I’m turning 30 this month and something about reaching an age that ends in a zero makes me reflect a little harder on life than usual. I’ve also noticed a lot of my extended family is starting to creep into college age or about to finish college. So at this point, I thought it might be a good idea to talk about some things that I wish someone had told me ten years ago.
I’ve been incredibly fortunate in so many aspects of my life. One thing, which is increasingly rare among Millennials, is a claim to financial security.
I was incredibly lucky to secure a job before the financial crash of ’08. Engineers at least as smart as me and far harder working struggled for years to find work, simply because they graduated in ’08. I miraculously avoided any major mistakes that are very easy to make at 18 or 22, before you have a clear understanding of the practicalities of how the world works.
And, above all, I have an amazing support system and family, which is something that many, many people lack.
So, to pay it forward, here’s my advice to the somewhat younger folks in my life, who are trying to or will soon start sorting out their financial lives.
For many readers, this advice will be amazingly obvious. But it wasn’t obvious to me at 20 and I didn’t have anyone to explain it to me. So, with that said, let’s get started.
On Credit Cards
Never, ever carry a balance on your credit card if your interest rate is above 0%. This is so important I’m putting it first.
Put another way: NEVER pay a dime of credit card interest. ALWAYS pay your debt off in full, every month.
I use credit cards all the time and they’re an amazing thing when used right.
That being said, it’s an easy thing to use wrong. The financial security of the country would be magnitudes better if high school students all took a one week course on how credit cards work. But you don’t get a one week course: you just have me, and other advice on the internet.
If you don’t pay your balance off in-full, then you’re just burning money. If you pay the minimum, then you could easily spend DECADES paying off a charge.
A $5 latte could cost you $30 if you only pay minimum payments. That’s what “interest” means: it’s money you’re giving to someone else for the privilege of borrowing money. It’s paying someone $100 later so you can spend $10 now.
Makes zero sense when you calculate it out, so just don’t make the mistake up-front: pay off the monthly balance on your credit card every single month. If you can’t afford to do that, then you can’t afford to use the credit card.
Some people just aren’t compatible with credit cards, just like some people have trouble with alcohol or gambling. If you figure that out about yourself, then stay away from credit.
And last: you don’t need to pay interest to build your credit score. That’s a myth. You can have a fully paid balance every month and still get a great credit score.
The best way to do this is to only get credit cards that support automatic payments, and then set your payment to “pay full balance.” Chase and American Express both support automatic payments. They also tend to have the best rewards programs.
Spend Less Than You Make
This sounds obvious, but it can be tough depending on your income.
It can mean making all sorts of sacrifices. It might mean shopping at second-hand shops or not buying new clothes at all. It might mean cutting a cable bill. It might mean never eating out. (Auxiliary: learn to cook.) For a lot of people, it means living with parents and pooling income.
If you can’t find a way to make this happen, then you’ll fall into debt, and it could take decades to claw your way out… if you ever do.
If you need help for cost-cutting ideas, you can check out /r/Frugal on Reddit. They can have some pretty extreme ideas, though, so make sure you take advice that matches with you and your income. /r/PersonalFinance is another good forum that’s targeted a bit more toward middle-class and up earners.
Paying Off Debts and Saving for Emergencies
If you’re able to spend less than you make, then that extra money needs to go somewhere. You probably have some sort of debt: credit cards (horrible) or student loans (not as bad).
Before you do anything else, pay off your debts. Credit card debt ALWAYS gets top priority. Always.
Next, there’s the issue of student loans and emergency money.
An “emergency fund” is money you have sitting in your bank account. It just sits there, not doing anything at all… until you need it. For any unexpected expenses: car repairs, medical bills, unemployment. You should make saving up 3 months’ of expenses a top priority.
That means tracking your spending and figuring out how much money you spend on EVERYTHING every single month. Then saving 3x that figure. I use Google Spreadsheets and put my transactions in manually. You can also use Mint or a similar website.
Once you have an emergency fund setup, you should attack your student loans. As a rule of thumb, anything you pay more than about 5% interest on, you should pay off ASAP. Your student loans probably fall into this category. Push as much cash onto it as you can every month, above and beyond the minimum payments.
And watch your student loans like a hawk. Those companies are amazingly unscrupulous. Make sure your money goes to the principal, so you’re actually paying off your debt. A lot of times they’ll push the money onto future interest payments, meaning your loan doesn’t get paid off any faster.
The best way to do that is to do a multi-pronged contact approach. Specify where you want the loan to go on the website, if it lets you. Write them a letter (you can use Mail A Letter to send it online so it’s less hassle). Copy the letter into an e-mail and send that to them as well. Give them a phone call and verify that’s how it’s being done.
If they won’t follow your directions online, then send your payments in certified mail with a letter specifying your instructions. Be detailed, including the account numbers you want the payment to go toward and the exact amounts that should go to the principal.
And of course, watch to make sure your principal goes down on the website every month, by the extra amount you’re paying.
I know that’s a lot to take in. But it’s worth doing in the long run, believe me.
