Many students that graduate from a University will have some student loan debt. In fact, approximately 70% of students will have around $30,000 in debt upon graduation. When student loans are kept to a minimum and chosen with a appropriate major, a student loan is good debt. It allows the student to increase their human capital to become successful. But what if you are part of the 30% of graduates that do not have any student loan debt?
You either worked long hours on the weekend, received a scholarship, had summer internships, or you were fortunate enough to have loved ones that could help pay for your college expenses. Nonetheless, you worked hard in college and upon graduation positioned yourself into landing a lucrative job. Your new job came with a fat 100k salary plus benefits. You might not be as rich as Mark Zuckerberg, but you are indeed young and rich. Many graduates before you have started careers with high salaries, but little to none are able to convert that salary into lasting wealth. Regardless of your habits today, these financial tips will help you to keep your wealth beyond your youth.
1. Live With A Roommate
Flushed with cash, your first instinct is to move directly to the heart of downtown and rent a luxury apartment to display your current success. However, such a decision will not provide lasting wealth for yourself. Take Mark Cuban for example. He shared his room and apartment with several of his friends during his 20’s.
“It doesn’t matter where you live. It doesn’t matter how you live.” – Mark Cuban
Taking Mark Cuban’s mentality forward, one of the easiest ways to save money is to find a roommate and rent an average sized apartment with him or her. Then save the difference you would have spent on a single apartment compared to living with a roommate. By trimming your expenses and saving the difference, you can build a sizable future down payment for a house.
If a single room apartment has rent and utilities that cost $1,600/month and a comparable apartment for two people cost the same $1600/month several streets over, you will be saving $800/month with a roommate. Simply save the extra $800/month in a money market fund and within one year you will have saved $9,600. If you continue to live with a roommate for three years and continue your discipline of saving the difference, you will have $28,800 that can be used for a down payment on a house. Not to shabby!
2. Emergency Fund & Budget
One of the first financial milestones you will need to accomplish is saving for an emergency and creating a budget. Two relatively simple steps to accomplish but commonly overlooked.
Many individuals believe budgeting requires a lot of time and effort, however that is not true. With recent technology in budgeting software, creating a budget is simple and provides real-time spending data to your smartphone.
Secondly, an emergency fund is critical to your financial health because it provides the cushion and liquidity that is needed in the event of unforeseen circumstances. Some examples may include:
- You get laid off at work
- An expensive car repair is needed
- The septic tank breaks
- You break your nose
Without liquidity in these situations you are left vulnerable of a financial melt down, especially if you were to lose your job. Liquidity ensures you will not have to take money from your retirement accounts or take a high interest loan to cover the sudden expense. Conventional wisdom suggest saving six months of your bare expenditures into your emergency fund and in most circumstances I tend to agree with that strategy.
The opportunity cost may be high leaving your emergency fund in a low return saving account. However, remember the objective of your emergency fund is not to make money, but rather decrease your personal financial risk of a sudden large expense that can ruin your long-term financial goals. Some experts may suggest that a credit card can serve as your emergency fund but in terms of the general population and behavioral responses, it is wise to keep it simple and stick to the six month emergency funding rule.
3. Resist The Urge To Buy A New Car
Society associate success with the type of car one drives and pushes individuals to purchase expensive cars. However, if we observe the behavior of some of the wealthy elite, such as Mark Zuckerberg (Facebook), Ingvard Kamprad (Ikea), Warren Buffet (Berkshire), we will notice a fancy car does not equate to success. In retrospect, people who usually have expensive cars have their money tied down to their deprecating car rather than increasing their stock portfolio. Moreover, the pressure to buy an expensive car is even greater when you are young and rich.
Recently, I had a friend that got a really good job making approximately hundred thousands dollars right out of college. One night drinking, he told me he was going to buy a Porsche. He went on to say he even had an excel sheet and figured out down to the penny how much he would need to save each month so he could buy the Porsche outright in three years. However, I knew he had a car that was still driveable with no major problems. So the next morning before we meet up to eat lunch, I went online and printed a simple compound interest table. It demonstrated to him if he instead saved the “Porsche” money in the stock market, the compounded growth over the years could provide future opportunities for him to take greater risk (i.e starting a business) and not sacrifice his future retirement. He was astonished by the power of compound interest and ultimately resisted the urge to purchase the new $65,000 Porsche and instead save the money in the stock market that has the potential to grow above $700,000 in 40 years for his retirement.
So when you are deciding on whether to purchase a new vehicle or not, remember new cars will lose 20% of its value in the first year. Cars are depreciating assets and will not increase your future net worth. Change your mindset to view the car as a function, to get you to point “a” to point “b”, and when that happens you will have the power to resist the urge to buy a new car.
4. Develop A Frugal Mindset
Frugal does not mean cheap, instead it is the cultivated mindset of carefully watching your every dollar. In our consumerist economy, temptation is lurking everywhere, trying to take your money. Many millionaires develop a frugal mindset by asking themselves “Is there anyway I can save money here” with every purchase. Today, we are armed with a smart phone and looking up comparable prices to save money is beyond easy and should become a habit. When you nourish a frugal mindset, you will automatically shun debt and live below your means. Your creativity and motivation will grow and you will find solutions to your problems without spending too much money.
Your frugal mindset can begin by following the above financial tips in this article. Getting a roommate, creating a budget, establishing an emergency fund, and not buying a new car are all actions of an individuals with a frugal mindset. If you are able to accomplish these steps, you are on the correct path of cultivating the frugal mindset that many millionaires before you developed at a young age.
