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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.
Use an automatic payroll deduction or transfer from checking account to start an emergency fund and retirement investments. Ideally, you’d save 3-6 months living expenses for an emergency fund, but it’s okay to start by saving $20 a week. Investing 15% (or more) of every paycheck for retirement is ideal, but if you can’t manage that much, start with 5% and increase a percent a year.
Pay off your credit card weekly the first year, before you run up more debt than you can afford to pay in full when your bill is due. Learn to cook a few simple meals that reheat well, then take your lunch to work at least four days a week; a hearty soup with beans or lentils is nutritious and easy.
Wait until you have a month’s expenses in your emergency fund before you acquire a dog. Try volunteering at the animal shelter or joining a dog-walking or dog-sitting service. You’ll save on food, pet rent, and vet fees, while you’re establishing a financial safety net.
If married do not get divorced, THE worst financial move, unless your only alternative is jumping off a skyscraper.
I think this is my top 10 12:
Max out your IRA, or 401K, most “stuff” you buy you won’t like or need in a few years, invest in yourself, take your health seriously.
One of my favorite pieces of advice is to save first, and save automatically. Automate as much as possible, so savings and expenses, are taken care. You may have a meager take home paycheck, but you will learn to live on it, and feel really good watching your savings grow.
Second your suggestion for automation. When you don’t have to think of it regularly the savings can be essentially painless, and hopefully when one does look, for example with an annual “tune up”, they find that this pot of money has grown.
Max out your Roth IRA and invest as much as you can in your Roth 401k.
Read the book “The Intelligent Investor” by Benjamin Graham – twice!
When looking for proven voices of reason on how to think about investing it is the “Bedrock” of value investing and explains about what risks you should consider and how to think about the market.
Do not get a single credit card till you’re certain you can and will pay the full statement balance every month. Running a balance on credit cards, with their exorbitant interest rates, can quickly spell financial ruin as you dig yourself deeper and deeper into the hole.
And when you do get a card, get one with the best rewards. There is great satisfaction in having the credit card bandits pay you every month!
There’s plenty of good advice to offer, like save diligently, diversify broadly, fund your employer’s 401(k) and so on. But I’d probably start with two key phrases: “Keep it simple” and “keep your confidence in check.” It’s all too easy to assume we know where markets are headed, which investments will outperform, what we want from our financial life and what the future holds for us. These assumptions will almost certainly fail the test of time. Faced with that, our best bet is to buy a few simple low-cost investments (think target-date funds, total market index funds, money market funds) and save like crazy.