Friday, February 15, 2008

Lessons I Wish I Learned Earlier

We’ve all heard it: “If I knew at your age what I know now” from our parents and other adults. I think it’s difficult for someone to say this without sounding arrogant and patronizing, which completely defeats the purpose of trying to share the information. However, much of the information generally turns out to have at least an iota of worthiness to it (at least, most of what I heard did), so I think it's worth sharing such a list.

As I re-read this list I’ve been working on, I realize that while it would have helped me dramatically when I was in my 20s, it’s still good advice for me today in my 30s. While I knew most of these principals in my 20s, I don't feel like I really learned them, because I wasn't actually practicing these things.

1. Save early and often. We all know this. I didn’t start contributing to a 401k until I was 29, and because I wasn’t make much money, I only contributed about 4%. Yikes. Well, I did have a 401k for about 15 minutes when I was 23, but I’d only contributed about $20 by the time I paid the fees for cashing it out [when I left the job], it was only about $3. Even if I’d only set aside a small amount of money, for retirement/finishing my college degree/buying property, I’d be in a better position than I am today (e.g. I’d probably have at least low 6 figures in my retirement accounts, instead of low 5 figures). I always treated saving as something to do with money that was left over, instead of making it a priority. My only priority was to not be absolutely broke, and I accomplished that. If I’d made my goal to be financially secure in the future, things would be much different for me today.

2. Budget, and make it work for you. It’s one thing to make sure the minimums are paid on your bills, and it’s another thing to make the things you want to happen occur after the bills are paid. Know how money is being spent, and learn where cuts can be made to make other things happen (e.g. buying a new electronic gadget, going on vacation, buying new furniture). If you have a budgeting spreadsheet, you can also put information on your savings accounts and investments on it and then compare what you project will happen in a year with what actually happens. Creating a budgeting spreadsheet last year really opened my eyes to my finances, and was the impetus in paying down 40% of my debt. Really.

3. Save more than you think you can, but still allows you to live reasonably, because you probably can swing it. If you think you can only save $20/paycheck, try $25. I know that for someone starting out at an entry level job, saving any money can seem like a major challenge. For me, though, instead of starting to save for property at 37, I’d actually own property. (Note: I did have the money for a down payment when I was 34, but I used nearly all of it to travel the world for almost a year – an experience I would never give up. Though, the bulk of that money came from a small inheritance and stock options from my former hi-tech job.)

4. There are moments in time when it’s ok to live outside your means. Specifically, if you lived with roommates in college and go on to live in your own place, spend a reasonable amount of money to furnish it. In the same vein, when you leave college and start working full-time, you’ll likely need to invest in some better/different clothing – and yes, the clothing is an investment, because it’s doubtful an insurance company is pleased if their new recruit shows up in worn jeans and a t-shirt from Sammy Hagar’s bar in Cabo.

5. Invest. Start small, and slowly build a varied portfolio. If I’d invested in the companies I followed in 1999, I would have a significantly different portfolio today. If I’d bought the stocks I almost did when I was 22, I would have had a very, very strong return on them. You don’t have to have a lot to invest – especially now that there are so many easy-to-use online brokerages. Just buy a little on a regular basis, and spend time learning the basics of how the market works, and pay attention to your stock’s performance on a quarterly basis. If you don’t think you have enough to invest, do something simple like save all your coins, and then once a month convert them and invest that money. Odds are you’re not really going to miss your pocket change.

6. Network. When I was in high school, I thought networking was a silly, pretentious, yuppie affectation. A couple decades later, I can count many opportunities I’ve had because of the people I know. I’ve received jobs and job offers, shared-living opportunities, free stuff, and more. Once someone knows that you do something well, they’re highly likely to mention it to someone else when the topic comes up. For several years, I’ve been an occasional petsitter. At some point, I said this while in the office of one of my clients, and recently the president of the company came over and said “I heard you housesit. Do you like dogs?” Since I was also planning to be out of town, I couldn’t do the project. More importantly, it was someone else who told him about me doing that, and he never would have asked me if he hadn’t heard about me from someone else. The woman I was recently petsitting for (and will be again in about a week) was referred by a mutual friend.

7. Listen to people older than you. You don’t have to follow every piece of advice, nor do you have to agree with it – just listen. Just decide what sounds good to you, and go with it. If you hear the same thing from three or more people who don’t know each other, it’s probably a sound idea.

8. Talk to your friends about money. You don’t have to talk about specific numbers, but talk about stocks, IRAs, banks. Since you likely trust your friends, you’re more likely to trust and follow their advice. Maybe you start an investing group together, or maybe you swap personal finance books, or maybe you just get a referral for a CPA. Talking to your friends about money also helps keep all of you accountable and inspiring the others. After hearing me rave about The Crack (Budgeting) Spreadsheet that I have, I’ve sent [blank] copies to a couple friends so they can look at it and possibly use it.

9. Set financial goals. If I had done this in my 20s, I would certainly be in a better financial position today. Instead, I looked at money as something I generally didn’t have enough of, and as something to spend when I had some left over. I rarely even thought about saving for retirement. I coasted along on the paycheck-to-paycheck mentality, and while I built good credit by accruing and paying down debt, having a good credit score has not provided me with a strong, diversified investment portfolio or my own piece of property. I’ve decided I’d like to have $3 million at retirement. I’ve also realized that to do that, I need to save at least $1k each month. While I’m not (yet) able to do that, I know what that number is for me.

10. Have fun. Know that you aren’t expected to be financial whizzes in your 20s, and that it’s ok to make mistakes and rack up some debt – I once read “in your 20s you learn, in your 30s you earn” and I tend to agree with it. It’s natural, and it’s a learning experience. Just don’t have too much fun, or you’ll be paying for it far longer than you imagine. I know that sometimes you have to splurge and have some fun (within reasonable limits), or else the whole budgeting/financial planning thing becomes tiresome and something resented (and then abandoned altogether).


Colonel Cash said...

This is a good reminder that history is our best teacher and that we can learn from the experiences, the successes and mistakes, of others.

Shana said...

I definitely agree with you Colonel. Though, I know that for many (me included) a certain amount of mistakes have to be made so that someone can learn firsthand. If someone is like this (like me), finding the right balance can be a difficult process.

Taekduu said...

Your post is very interesting because I am 26 and most of my current colleagues are anywhere from 2 to 10 years older than I am and seem to still not have learned the same lessons.

I am not sure if 4% is that little. I contribute that to my 401K because my company matches dollar for dollar until 4%. Automatic rate of return and it actually comes out to >5000 over a period of 1.5 years.

Shana said...

Hi Taekduu,
Well, it depends on how much money you project you will need when you retire. I'm not sure what you mean by automatic rate of return (the matching? the market's average performance?). If I could re-do my 20s, I'd put as much into a 401k and an IRA as I possibly could. Also, the more that is invested early on, the more it will grow (thank you compound interest) and that allows for smaller contributions later on.

Good luck!

Finance Matters said...

Very true, there are many financial lessons I wish I had learned earlier in life. I think that schools should have more classes and lessons focused on money management, saving, etc.