Saturday, December 10, 2011

My personal guide to making money in your 20s

First off there are more important things than money. There are great friendships, loving families and so much more that makes life worth living. To judge your life strictly by your balance sheet is a crude and simplistic way of looking at something more complex.

That being written I think that being financially well-off is important in a life. It just makes things easier. For example M and I just got back from London and Paris. If we didn't feel comfortable with the amount of money we had saved up and plan to make in the future then we wouldn't spend the money to go on that trip. My father always would say something like "we can do anything we want - just not everything" to describe our financial situation. I always liked that saying and tried to emulate my parents by recreating that situation. I think M and I are at that point in our life, which is a product of good luck and hard work. I feel confident saying that our financial situation is very healthy and looking back on the decisions we made here is my advice to people. 
  1. Make your own decisions. It is your own financial life and you should trust your own judgement if for no other reason than ultimately you are the only facing the consequences of your financial decisions. If you've done the research and feel comfortable with your analytical abilities then disregard what other people might say. This doesn't mean you can just play things by emotion and turn a blind eye to rational thought. Just because someone at work says a stock is a great buy doesn't mean you are off the hook on thinking about it yourself. In the end the money you put into that stock is your money and you have to take full responsibility for that.
  2. Don't buy a starter home. I am very strict about certain rules about home buying and this is one of them. The reasoning I have on this is that starter homes don't make much sense for a variety of reasons. First off it is a starter home then it means their are some less than desirable characteristics about the home. It might not have enough bedrooms or be in a bad school district. Why would you lock yourself into that type of home? Also, once it is time to sell then you have to pay the real estate fees to go from a starter home into your next home. The transaction costs are too high. Finally, while you are in your 20s there is a decent chance your salary will increase. I wouldn't have wanted to buy a home based on the salary I made at 22 compared to the salary I make now. 
  3. Don't buy a home until you are a married. There is too much risk if you lose your job and if you plan on getting married then your situation will completely change. You will go from one to two incomes and what you might want/need will change with another person's opinion. The result is that the type of home you might want and could afford will change. If you want to get married then just wait till then before you buy a home.
  4. Put 20% down on a home. If you can't put 20% down on a home then you probably shouldn't buy a home. It might be tough to do, but that type of financial discipline should be required before you buy a home.
  5. There is good debt and bad debt, but mostly debt is bad. Debt is an albatross that you carry until it is paid off. Depending on the interest rate you can pay 2 to 3 times the amount the product/good is actually worth. Now their are good types of debt, like for example my one friend who went to a prestigious law school and is now making a healthy salary as a lawyer. That type of debt is understandable. However, besides the obvious bad debt (credit card bill thanks to a new 60 inch tv) their is good debt (school loans or mortgage) that will severely limit your ability to accumulate money. If you want to go to a random private school then by all means go for it. However, just know the $120K in student loans you took on will eventually have to be paid. Again, I am not writing that going to a private school is a wrong decision for your personal life, but financially it might set you back. 
  6. Luck plays an important part in your life and one should not to discount that variable. There is a difference between making a bad decision and getting a bad outcome and making a bad decision and getting a good outcome. In the first scenario you get what you deserve and probably will keep that in mind when you face a similar situation. In the second scenario though you might think that you made the correct decision because of the outcome. The best example of this would be something simple like blackjack. If you hit on a 14 when the dealer is showing a 6 then you made a poor decision. It doesn't matter if you get a 7 and win the hand. Another real world example of this would be back when I first started investing in 2007. I felt that investing in the stock market was a good idea and even when the market crashed in 2008 and 2009, I kept my money (and even added money) into the market. I am happy that I did that and didn't think that the bad luck of investing at the wrong time made the decision to invest a bad one. Anyway, understand the importance of luck and distinguish between making good decisions and being lucky.
