present suddenly..
2) Buy an older but reliable “beater car” from either your folks or a private seller after graduation, (but don’t purchase collision coverage on your car insurance if the Kelly Blue Book value is less than 4K-5K). As an under 25 driver, you’ll be paying much higher collision premiums than older drivers, and if you have saved up 4-6 months of net income by living at home, you could likely buy yourself another beater car with saved cash if the car is totaled in an accident, (i.e. assuming that the crash was your fault). Buying a new car with borrowed money after graduation requires a good sized cash deposit, includes paying loan interest for the next 4-6 years and requires a borrower to maintain collision coverage on their insurance. All this money spent is protecting a depreciating asset. Buying new cars when young is a loser’s game – don’t get sucked into it.
3) Fund a Roth IRA – Start at 50 or 100 / month, if you must – but establish the behavior right away and increase the monthly contribution amount with each raise you get at work.
4) Participate in your employer’s 401(k) plan, at least up to whatever amount the employer is willing to match dollar for dollar. This employer match is like getting a 100% return on your investment…all before the money even gets invested into the stock market. Added bonus: you reduce the amount of your income subject to federal income tax every year by your contribution amount.
5) If you are healthy (most generally are, when young), choose an employer health insurance plan with a higher deductible (1400/yr. or higher deductible minimum), then open up a Health Savings Account (HSA) so you can squirrel away even more tax deductible dollars for future healthcare-related medical expenses. Open your HSA with a company that offers an option to invest your contributions in low cost indexed mutual funds (such as Vanguard). Keep all your eligible healthcare expense receipts (scan and stockpile them, ideally saved by calendar year). Leave your HSA funds invested in the marketplace for a long time. If you can afford it, pay for any prescriptions, doctors office co-pays, deductibles etc. out of your cash reserve fund – not from the invested HSA account money. There is (currently) no established maximum timeline in our tax code for how long you are permitted to wait before requesting HSA reimbursements for eligible health care expenses. You’ll want to get the full benefit of tax deferred growth over a long period of time on the invested HSA money before you start withdrawals, perhaps even waiting until after you retire to reimburse yourself for medical expenses you paid for years earlier with cash.
Rule 1. Spend less than you earn.
Rule 2. Pay off your credit card balance in full every month. If you don’t pay off your full credit card balance every month, you violate Rule 1.
Rule 3. Open bank savings account and add to it every month until you have $5000 in cash savings. You face life differently when you have at least $5000 in your savings account.