Start Saving for Retirement Now
I know retirement seems like forever away. But the longer you wait, the harder it’ll get to save.
Compound interest is your enemy when it comes to debt, but it’s your friend when it comes to saving.
Over the short term, stock market prices are all over the place. But this shouldn’t matter for you saving for retirement. Today’s prices are meaningless: over the long run, buying into the stock market and holding on will mean that your investments grow over time. You don’t care what the market does in the next minute or hour or week or even year. You care about what it’ll be in 30 or 40 years.
By buying in now, instead of paying a credit card company to borrow money, you’re getting paid to save. What could be better than that?
Open an account with Vanguard. It’s a great company that doesn’t try to cheat its clients. It’s the only client-owned brokerage in the world. That means when it makes money, that money goes back to you, the customer. It doesn’t go to fill the coffers of some guy you’ve never met with twelve yachts and a hotel chain on the side.
Opening a Vanguard IRA will take 5 minutes and will probably be the most productive thing you do all month.
Once you’ve saved $1000, you should do it right away. That might sound like a lot, but it’s an amazingly important start. Put the money into something simple, like the Vanguard STAR Fund.
Automate Your Savings
Once you have a Vanguard IRA open, you should automate your savings. Figure out how much extra money you have out of each paycheck. “Extra” is money that isn’t going to an emergency fund, paying off debt, or life expenses.
Allocate a bit to “fun money” if you can spare it. Then the rest should go to your retirement savings.
If you’re lucky enough to have a 401(k) that gives you a match, then put your money toward the match first. If that isn’t the case for you – or if you don’t know what that means yet – then forget it. Just put the money into your Vanguard IRA.
With Vanguard, you can go into your account settings and setup automatic payments. You can make the payments weekly, biweekly, or monthly.
Set it up so it coincides with your paycheck. Set the amount to whatever you can spare.
How much is enough?
It can be a scary target to hit. You should aim to save 17% of what you make every year. That’s what’ll make it safe for you to retire in 30 years.
If you can’t quite hit it, that’s okay. Just save as much as you can. Keep hustling at work and finding ways to cut back on your spending. Every time you get a raise, put at least half of it into savings. You’ll get there. Every little bit you save now will help in the long run.
Don’t Try to Beat the Market
The absolute best book I ever read on investing is The Intelligent Investor by Benjamin Graham. At $13, it was one of the most useful purchases of my entire life.
Pick it up. Read it. You don’t have to go cover to cover – you can even look at the chapters individually, one at a time.
One of the most important points of this book, from one of the most successful investors of all time, is that you will not beat the market. So don’t even try.
“Active” funds are funds that charge you a percentage so that some people you’ve never met can throw darts and try to beat market performance. Year after year, and especially decade after decade, they fail spectacularly to do better than monkeys drawing choices out of a hat.
We all want to think we’re stock-picking geniuses who have an edge. “Big banks hate us!” we want to shout. “We have the secrets that they don’t want you to know!”
Well, I hate to break it to you, my dear friends and family. But we are not smarter than the stock market. We are the stock market. Simple logic and math will point out that even professional managers can’t consistently beat the stock market.
A look at historical performance over 30 years (the time horizon of your retirement planning) will show that the overwhelming majority of active funds fall behind simply buying into a passive index fund and letting the money sit there. Countless studies show this repeatedly.
Is it possible your active fund, or your personal stock-picking, will beat the market over the long run? Sure. It’s also possible I could put my life savings onto “Black 20″ on the roulette wheel and walk away a millionaire. Saying something is “possible” is not the same as saying it’s a wise investment strategy.
So, what’s the solution? Try to match the market, not beat it. Buy a passive fund that buys into the ENTIRE market and that doesn’t charge you exorbitant fees. Use the Vanguard STAR Fund to start out. Then when you manage to save $3000, move everything to a Vanguard Retirement Fund set for your target retirement year.
Then leave it alone. Set your automatic savings and forget about it. Don’t touch it, because it doesn’t matter what the market does in the short-term. Prices can go up, down, sideways. What matters is what the number says in 30 years, and that number will be better the less you mess with your allocations.
Money Isn’t Everything, But…
Money isn’t everything. Except when you don’t have it.
Having money and saving money and securing your financial future – none of these things are enough to make you happy. But I guarantee that NOT doing and having those things will make it much, much harder to be happy in the long run. They’re prerequisites, not the goal itself.
I can’t offer much advice to my 20-year-old self (or my younger cousins and nephews) about happiness. Nothing that doesn’t sound like a cliche or a closing monologue to some 80s coming-of-age film.
But one of my dreams was to see the world, and I’ve been very lucky to see a lot of things, and be a lot of places. I’m unbelievably fortunate to be sitting here, typing this at a bakery in Laos, enjoying a cone of caramel ice cream. Not five feet out the window I can see a clustered shantytown of rusted tin roofs.
Learning about money didn’t make my dreams happen for me. But it would’ve been a lot harder if I hadn’t learned these things. I hope this helps other people in my life get a little more freedom and a little more security to do the things they really want to do.