A couple weeks ago, I was with some friends of mine and they were asking about what they should be doing now to get started on a good financial track. I started thinking, but to provide them with the best possible answer, I also read a few financial blogs and talked to some other folks. When I did, I realized one big thing – there is a lot of misinformation out there and people pushing their own agendas. In full disclosure, yes, I could very easily do the same thing. Hey, I like making money just as much as the next guy, (who doesn’t). I could set you up to fail then come swooping in like a superhero, waving a magical product in your face, saying the magic words, and have you paying an arm and TWO legs just to begin reviewing your financial situation, but I don’t. I’d rather help you get started earlier on the right track by just givingyou good advice, so when it’s time for life’s joys to begin (i.e. buying a house, getting married, kids, etc.), we aren’t wasting time playing catch up, but are having productive meetings, growing as you grow, and you are enjoying life stress-free.
So what should you do now to help alleviate financial stress later? In four points, I’m going to cover the basic areas you need to maximize to start building a solid financial strategy. I’m going to keep this post short and sweet, but if you want to dive more into to any of the topics I will cover below, just stay tuned for future posts.
So far in my career, I have come across three types of people: 1) The “I’ll figure it out later” person, 2) the “I need to do this, but it’s TOO difficult” person, 3) the “I’ll do whatever it takes” person. Success does not come easy, unless you win the lottery (but most of those people wind up broke again anyways). It is achieved through drive, dedication, hard work, and persistence. Doing the right things time and time again.
My hope is that by implementing some of these strategies today, you won’t look back on the last 10, 15, or 20 years and say, “man, I thought we would be further along.” Now, without further ado, let’s begin:
Off the top, it is important to understand one thing: For I’m sure this comes as no surprise to you, but your financial life revolves around your cash flow (which I know for many young people is difficult when they’re just getting started in their careers with lower salaries and living in Atlanta -or other places- paying $1,000+ for rent). Cash flow drives everything you have today, and everything you will have in the future. What you do with that cash flow is of utmost importance.
- Pay yourself first –Off the top, you need to be working towards saving 20% of your gross income (think top line revenue aka add salary, bonus and commissions). This will be a combo of 401(k)’s, IRA’s, savings, and investment accounts. There needs to be a balance with these accounts or “buckets” as well. Don’t funnel all your money into a 401(k) and not have any liquidity (money in cash). You will want cash in the future for opportunities that will come up (i.e. a down payment on a home). The last place you want to go is your 401(k) and pay ordinary income taxes and penalties. You want a bucket for the short-term (i.e. a rainy-day fund, NOT for Coachella tickets), the mid-term (i.e. investment opportunities – businesses, real estate, stocks, etc.) and the long-term (i.e. retirement accounts that you can’t touch).
- Protect yo self before you wreck yo self – Look, for most people life will go right 364 days of the year; however in everyone’s life, something will go wrong. That’s called life. It happens. Earlier this year BOTH my parents ended up in the ER, and they BOTH nearly passed away. On January 1st, my mom was in ICU for a few days with a cause that is still unknown, and then in February my dad had emergency surgery for diverticulitis where it ruptured in his stomach and he was just a few hours from passing away. March no one went to the hospital, thank the Lord, but it was definitely a rough start to the year. When these things happen, you don’t think about anything other than those family members who need you. I hear stories all the time of young people, old people, rich people, and poor people, who have something tragic happen and it changes their lives forever. Of the big five threats people face, each one deals with preserving income and cash flow for yourself, your family and your future. There is no continuing on an upward trajectory in life without cash flow.
- Pay your debt – For many people in our generation, they have some sort of debt – credit cards, student loans, car loans, a mortgage, etc. The big dilemma, however, is “do you pay your debt off faster in order to save more later,” OR “do you pay your debt off slower (i.e. make the minimum payments) to save more sooner?” Here’s the problem with the first strategy – something else WILL come along and that payment WILL get absorbed into lifestyle addiction or another bill. Most people will not save more in the future when they have more obligations (i.e. house, family, child care, college, etc.). How do you pay off debt you ask? Stay tuned for later blogs….we’ll talk about it.
- Build wealth – This is the fun one…. THIS is what intrigued me about personal finances and got me into the business. There are plenty of different ways people become “wealthy” (defined differently by every single person), but no matter what, your BEST investment is back into yourself. Let me repeat: YOUR BEST INVESTMENT IS BACK INTO YOURSELF! When you invest in yourself, that directly impacts your income, and as we discussed above, your income drives everything. Don’t be fooled, when I say “invest in yourself” I’m not a self-help counselor telling you how important it is to treat yourself (although rewarding/treating yourself is great when paired with the right amount of discipline and intentional budget) but I mean to invest in your KNOWLEDGE. The more you know the more you make, the more you make, the more “rewards” you get. But more money means nothing if you don’t have discipline when it comes to saving and spending it…..Your money is not emotional about you, but are you emotional about your money? How well you behave when it comes to your money?
To Recap—How to get started on a good financial track when you’re 20 something means to:
- Build a Rainy-Day Fund of income –(not to be confused with just a long-term savings account, or savings that will be spent later)
- Own Protection – When it rains, it pours. Trust me, and it’s not fun. Don’t be left without an umbrella (policy), life insurance, disability income insurance, and the proper legal documents (You’ll learn more about this in later posts).*
- Pay Debt Strategically – Balance it with savings, otherwise you will be back in debt when something comes up (and it will).
- Behave When Building Wealth – Don’t let your emotions get the best of you. Just because “everyone else is doing it,” doesn’t mean you should too. Sometimes it’s better to be the person freezing on a piece of wood in the ocean rather than on the ship that’s sinking (see Titanic).
Lastly, you need to enjoy the life you live. Finances can be very stressful, and at times they will be, however they shouldn’t be the thing that keeps you up at night. You have other things to worry about. If you can start your 20s on a solid foundation, save the right amount of money, protect your cash flow and income from loss, get out of debt, life is going to be full of opportunities down the road.
If you have found this helpful, please share, comment, and spread the good word to people you care about.
*Neither Guardian nor its subsidiaries issue Umbrella Insurance. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.