What I Wish I’d Known at 18: Money Advice For a Graduating Senior
I’ve met Dr. Morgan a couple times now — he happens to live next door to Dr. Jim Dahle of The White Coat Investor, and I’m happy to hear the first of his six children is graduating and leaving the roost. I certainly hope he reads this one and that his father bookmarks it for the next five!
Let’s hear what the good doctor wants his son and graduating seniors everywhere to know.
I’m just about to hit a big milestone: my oldest is about to graduate from high school and head out into the big bad world. Yes, please indulge me if I join the chorus of all the generations before me in saying, “Where did all the time go?”
Seems like just yesterday he was 6 lbs. 6 oz when we brought him home. Now he is 6 feet 6 inches and weighs 190 lbs. While there will be few benefits of seeing him off (like a substantial drop in the food bill, and I won’t have to wonder where all my clothes went), I am sentimental about having him leave home. And, like all good parents, I also wonder if I’ve taught him all the right things to maximize his success.
18 years goes by quick!
So in honor of sending (kicking) him out of the nest, here are 7 Basic Habits of Prosperity I want him to understand and begin to apply in his life.
1. Study Money
Make financial education a regular part of your routine. Money-savvy does two things for you: (1) it sets you up for financial prosperity (good offense), and (2) it protects you from wasting money (good defense).
However, getting good at money is not the norm. In fact, most people suck at money. Need proof? Sixty-two percent of Americans have less than $1,000 in savings. Don’t be one of them.
A few key principles will take you a long way if you can stick to them.
- Keep expenses lower than income and invest the difference
- Pay off credit card balances every month (if you can’t do this, then cut them up)
- Maintain an emergency fund of at least $1,000
- Save at least 15-20 percent (Pro tip: savings rate is much more important than investment rate of return)
- Max out your tax-advantaged accounts: 401(k), 457(b), Roth IRA, HSA, 529
- Use low-cost index funds from Vanguard like VTSMX and VTI
- Automate your savings and investing (i.e. set and forget)
No one starts out knowing how to do all of this and they don’t teach it in school. Don’t be intimidated by all the strange account names. You’ll get to know them in time. Take matters into your own hands and begin a personal finance curriculum. Pick up a book and start reading some basic finance. Don’t worry too much that you’re doing it wrong. It’s about learning as you go. Here are a couple of resources to get you started.
Best Introductory Personal Finance Book
- Personal Finance For Dummies – Don’t let the name insult you. It’s a great place to get your feet wet.
- Bogleheads Guide to Investing – Written by investors who follow the philosophy of Vanguard founder Jack Bogle, which is the idea that successful investing is not a complicated process, and can be accomplished by anyone with a small amount of effort.
Best Introductory Financial Web Site
- Bogleheads.org – A wiki and forum built by volunteers who are dedicated to helping people begin or improve their investing by applying sound investing principles.
Best Introductory Financial Podcast
- YNAB Podcast – A free podcast by the founder of You Need a Budget (YNAB), which is the leading budget tracking software. Start at the beginning with these little nuggets of financial wisdom. Listen to them while you walk to classes.
2. Be a Skeptic
A large part of building wealth is learning to hold on to your money. There are millions of people trying to help you part with it at every turn. Learn to be a skeptic. Don’t be too trusting. If it sounds too to be true, it is.
Be careful what you sign up for. Don’t be naive. In most cases, you are not the customer you are the product. Your information is being sold to the highest bidder.
Sophisticated people and tools are “playing” you for all you’re worth. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
3. Avoid Debt
I’ve talked about how debt is like being in a hole. It’s like indentured servitude. It takes away your choices and limits your freedom. The goal of marketers today is to make transactions seamless and frictionless.
While things like Amazon 1-Click and ApplePay may be convenient, they are a slippery slope. It’s easy to lose track of how much you’re spending. Pretty soon, you’re one of the masses of people who are living paycheck to paycheck and barely making minimum payments on credit cards.
Don’t be like them. In fact, use cash if have to. Research shows that people who use cash spend less. It’s likely because letting go of a stack of Benjamins is a lot harder than a quick swipe.
A good rule of thumb is never to borrow money for anything that doesn’t pay you back. A few examples: MD degree = yes. House = maybe. Car = no. Vacation to Europe = no. See how it works?
Another pitfall is education expense. Education is abundant. Don’t overpay. Do whatever you can to cash flow your undergraduate degree. By choosing the right school, getting scholarships, and working (part-time while in school and full time in the summers) can get you through college debt-free.
