Financial Advice to 20-30 Somethings

[frayne]

Went to my son's house last night for a cookout and afterwards a bunch of us guys were BSing around the fire while the women folk chit chatted about whatever women folk chit chat about in the house. My son and his friends are 20-30s, all married, for the most part college educated, and good hard workers mostly in sales/engineering fields. My son made a comment about me being able to retire early and the subject turned to what strategy I had used as well as advice.

I tried to explain to them my overview of investing which is no load index funds, don't market time, maxing out 401Ks, etc., etc. A few of them looked at me like I was from the moon and had no idea what a no load index fund was, DCA, expense ratios, beta, turnover, so on and so forth.

Also talked about discipline and not knee jerking to the market or daily financial news porn, buying pure life insurance (term life), staying married, not carrying credit card debt and living below your means.

The whole point of this thread is to ask, what would be your top five recommendations to a young person starting out to help guide them to a secure financial future and hopefully, FIRE ?

Heres mine for starters;

Stay Married

Don't carry credit card debt

Max out tax deferred savings via DCAing into a no load index fund(s)

Carry only term life insurance

Live below your means

 

[TromboneAl]

Sounds like they got some excellent advice. I would've told them about the same thing.

 

[retire@40]

LBYM is tops :Your living expenses need to be no more than 75% of your earnings. The lower the better.

Invest for the long-term : Don't put money in retirement plans only to dip into it when you "need" it before you retire.

Be frugal (but not cheap)

Start your own business (as long as you think you are smart enough to run it correctly)

Diversify your investments (unless you only have one egg or one basket)

Keep track of your net worth on a regular basis : You can't know where you're going unless you know where you are. I like to review my net worth on a monthly basis, but it could be done quarterly.

Take some calculated risk early in life : Do it when you can recover from a failure. And don't be afraid to fail.

Don't be stupid : It's tempting to forget where you came from when success goes to your head. Always remember how hard it was to earn your first $10,000.

Don't do what your friends are doing : To be successful you need to blaze your own path. If you copy what other people around you are doing, then chances are you won't succeed. There are more unsuccessful people in the world than successful people. The majority of the population is just getting by.

 

[DangerMouse]

The only thing in addition to previous posters I would add would be to find some balance in your life between the need to save for a future and enjoying your life today.

 

[MooreBonds]

1. LBYM - encompasses most of the golden rules (no credit card debt, only use other debt (car loans, HELOC, etc.) if absolutely necessary).

2. Save as much as possible as early as possible - the power of compounding cannot be overstressed. A lot of people will try and use an excuse of "I just graduated school, I'm on my own now and want to live it up!".

If someone graduates college @ 22 and works right away, they'll likely want to splurge a little for a few years living it up. However, if that same 22 year old goes to graduate school to further their education, they'll (hopefully) continue the life of a meager student, since their funds will likely be limited. 2-3 years later, they now have a good job and possibly a sizable debt load. The presumed reason for entering grad school @ 22 is to get an advanced degree to make more money. If there's nothing wrong with living the life of a simple grad student from 22-25 to increase your net worth, why not live the life of the simple working person @ 22, save as much as possible from 22-25 to increase your net worth, then loosen the belt at 25 and then pick up where you wanted to when you graduated @ 22? Your savings stash will be impressive, and you can pick right up where a masters student would be. Sure, your income won't be what a Master's student would be, but your long-term stash will have a huge long-run growth potential.

2a. As a side note to the above, your savings stash would take advantage of the variety of accounts, in order of importance:
1) HSA (if you're healthy and qualify for a HDHP)
2) 401(k) - depending on your tax bracket and other items, you might max your 401(k) first, or up to match, then move on to 3) and back to 2)
3) ROTH IRA
4) Taxable Savings

3. Use a cheap, diversified portfolio of index funds (with a little Wellesley thrown in)

4. Build an emergency fund - You won't have to do this first, since credit cards/family should be able to hold you over for any realistic emergency. Slowly build up an e-fund (using MM account, or I-bonds if the real rate is high enough) over 2-3 years, so you don't deprive 2a.

