I have a daughter who is 20 years old. Over the last few years, I have been trying to teach her how to handle her money. I’m proud of the fact that she has had a job, a bank account, and has been earning her own money since she was 15. Now a sophomore in college, she is receiving credit card offers daily and I don’t want to see her fall victim to the temptation of easy debt. Finances can be a difficult minefield to navigate as a young adult. I began thinking about what I was taught, what I have learned on my own, and what I wished someone would have told me when I was 20. Here is the advice I offered to my 20-year-old.
1. Budget - Create a budget and stick to it. This helps you determine how you will spend your money each month. Using a budget keeps you from falling into the traps of impulse buying and overspending. If you don’t have it in your budget then don’t spend the money!
2. Save - Build an emergency fund of at least 10% of your annual income. This helps you stay healthy financially. If you have savings, small emergencies like car repairs or other unexpected expenses are not going to derail your budget.
3. Invest - Start investing early, time is your friend when you’re long-term investing. If possible invest at least 10% of your income in growth stock mutual funds. Always participate in your employer’s 401K plan and if they offer any matching, always invest the maximum matching percentage. It’s free money!
4. Give - Give at least 10% of everything you make. This is a good habit to develop early. Whether it’s your church or another charity, I believe it is good to give! I also believe you will find it to be very gratifying!
5. Live on less than you make - If you follow your budget and spend less than you make it will allow you to have less stress and more control over your finances. It also increases the likelihood that you will accumulate wealth.
6. Stay out of consumer debt - Many young people fall into the credit card trap. Using credit cards to purchase everything from travel to clothes, electronics, food, and drinks. When you are using credit cards, it is much easier to lose track of your spending. This can cause you to overspend and totally blow your budget. Another type of debt you should avoid is consumer loans. These loans are used for financing cars, boats, motorcycles, RV’s, and other depreciating assets. Financing these types of toys can eat up your disposable income and cost you thousands in interest and lost investment opportunities.
7. Pay Cash for a Vehicle - Purchasing a vehicle, for most people, is the second-largest purchase they’ll ever make, after their home. When it comes to buying a car, I don’t recommend buying a new one! A new vehicle on average depreciates over 10% when you drive it off the lot and 20% or more over the first 12 months. Let someone else take that loss. I recommend finding a reliable used vehicle that you can afford to purchase with cash. It doesn’t have to be stylish or cool, only functional.
Don’t get in over your head buying a car you can’t afford. I sold cars for several years and I saw many young people buy more car than they could afford. Only to later come back and try to get out of the deal. Little do they know, once financed and funded, the deal can not be undone. More often than not, because of the instant depreciation of driving it off the lot, they now owe more on the car than it is worth! This is what we called “upside-down” in the car business. Once this happens, you basically have three choices:
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- Keep the car - suck it up and make the payments, or at least until you pay it down enough to sell it for more than you owe, so you can pay off the loan.
- Sell the car for a loss - sell the car for what it’s worth (less than what you owe) and come up with the difference that you will still owe in cash to clear the loan.
- Repossession - let the car go back to the lender, I do not recommend this! Not only will this destroy your credit, it actually ends up being a worse version of option “2” because the lender will sell the car at auction, and then any remaining balance will likely be placed on your credit as a “deficiency” balance. The lender then may offer to work out a payment plan, turn it over to collections, or they may get a judgment and garnish your wages. On rare occasions, if you’re really lucky, they might forgive the balance.
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Occasionally, it may make sense to finance a used car. If you need reliable transportation to get to work or school and can find a great deal on a vehicle, it might be worth it, but otherwise, I would save up and pay cash! I would only consider this option if you can easily afford the payment and the interest rate is reasonable.
8. Set Goals - Most successful people set goals for themselves. This gives you direction and helps you focus your time and energy. To ensure your success, make sure to follow these rules for goal setting.
Goals must be:
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- Written - Writing goals down helps embed them in your psyche, making them real to you. Place them where you will see and read them daily. (i.e. on your mirror or computer monitor) It is also good to share them with friends and family who will hold you accountable.
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They also need to be S.M.A.R.T. Make sure your goal has all the following qualities:
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- Specific - For example, just having a goal to lose weight isn’t specific enough. I want to lose 50lbs. is.
- Measurable - How much weight? (50lbs - that’s measurable)
- Actionable - What actions or plan to accomplish? (Workout for 30min 3x per wk)
- Realistic - Is it realistic? If a goal is not realistic or unattainable, it is just a pipedream. Frustration will lead to failure and you will not accomplish your goal.
- Time-Limited - What is the deadline for this goal? (90 days)
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- 9. Find multiple streams of income - Don’t rely on one source of income. Find a side hustle that you enjoy. Having multiple sources of income can improve and stabilize your financial future.
10. Finish High School/College, Get a Full-time Job, Then Get Married and Have kids (in that order) This greatly improves your chances of financial success in life. Statistics show if you mess this up you’re five times more likely to end up living in poverty!
11. Only pay for college if you're going for high-paying careers (doctor, lawyer, engineer, etc) Going to college is outrageously expensive nowadays. You need to have a plan! Spending an exorbitant amount of money to get a degree in liberal arts doesn’t make sense. By choosing to get a degree in a high-paying field, you are ensuring that you will receive a high return on your educational investment. If you feel college is not your thing then you might consider going to trade school and learn a skilled trade like welding, plumbing, electrical, or HVAC repair. Jobs in fields like these are always in high demand and usually pay well.
12. Avoid Student Loans (use scholarships, grants, or work to pay for school) I personally worked and paid my way through college. It wasn’t easy, but it can be done! Nowadays, in my home state, your first two years can be completed at a community college for free, thanks to a scholarship paid for by the state lottery! It is definitely worth spending a little extra time and effort searching for as much financial assistance as you can find. Student loans should be your absolute last resort for funding your college education! In 2020, student loan debt surpassed a record high of $1.57 trillion. That’s one statistic you don’t want to be part of!