We’ve just graduated a fresh crop of high schoolers and college students. This time of year, I’m often asked the best way for a young person to get a solid start financially.
Here are four rules any young person can follow to get off on the right foot:
1. Control yourself. The first step in getting a healthy financial start is habits. Habits are a lot like getting in good physical shape. The hardest part is the beginning. There’s a lot of pain, agony and discomfort. But after the initial phase, you notice it gets easier and easier.
First, live beneath your means. Not within them, beneath them. Because only if you live beneath your means can you save. And systematic saving is perhaps the most important financial habit you can cultivate.
Start with 10% of your gross income. If you can’t save that, you are likely spending too much money.
2. Control your money. Once the basic habits of living beneath your means, spending and saving are established, it’s time to implement some basic strategies to accompany your good habits.
Allow your savings to accumulate until you have six months of your annual income in the bank. The foundation of any financial plan is accessible cash savings.
Once six months of income are built up, consider that savings account as your bank, from which you borrow to buy big ticket items. If you borrowed from a bank, you’d have to pay back the loan with interest. So why not do the same for yourself and keep all that interest in your pocket, not the bank’s?
3. Protect yourself. Bad stuff can and does happen to really nice people (like you!), so make sure that you work with an experienced agent to install life and disability insurance as needed for your circumstances.
4. Have faith. I’m not referencing spiritual faith, but economic. I know people of spiritual faith who have a very pessimistic view of the near future. In various ways, they see the end as near and have little hope things will get better for them in this world.
Others hold a more positive view. They see the possibility (perhaps even the probability) that a world occupied by humans made in the image of God will find ways of continually improving their surroundings, thereby creating wealth and improving the standards of living for many.
I find myself in this second camp, which is why I counsel long-term faith in free markets allowing strangers to cooperate with one another protected by the rule of law.
For most young people, this means long-term participation in the equity markets, probably through the ownership of mutual fund shares.
Recent graduates may just be starting out. But when a twenty something person gets the vision for a well-managed financial life, it sets the stage for great things to come.