Unless you have parents footing your bill (hint: as one of six, you don’t), you MUST consider the return on investment. The majority of jobs want you to have a degree. Get your degree without mortgaging your future. Just because you see a lot of kids going into loads of debt, it doesn’t make it smart or right. In fact, if you see the masses doing something, it’s probably a good idea to go the other direction.
4. Know the Difference Between Gambling and Investing
For the average personal investor, picking individual stocks is no different than horse racing. You’re looking at a “track record” and then you are just trying to “pick a winner.” In order to beat the market average, you must have superior knowledge.
I can’t “beat the street” and neither can you. And you know what? Most “experts” can’t beat the street either. Almost 90 percent of actively managed mutual funds trail passive index funds over a period of 10 years. Read that last sentence again and commit it to memory.
So, unless you have the time and smarts to think you can outperform the experts, do what Warren Buffet and Jack Bogle (two of the top titans of investing) advise: invest in low-cost index funds and forget about it.
5. Be Wary of Predictions
No one knows the future. One of the smartest financial people I know (you know him too — he lives next door) is quick to admit that his “crystal ball is cloudy.” The smartest people are often surprised by what the market does. If you don’t believe me, save articles that predict the market in one to two years and then read them again a year later. Better yet, write down your own predictions.
There are so many factors that affect the market, it’s too hard to know what is going to play out. There are wars and rumors of wars (literal wars and trade wars). There are changes in domestic political power with new policies. There are new technologies. There is inflation. There is irrational exuberance. There is also panic.
Speaking of panic, fear sells. Watch out for doomsday rhetoric. It plays on your fear and regret. Most of us actually fear losing money more than we get joy out of making money. The effect of this is that you can get paralyzed. There are people who get so concerned about market dips that they pull out of the market and miss all the rises.
Remember, slow and steady wins the race. Or, as I say, with market returns, getting the average is actually above average.
6. Be Your Own Advisor
The investment advisory business is largely one large complicated conflict of interest. The financial industry feeds off the perceived complexity. It makes you think you are getting something valuable for the high fees they are charging you. In most cases, you’re not.
Many financial planners are just commissioned salesmen masquerading as “advisors.” The best way to sniff this out is to consider how people make their money (i.e. follow the money).
If your “advisor” works for an insurance company or an investment firm, then it is highly questionable if the advice is actually better for you or for them. If you do pay for advice, use fee-only advisors who are only paid to act in your best interest (it’s called a fiduciary duty).
One of my favorite mentors told me, “No one looks out for Harry like Harry.” In other words, you are the best person to look out for yourself (except perhaps your dear old dad).
Becoming a smart money manager is one of the most profitable “side-hustles” you can have. Sure, it’s a bit intimidating at first. It all seems complicated. The good news is that you can do it “just-in-time.”
7. Stay the Course
As you probably know by now, success is not so much about knowing “secrets.” Instead, it’s about common sense uncommonly applied. The most valuable wisdom is nearly always hiding in plain sight.
Yet, though the plan may be simple, it’s almost never easy. In fact, it can be ridiculously hard to follow through on simple plans (just look at all the people who are overweight and in debt). Or in the words of Derek Sivers, “if information were the answer, we’d all be billionaires with perfect abs.” Personal finance, like many aspects of life, is mostly about actually doing what you already know.
“If information were the answer, we’d all be billionaires with perfect abs.” – Derek Sivers
Because you will find that your money saving motivation ebbs and flows and your temptation to spend is abundant (hint: fast food is killing your budget), you should automate your finances as much as possible.
Set up your account to pay bills automatically to avoid late penalties. Create automatic savings/investment deductions from your paycheck so that you don’t have to remember to do it. Let the power of a strong savings rate (at least 15-20%) and the ‘magic’ of compounding interest do its work. If you do this, you will be one of the minority who understand and benefit from the law of the harvest.
Finally, don’t panic. Stick with your plan through the ups and especially the downs. Avoid the financial news–it will make you think you need to DO something. You don’t. If you need reassurance to stay the course, post your concerns on a reputable message board like the Bogleheads forum. Listen to their collective wisdom. As a last resort, you could even give me a call.
As you leave “the nest,” keep these habits in mind. Your future is bright. Set goals and make a plan. As the wise Yogi Berra said, “You’ve got to be careful if you don’t know where you’re going because you might not get there.” Work to live, don’t live to work. Set your sails for financial independence.
Bon voyage, buddy! (And don’t forget to drop us a line once in awhile.)
[PoF: Thank you for sharing your wisdom with your son and with sons and daughters everywhere about to embark on the next chapters of their lives. Congratulations to all of you, parents and graduates alike!
For more wisdom from Dr. Morgan, be sure to check him out at The First Habit.]
What additional advice would you give a graduating senior? Or what advice have you given (and did the recipient of your sage advice listen)?