5. Live frugally - learn how to get the most out of your expenditures without having to spend the money.

6. Marry someone that is psychologically compatible and has similar long-term goals (especially financial). eHarmony gets two thumbs up from me

 

[REWahoo]

...what would be your top five recommendations to a young person starting out to help guide them to a secure financial future and hopefully, FIRE ?

I'd only have one recommendation, to follow "Dilbert's 9 Rules for Financial Security":

1. Make a will
2. Pay off your credit cards
3. Get term life insurance if you have a family to support
4. Fund your 401k to the maximum
5. Fund your IRA to the maximum
6. Buy a house if you want to live in a house and can afford it
7. Put six months worth of expenses in a money-market account
8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio

 

[CompoundInterestFan]

I'm still in my early 30's, so perhaps I can comment from a different perspective. I agree with pretty much everything that's been said so far, except for maybe the life insurance thing (I'll explain below).

- Play around with a compound interest calculator. Seriously. Echoing what MooreBonds said, there's nothing like seeing the real power of compounding. I'd always been told about the power of compounding, but to actually see it made a big difference. It can be a huge motivator.

- Build an emergency fund, especially if you're in a volatile field. Count on getting laid off at some point in your career.

- Buy a house earlier rather than later. This can be difficult, because so much is in flux in your 20's, but it really is better than throwing your money away in most cases.

- Don't get a graduate degree unless you really need it. I've seen people spend so much money on degrees they either didn't really need or never used.

- As far as life insurance goes, I think it's probably the last thing on their minds, and unless they're married, there's probably no reason to have it. But I agree, if they are going to get it, only get term.

 

[RedHawk]

unless they're married

Depending on the spouse's job potential, I always thought the need for life insurance started after you had kids and not necessarily a spouse.

 

[bbbamI]

rjpatt...

IMO life insurance is useful even if you don't have kids.

1. when you're young, the premiums are lower
2. if a husband dies, his wife could possibly be pregnant and not be aware
3. since you are just beginning your life together, there may be a period of time when you need both of your salaries

I would suggest term life insurance only. DH and I have been fortunate that we have always had life insurance through our employers.

As far as advice for 20 - 30 somethings...all of the posts have been excellent. I would like to add that when you're young, you kind of feel 21 and bullet proof. But there will come a day when you no longer want to work, or your body has an ache or two. You want to be able to leave your job and live on your investments. Time waits for no one.

 

[haha]

Heres mine for starters;

Stay Married

Don't carry credit card debt

Max out tax deferred savings via DCAing into a no load index fund(s)

Carry only term life insurance

Live below your means

Which one of these things doesn't belong here? Let me see, all of them are essentially voluntary and under one's control except one.

Expalin to me how this appies to #1:"Stay married"? Divorce is an OR, not an AND. Husband OR wife wants out, you are no longer married.

While the advice is undoubtedly good, I find it perhaps a bit smug.

Ha

 

[bssc]

As per point #1, I lived with two women before I met my present wife. Living together was enough to see that I would not want to marry them, because they both were financially irresponsible so we split up. It made me appreciate my present wife's mature attitude.

 

[trixs]

I would say the best financial advice for a young person is to simply to get interested. Get them to invest in random stocks of there choice to see how you can make or lose money. If they get interested in investing the rest will come with the research they will do. At least that was my path.

 

[sgeeeee]

In my 20s and 30s I don't think I had much interest in what some old phart (like me) had to say about investments and retirement. I didn't know squat about investing at that time. I did have the frugal gene and that seemed to serve me well enough. That may be enough for most 20 & 30 year olds.

At some point I got interested enough to read and study up about saving and investing. It took me several years to become really comfortable with my own retirement plan because there is so much cr@p in the literature and it takes awhile to sort it out. But there is good information too.

