There are things you only learn with time. For many, personal finance is one of those things.
Maybe it’s the arrogance of youth that causes you to brush off advice about money from your parents and grandparents, or maybe there are just certain life experiences you need to have before you can really grasp things like, how much money it’s going to cost to retire.
Whatever the case is, here are 4 things I’d tell my twenty-year-old self about money. Because maybe I’d have heeded the advice if it came from my own mouth (but, probably not).
1. Start putting money away
This is one I remember hearing a few times. Once when I was 18 from an uncle who said, “Just start, doesn’t matter how small it is. Twenty bucks a month. Just start a savings account and start putting just a smidgeon of your pay cheque in there every month.”
Of course, I brushed the advice off.
But wow is it good advice. Simple and so true.
The greatest financial resource a person has is time. Compound interest is an absolute force of nature (a force that can work for you or against you).
This is something you don’t really appreciate until you see the numbers first hand.
Investing for Dummies put together a cheat sheet where they broke down how much a person would have to save and invest to have 1 million dollars by the time you are 65. The numbers are based on assumptions of a 10% return every year and starting with a savings of 0.
If you start saving when you are 20: You need to save $95.40 per month
If you start saving when you are 30: You need to save $263.40 per month
If you start saving when you are 40: You need to save $753.67 per month
If you start saving when you are 50: You need to save $2,412.72 per month
If you start saving when you are 60: You need to save $12,913.71 per month
Giving your money lots of time to incubate without being touched can change the concept of becoming a millionaire from a lofty dream – only attainable for the precious few – to something really manageable and attainable.
Setting up an automatic withdrawal of $95.40 to go directly into a savings account for investment every month when I was twenty is something I probably wouldn’t have even noticed.
2. You don’t need to be rich to start investing
I spent most of my life up to this point thinking you need to have a ton of money before you can start investing and dabbling in things like the stock market.
Turns out that is just false.
Yes, you may need larger sums of money to make a lot of money investing. But it is completely possible to start small and use it as a way to start making your money work for you (a little thing called passive income – check out another article I wrote for different ideas to generate passive income).
Getting into investing young is great for two reasons:
First, it is a way of saving money that will get you an average yearly return on investment better than what you can expect from a regular tax-free savings account.
There is some risk involved, of course. But you can set yourself up with a relatively low risk portfolio using some of the tools I’ll mention shortly.
Second, starting small gets you learning about investments and getting comfortable with them. This way, when you reach a point in your life when there is regularly more money coming into your account, you’ll know what you’re doing and can really start to make some good money before retirement.
CNN put together a good article on how to get started with investments that serves as a good starting point if this is something you’re interested in. It covers where you should get your advice from, what you should be investing in, how much money you need to start investing, and how you physically make an investment.
3. Pay attention to what you’re spending your money on
Responsible spending is the bedrock of financial health, now and in the future.
The first step towards responsible spending is paying attention to what you’re spending your money on.
Try an experiment: track your purchases for a month. And be honest.
You’ll be surprised how much money you spend on little purchases you think are relatively innocuous at the time.
When I tried this, I was flabbergasted at how much money was going to app purchases, memberships to websites, and buying what I thought was just the occasional lunch.
Tracking your spending lets you see where you stand. It helps you identify areas in your life where you’re spending way more money than you should be. Twenty-year-old me spent way too much money on beer and entertainment. Way. Too. Much.
Here’s your perfect budget as an up and comer, according to Nerd Wallet.
50% of your income goes to necessities – these include rent, insurance, car payments, etc.
30% are for your wants – the dinners out, frivolous purchases, an Xbox… you get the idea
20% is for your future financial health – savings and investments
I could have made this budget work easily way back when if I had just stayed home even just one Saturday per month.
4. Get insurance
A simple fact of life: bad things happen to good people.
As a young man I fit into the category of the prototypical young person thinking that I was invincible.
People’s cars, apartments, and lockers got broken into but that wouldn’t happen to me.
Well twenty-year-old me, sometimes shit just happens. If you’re renting, get renters insurance.
It’s cheap and it covers things like break-ins, damage from a fire or severe weather, and the stuff in your car if your car gets broken into in the parking lot.
Also consider life and disability insurance. Much like investing and saving, the younger and healthier you are when you start, the cheaper it is and the more coverage you’ll have over time.