  7. Keep a budget. It could be as simple as writing down the amount of money in each one of your accounts (checking, savings, 401K, etc) and also the amount of money you make and spend. Find something that works for you. I keep the data in about 15 categories (rent, entertainment, groceries, etc), but the important thing is to know whether or not you gross or lose money every month. From M and I's budget I know how much legroom we have between what we make and spend. That money we save and also reinvest in the stock market.
  8. Do well at your job, but also don't be unduly loyal to a company. I've enjoyed both of my previous companies, but I always knew that any given moment I could be let go. I was an at-will employee and I have enjoyed that freedom to quit. The ability to quit has provided me the two largest raises of my career. There are many things to consider with a company (the people you work with, vacation hours, etc), but unfortunately sometimes the best way of getting ahead in terms of salary is to leave for another company. Again there are plenty of exceptions to that rule, but that has been my experience and I wouldn't want somebody to rot away at a company that most likely doesn't care about you.
  9. The earlier you find out what you want to do with your career the better off you will be. Just like switching homes can be costly, it also be costly to switch careers. You can make money in most professional avenues, but normally the salary you make is tied to your experience level. If you completely switch careers you probably go to the bottom of the ladder. 
  10. ETFs are better than Mutual Funds because of their low expense ratio. Unless you really believe a Mutual Fund manager can consistently beat the market (I don't) then pick the type of portfolio you want (large/mid/small cap, growth/value, etc) and look at the expense ratio. 
  11. Save aggressively when you can because eventually you will have a mortgage, kids (I was just told by a friend to estimate day care as another mortgage) and other expenses. The more you can bank away now (6 months of living expenses can be tough to save up, but is important) the better. It should go without saying, but it is wise to invest in your company's 401K to at least the percent that the company matches.
  12. Ignorance is not bliss when it comes to money. If you think that just by ignoring something then it will magically get better then you need to grow up. When I was a teenager I didn't really worry about money besides what I had in my pocket. However, that excuse doesn't really work when you are an adult. You should know where your money is, what it is doing there and why you are choosing that path for your money. You probably work hard for your money, so take care of it.
  13. The morning coffee at Starbucks adds up, but the real cost you should be worried about are your big expenses. Most money advice articles I read suggest giving something up like a $3 cup of coffee to help with your financial situation. If you get a $3 cup of coffee every day at work for the 49 weeks your work (assuming 2 weeks of vacation and 1 week of holidays) then you spend $735 a year. That is definitely important and adds up, but it isn't as important as choosing a Civic instead of a Lexus or a reasonable apartment compared to luxury apartment. M and I spend money on smaller expenses, but I think the main reason we have been able to save money is by managing our big (I call them fixed costs on our budget) expenses.
  14. Understand the risks/rewards and the worst case scenario. Often people can be too optimistic (e.g. home prices will always go up) and don't factor in what might go wrong. It might not be the best way of living life, but I have found that a lot of my best choices I've made are ones that I've decided against because of the added risk and possible worst case scenario. 
Also, despite the fact that I've spent four years as a forecaster doesn't mean I can predict the future. I might make mistakes as soon as we put an offer on a home, and I try to understand that. Things have worked out in M and I's favor and for that I primarily thank both of our parents. They have provided good examples of a strong work ethic and/or good decision making. The luck of who are parents are (because you can't really choose them) was the most important factor in where we are now. That factor is out of your control, but what should be in your control are the 14 points above.

1 comment:

Chris H. said...

This is a good list, Kevin. I have your blog bookmarked and enjoy it. I think we have similar financial viewpoints, but I did break rules number 2-4 and here is why....

#2 - B and I bought a starter home, but we plan to stay there 5-10 years. Also, we bought at the bottom of the market in 2009 and used the $8k tax credit to make improvements to the kitchen and bathroom.
#3 - B and I bought the house together about 6 months before the wedding, so we weren't technically married when we bought the house.
#4 - We only put 10% down because we wanted a reserve fund for wedding expenses. After we got married, we now put an extra $250 per month towards the principal of the mortgage. I would recommend putting extra savings towards your mortgage principal as rule #15. Fight against the power of compounding interest and let it work in your favor! This is a risk free investment in my eyes and beats a savings account/CD any day.

I pretty much agree and follow all your others rules, especially #8. I am not only making more money at my new job, but am working less hours, less stress, more job security and much happier.