I think the best thing you can do is be ready to provide good source material to that 20+ year old when they are ready to learn more.

 

[frayne]

Which one of these things doesn't belong here? Let me see, all of them are essentially voluntary and under one's control except one.

Expalin to me how this appies to #1:"Stay married"? Divorce is an OR, not an AND. Husband OR wife wants out, you are no longer married.

While the advice is undoubtedly good, I find it perhaps a bit smug.

Ha

I'll revise it to elimilate the smug factor.

If possible, stay married.

 

[SecondCor521]

I'll revise it to elimilate the smug factor.

If possible, stay married.

To put it another way, don't divorce your spouse. I am divorced but I did not divorce my wife.

2Cor521

 

[Ed_The_Gypsy]

Avoid debt like the plague. Only borrow to finance school and house.

Be sure you have health insurance (HSA if possible) and disability insurance. First choice: individual policies (they are portable) instead of through workplace.

Save 20% of earnings. Put it somewhere and don't touch it. If not comfortable with stocks, put it in CDs (Vanguard TSM much better) and then learn about investment, but save first, get fancy later (don't wait too long!). Put as much as possible into a Roth first.

When choosing a job, first go for the experience, later for the money.

 

[ylm23]

About life insurance - what DH and I did when we owned our home but weren't married yet was take out term life ins in the amount of the mortgage, sure we had about equal earning potential but the mortgage alone would have been a stretch for either of us and it is one less thing to worry about while mourning the loss of the love of your life.
I do agree if you have no dependents and enough money to bury yourself, life ins. isn't necessary.

 

[CompoundInterestFan]

Start your own business (as long as you think you are smart enough to run it correctly)

I would amend this to add "and as long as you have a desire to do this." No sense doing something you're not interested in, even if it is a way to (possibly) make more money.

 

[retire@40]

I would amend this to add "and as long as you have a desire to do this." No sense doing something you're not interested in, even if it is a way to (possibly) make more money.

Well, that's a given. You'd have to have a desire to do anything to make it work.

 

[Billy]

I came from a business family background. Great grandpa came over on the boat in early 1900's. Brought Grandpa over when he was a child, and started business - left Grandma in Europe. Brought her over later.

I grew up thinking it only made sense to have one's own business and I assumed I would marry someone who wanted to be self employed.

As I have lived more years in life, I see where self employment doesn't fit everyone's drive or emotional makeup. However, if it does, then it is a tremendous way to prepare for FIRE (a la Millionaire Next Door). If it doesn't, one could find themselves in debt, divorced, and with a severely ruptured self esteem!

Akaisha
Author, The Adventurer's Guide to Early Retirement

 

[tikitoast]

About life insurance - what DH and I did when we owned our home but weren't married yet was take out term life ins in the amount of the mortgage, sure we had about equal earning potential but the mortgage alone would have been a stretch for either of us and it is one less thing to worry about while mourning the loss of the love of your life.
I do agree if you have no dependents and enough money to bury yourself, life ins. isn't necessary.

That's such a great idea, for the sake of any children also. I wish my father had had insurance for the amount of his mortgage.

When he passed there was no money to keep the house, which was sold in a hurry under pressure from my uncle--who recently admitted to me (vindicated at last!) that he should have worked harder to keep that property as part of my trust. Fifteen years later it would be valued at around 400k...Whereas the investments he kept churning for me had plummeted significantly when I finally inherited them.

Live and learn!

 

[newyorklady]

i truly believe that your choice of a spouse is the number one factor for financial success. also check into potential spouse's family to see if they will be a burden to you. i am not saying marry rich, which is always nice (i didn't do that btw) but marry someone who is into the lbym mentality. in addition to the financial benefits of this, there are so many more benefits such as a much more fulfilling and interesting life. someone who equates happiness with a new car is just a plain old bore in my book.