In a few short months a massive group of students will graduate and enter the workforce for the first time. Unlike years past, this is actually a good time to be entering the job market. Unemployment has dropped to historically low levels…to the point we are close to what is considered full employment. This means companies expanding their operations will be competing for workers. If you have a child or grandchild who will soon be starting their career, do them a favor and share these 5 Golden Rules of Money. I certainly wish I had learned them early in my career. It would have saved me a lot of angst and helped me avoid a number of money mistakes.
- Save (a minimum) of 10% from each paycheck. If you’re a twenty-something and do this one thing, I can just about guarantee you you’ll arrive at retirement with enough money to be very comfortable. If you want to be more than comfortable, increase your investment percentage. For example, if your beginning annual earnings was $40,000 and you invested 20% from each paycheck, by age 65, you’d have more than $1 million.
TIP: The key here is to raise the dollar amount of your investments as your pay increases…in other words, focus on the percentage versus the actual dollar amount.
- Spend less than your paycheck. In a world of easy credit and “I want it now!’ mentality, it’s so easy to get upside down on your finances. Learn the difference between bad versus good debt and avoid the former with a vengeance.
TIP: Bad debt is any debt used to purchase something that is declining in value and could not be sold to fully pay off the debt. Examples would include just about any credit card debt, debt for a car, debt for appliances or merchant store revolving debt. The best example of good debt would be a mortgage to purchase a home. A couple of examples that fall a bit in the middle are (reasonable) student loans…an investment in you, and perhaps loans related to owning/running a business.
TIP: Initially, you may have no choice but to borrow to buy a car. Buy used; pay it off as fast as you can; and continue to save so that, going forward, you can pay cash for all future cars.
- Invest (primarily) in stocks for the long haul. Historically, stocks outperform bonds (and CDs, money markets) by about double over the long term. Assuming you have ten to fifteen years or more until you plan to retire, investing in stocks is your best bet. This doesn’t have to be complicated or expensive. One good, simple and inexpensive choice is Charles Schwab and Company’s S&P 500 Index fund. It’s a broad basket of 500 of the largest companies in America. Expenses are extremely low and there is no minimum initial or ongoing investment required.
- Prioritize your investments. If your company has a retirement plan and ‘matches’ a portion of your contributions, this should be your first priority because that matching contribution is like free money. Next, consider investing in an IRA. If you expect your income tax bracket to be relatively low (under 22%), use a ROTH IRA. You won’t get an income tax deduction for your contribution but your money will grow free of taxes and withdrawals during retirement will also be tax free. If you expect your income tax bracket to be 22% or higher, consider a tax deductible traditional IRA. You get a tax deduction up front; your money grows tax free; and withdrawals during retirement are fully taxable as ordinary income. Finally, after you’ve exhausted the above choices, open a personal investment account with a discount broker such as Charles Schwab & Company.
- Track your money. There’s no getting around this… to create financial success, you must keep up with your money…all of it! The good news is that there are a number of Internet tools that can make this very easy. One we recommend to our clients is com. This free service allows you to set up budgets, pay bills and receive custom alerts.
Financial success is about doing a few things right over and over. Inevitably most people will stumble and find themselves off-track. If this happens to you, don’t give up. Get back up, dust yourself off and get back on track using my 5 Golden Rules of Money.