Best Financial Advice For Young People.
I doubt there is advice or information that is “best” for everyone. At least two of these though will find their way into the top three list for everyone.
The things to know and do
- Save a little every month. It doesn’t matter if it is a lot of money, albeit better if it is. The idea is to make savings a part of your ordinary life. It won’t be long before you want to learn about investing. Investing is a time machine. It transfers money you have now to money you can use in the future. Spending will be important to you someday in the future and this money will help.
- Learn about exponential growth. people are not intuitive about it. We tend to think linearly because that works best in short time periods. Exponential is very different. A simple thing to know is the law of 72, It takes approximately 72 divided by the investment rate to double your money. at 8% money doubles in 9 years. That’s nice to know but what matters is giving yourself extra time means more doubles. You could calculate this, and when you do you will find the last double adds more to your portfolio than you made in ALL the previous doubles. Not intuitive, right? When you start later, you miss far more than a year or two’s worth of income.
- Choose your debt wisely. Things that you finance to add to your income potential, are worthy. Be sure what you will earn extra is enough to pay the debt quickly. Maybe 5 years. Things that reduce your cost of living may be worth financing. In business it is the replace versus repair decision. Sometimes it is cheaper to get something new or better than it is to repair something worn out. You’ll be doing so soon anyway, so start thinking about how.
- Understand interest rates on debt. Interest is the price of using something someone else owns. Like rent in a way. The part you care about is predictability. Today in Canada you can get a mortgage at less than 1% annually, but the rate is adjustable as market rates change. It might be easy to pay today, but what will it be in the future. If 3% would be a burden, you might be better off to get a locked in for 5 years at a rate of 2%. The extra you pay is the insurance against an unaffordable rate in future. The downside is there will be a penalty if you want to pay it off sooner.
- Be out of debt as soon as possible. Most people think investing is better and sometimes it is. They fail to notice that for similar risk, after taxes, paying debt is a pretty good investment. Paying debt down is riskless. The risk attaches to the asset not the way you pay for it. EXCEPTION: floating rate debt is risky. No debt makes life more focussed on the future rather than the past. Flexibility. Debt is a time machine too. It moves money from the future to the present.
- Understand where your money goes. Some portion of it is consumed. That’s lifestyle. Food, gas, clothing, cars, housing. Part of living costs include the price to get to work and present yourself well. Some portion pays for your history. Debt payments and debt reductions. Some portion goes to the future for retirement or future expenditures. Examples are savings, pension plans at work, or insurance that preserves economic stability. A big part is taxes, union dues and other direct costs to having income. Spend Now, spend some other time, or pay others.
- Learn how to shop. There are two factors. Price and quality of fit to your need. Buying a car is not the same as buying a magazine. Things with inconsequential price tags don’t matter. Things with big time or money commitments need some thought. The internet is your friend here. If you are going to buy something try to make it so it is not today. Thinking ahead gives you time to decide on the most reliable or best priced version. Research gets both. I have just purchased a Bissell wet mop which retails for over $200 with taxes. I had done my homework on models, capabilities and price. I bought it from a Facebook Market vender for $50. It had been used once. If you know what you want and need and what satisfies those, Kijiji and Facebook market, can be an advantage.
- Know what percentage of your income is used for consumption. That’s lifestyle and you will need to work out how to maintain that over the rest of your life. If it is much over 50% you should investigate why and what you are going to do about it. Less than 50% is desirable. A lot less lets you build wealth or get out of debt sooner, which is the same thing. Over 50%, with young people it is usually rent instead of a debt payment. Be cautious.
- Think in three zones. Money is always earned in the present. Lifestyle is always consumed in the present. Life though, includes three aspects of income allocation. Now, then and them. Then is when you will spend the money you earn today. Could be then the past, you student loan payments, or then the future, your savings and insurance. Them is almost uncontrollable, but you should be aware of it and do what you can to minimize the cost.
- You cannot spend the same dollar twice. If the money is for the rent, you cannot use it for a vacation. Some people delude themselves by putting the vacation on a credit card. It is all the same. How you pay means you paid and some dollar you have, or could have had, is now lost for other purposes.
- Financial planning is little more than organized common sense. Success means paying attention to and following time-honoured rules and ideas. Use some tools to help yourself. A cash flow budget is the first step for most. The rule is it’s difficult to manage things you don’t measure.
Know what you are trying to do and behave according to that. If you don’t know what you are trying to do anything makes sense. Like Yogi say, “if you don’t know where you’re going, you’ll end up somewhere else.”
If you spend more than you earn, someday you must spend less than you need to spend.
Fitting your lifestyle inside reasonable limits lets you maintain it forever and it gives you flexibility.
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