5. Saving For Other Goals — “Five Year Mantra”
The stock market can crash tomorrow, in a year, or in eight years. The fact is no one has a crystal ball to determine the next stock market crash. Since the early 1900’s, the United States has experienced approximately twelve stock market meltdowns. Even though we can’t predict the next stock market crash we can brace for it by following the five-year mantra before you invest.
The five-year mantra, learn from an old professor of mine, is to help with the behavioral responses of the stock market while decreasing the risk of selling your equities at a depreciated price when the stock market falls. The number rule of the mantra is, if you expect a large cash outlay within five years, that money should not be invested in the stock market. Only money that can be invested for a period of longer than five years, a typical market cycle, should be in the stock market.
When the five-year mantra is combined with your budget, a beautiful picture emerges for your financial future. Your budget will help plan and save for the large expenditures while the five-mantra keeps your investment mind and behavior on target for long-term success. A few examples of expenditures you may have within five years include a wedding, down payment for a house, vacations, a car, and so many others depending on your own goals.
These short-term expenditures should be saved periodically and be separate and distinct from your stock portfolio. These funds should be placed in highly liquid accounts (savings or a money market account) and not be intertwined with your emergency fund. When you follow the five-year mantra, long term financial success becomes easier.
6. Start Investing Now!
Many people call compound interest the eighth wonder of the world. It is pretty damn close to being the first wonder of the world if you ask me. It is essential that a portion of your first paycheck goes to investing. You are in a unique position that you are both young and rich – the two main ingredients to successfully witness the power compounding interest.
“Compound interest guarantees I’m going to get rich” -Warren Buffet
The easiest way to understand the importance of starting early is with an example. All individuals in the example make $100k right out of college, each contribute $25,000 per year for retirement according to when they start, and they do not increase their contributions in relationship to their yearly increasing salary. This is to keep it simple and we assume each participate will have increasing cost in the future so the increase in salary will be offset with higher expenditures.
Jake starts right away at age 23 contributing $25,000 each year. Matt waits until he is 31 and Tyler waits till 41 to start their $25,000 contributions. We assume a 6.5% interest rate and they will all retire at age 65.
The graph illustrates Jake earned significantly more interest compared to Matt and Tyler. In fact, Jake only contributed $450,000 more over his lifetime compared to Tyler but has an ending balance of $4,165,908 greater than Tyler due to the power of compounding. Tyler only had 25 years of compounding compared to Jake’s 43 years. If we are able to combine the power of compounding with a tax-efficient retirement account that your employer may offer, you can accomplish many (if not all) your long-term financial goals.
The point of the example is to motivate you to invest as much as you can right now while you are young and do not have many expenses. So if in the future, your salary increases but your expense increases at the same rate (due to kids, mortgage, ect.) the power of compounding will be always on your side for the money you invest right now!
This is how many smart, rich, young individuals fail to create lasting wealth. They do not invest when they are young and play catch up later on in life at which point they lose the power of compounding.
7. Continual Education
Successful people live a life of continual education and learning. To continue your prosperity beyond your youth, you must adapt the same mentality. Inside most professions, they will have some sort of qualification test or professional designation you can earn. Earn every designation you can and use the continual education requirements to earn more. Your goal is to have an “alphabet” behind your name and stay ahead of the curve both by increasing your human capital and your professional marketability.
Secondly, reading beyond your scope of your profession will lead to creativity and motivation. Learning about management, leadership, personal finance, or marketing are all useful skills that will enhance your intelligence and help lead a life of prosperity beyond your youth. Use every opportunity to learn from other successful people and do not hesitate to think outside the box. Staying ahead of your competition and colleagues is imperative as we will continue to see automation kill many jobs across every industry.
8. Marriage Prenup
A prenup is the start and end of all problems. Growing up around my parents, a prenup is something I never imagined I would be suggesting to others. I saw my parents work together as a team, money was commingled, and together they made financial decisions for our household. It was awesome and worked extremely well for them.
However, half of all marriages will end in divorce now. That is astonishing and this trend has lead me a believe in the importance of a prenup. It is even more important if you have family money or significant assets before the marriage. My preference shifted when old professor of mine went on a lecture on the benefits of a prenup randomly in class one day. He is a respected lawyer, professor, CFA, and has more initials behind his name than the alphabet.
He went on to tell us that everyone should get a prenup. His logic was rooted in one core principle. It was not about control nor about not trusting the other person. All assets, in his prenups, during the marriage is divided equally and is written in a way that disallows one partner from gaining too much financial power over the other spouse. Instead, the premise of the prenup is to allow the disclosure and discussion of all financial information and assets that each couple has. It tears down the mythical wall that humans put on money.
In a survey, “1 in 5 people are keeping major financial secretes from their spouse”. The number one reason a couple will get a divorce is because of money. When we address this problem before the marriage with a prenup, it will make your relationship stronger and less stressful. In addition, the prenup will keep family money in the family and assets before marriage separate (including investments and the interest earned on those investments).
At his conclusion of his lecture on prenups he backed it up with his own experience. He was a justice of the peace for several years and married many couples. He said, all the couple he married that had a prenup before the ceremony are all still married today. All the couples that did not have a prenup, are all divorce today. When you are young and rich the best thing you can do is side with caution and get a prenup to ensure your significant other is on the same financial wavelength as you.