I have invited my Dad on the blog to talk about securing the bag. I’ve been a student in my Dad’s Finance for Dummies class since I was born and I’m excited to share some of his tips with you!
Many of you may be wondering – “Why is it important to start thinking about and planning my financial future in my 20’s?”
Like many of you, I spent my early 20’s completing school, paying off student loans, and trying to launch a career. My first professional job at an accounting firm required me to put in long hours in addition to studying for exams. The job paid barely enough to cover my rent, car loan, and living expenses, but I knew it was important. I needed this job to gain experience and knowledge in business although I was not completely sure what type of business I might end up in. It was a tough go, but I knew that I would have more opportunities if I got through this.
We all have different skills and talents, and views of what we want out of life. What was right for me, might not work for you. However, regardless of how simple or complex your life goals are we all need some level of financial security to achieve and maintain it.
What do I mean by the word “wealth”? It is simply a number. You take the value of what you own less the amount of what you owe and the difference is your “wealth” or your “equity”.
Consider these five tips to build wealth
- Become both a Generalist and Specialist
Whether you decide to work for yourself or for others there is no escaping dealing with people. Success for both employees and self-employed people is largely about connecting with people and understanding them. The best book I read in my 20’s was a book written in 1936, How to Win Friends and Influence People. It is a window into how people think and how your interactions with them influence your relationships. I also remember a quote (author unknown) that “people don’t remember what you actually said to them, they remember how you made them feel”. The most successful people I have met in business and in life, understand these concepts and apply them well.
I also believe younger people should focus on a specialty. I believe that everyone should pick something and try to become great at it. It can be plumbing, web site design, teaching, playing piano, or Pilates. Author Malcolm Gladwell explains in his book Outliers: The Story of Success, that being a specialist (or expert) at anything requires 10,000 hours of work. That roughly translates into a full-time job (40 hours a week for 50 weeks a year) for five years. They say Bill Gates achieved this threshold in computer programming by the time he was 16 by spending all his free time on this one thing. When Bill was learning programming at age 16 he did not know he would one day start Microsoft. That was an opportunity that presented itself much later, and when it did, he was ready and prepared to take it on. The great thing about being in your 20’s is that you have the time to learn a specialty and then reap the benefits from it for many years.
- The 10% Solution
The first financial book I read was called the Wealthy Barber. It was the story of a small town barber and how he became financially independent. He had a simple formula that I always thought was clever. The rule is to take the first 10% of your income, regardless of what that income is, and put that 10% away and invest for long term in a general stock and bond index fund (google index funds). Essentially you need to adjust your lifestyle to live on 90% of what you make. For adults in their 20’s the biggest items are: shelter, food, car, entertainment. If you adjust each of these elements slightly then you can achieve this. Maybe take the subway rather than Uber and go out for lunch once a week rather than three times. This approach and discipline will allow for the compounding effect of your investments over a time horizon of 30 years until you are in your 50’s (which will come sooner than you think….). For example, if you can save $200 a month starting in your 20’s and each year as you make more money increase this by 10% you will have about $1M at 55. Working after 55 is hard for a number of reasons including health and energy levels. Also, it is a great time to enjoy the results of you hard work. Many of us can find where we spend $100 or $200 on things we don’t really need. If this is too much then start with 10% of whatever you do make and work with that.
- Life is a Marathon Not a Sprint
In my 20’s I tried to take a few shortcuts and they mostly blew up. I remember getting a “can’t miss” stock investment tip from a guy who knew someone. The stock crashed shortly thereafter, and I learned a valuable lesson. There are no shortcuts. Put in the time, do the work. I find it interesting how some people describe a person that is successful and refer to their “luck”. There is no question that luck can play a role in business and financial success. Anyone who bought Apple Stock or Amazon Stock 10 years ago is very fortunate today. I have always found that those hardworking people that put in the time seem to always be “luckier” than those who didn’t.
- Real Estate
If you know you will be staying in a place for at least 5 years then it makes sense to try and buy that property rather than paying rent. In most cities prices will go up enough after five years to provide appreciation and the added selling costs of 5% from realtors. If your plans are not to stay this length of time then best to simply rent and try to save for a bigger down payment for a home in the future.
- Failure is an Option
Don’t be afraid of failure. Most successful business people can tell stories of their many failed ventures. When you fail you learn. The time to learn the most is early in your life not in your 40’s. Take risks now and go all in. I learned more from my failures than my successes and you will too. When things are going great remember that it won’t stay that way. The same when things are bad.
Best of luck and enjoy the journey,
Faith’s Dad : )