As college graduation season approaches, many graduates want to step into the “real” world with a strong foundation and build their lives up from it. However well they may think they are prepared for the next step, most are missing a critical element of life success — basic personal finance knowledge.
So here is a gift to graduates or really, anyone in their 20s or 30s still looking to build their lifetime financial security.
If you’re willing to work and save, live on less than you make and invest consistently with a long-term view, you’ll develop all the financial security you need.
You won’t know it all or make every correct decision. That may leave you indecisive. Don’t avoid the unknown. Get comfortable with uncertainty. In some cases, you’ll need to take the leap and build your wings on the way down. The more you base your decisions on an understanding of your goals and the risk involved, the more likely you’ll fly before you crash.
Apply the following 10 ideas and you’ll develop habits and knowledge that may be more useful than many of classes on your transcript.
1. Become the CEO of You Incorporated. Treat your personal financial situation as if you were the CEO, making decisions about producing a great product at a profit, having a strong sense of your wants vs. needs and what your mission is.
2. Develop your human capital before getting too concerned about your financial capital. Your human capital is your ability to earn a salary. Education, training and skill development is the best way to increase your human capital. The more powerful your personal economic engine, the less heavy lifting investment markets will have to do to build your financial security.
3. Live on less than you make and start an emergency fund. Build cash reserves in case you need to change jobs, move, fix a vehicle. Work toward savings equal to three months of your expenses. This acts like insurance and over time, you can build your reserve up to use on a house, wedding or undeniable life experience.
4. Establish goals. If you’re going to pay yourself first with savings, plan for how you will eventually use that money to add meaning to your life.
5. Beware of overextending your debt capacity. Debt problems aren’t caused as much by the price of the daily latte or eating out too often as they are by overspending on big-ticket items such as cars, homes, weddings/honeymoons. If you’re using credit or debt to finance your ability to keep up with some ideal that you can’t yet afford you create a problem that can have long-lasting impact.
6. Be wise about insurance. Medical bills without health insurance can sink you quickly. Life insurance is a must if you’ve already got a spouse and children counting on your future income.
7. Don’t pass up free money. If your employer matches retirement account contributions, defer enough of your income to at least earn every cent of the match. Even if your employer does not match your retirement savings, at least start contributing to the employer plan or open a Roth IRA.
8. Understand the power of compounding — the ability for gains to grow on top of gains. Matched retirement dollars can turbocharge the effect of compounding. For every dollar you save in your 20s, you’ll be able to save less later in your working years or spend more in retirement, compared with those who start late and will have trouble catching up even if they save more than the early starter.
9. Be patient. The power of time is extraordinary. The most important determinant of long-term investing success is not the choice of the exactly right stocks or mutual funds, it’s simply the ability to stay invested, to overcome human nature — not selling when the market is declining — and consistently put money into your accounts. Over short periods, the market direction may be a coin flip but successful investors maintain staying power in the market measured in decades.
10. Even if you are among those who have taken a personal finance course, there is a lot to stay on top of. You must continue to educate yourself about your options and opportunities or find someone you trust to guide you through the series of financial decisions that can support your desired life.
Of course, it can be difficult to pay down debt, build a cash reserve and invest for the future all from one paycheck. But these are the things that will make you financially successful. Apply these good habits now and your future self will be very thankful.Gary Brooks is a certified financial planner and the president of Brooks, Hughes & Jones, a registered investment adviser in Old Town Tacoma. Reach him at firstname.lastname@example.org.