If you had to give a young adult one piece of financial advice, what would it be?
I am 22 years old and have developed a vast interest in personal finance and the economy. What would be the most critical piece of advice you would give to someone my age who has just entered his first career? I have lofty expectations for myself and my future, therefore, I want maximize my income and value as much as possible.
If I had to give you one piece of advice it would be 'Know Yourself' and related to that learn as much as possible to see what works for you. Many youngsters make decisions based on what others are telling them or what is popular. For best results, you should make decisions based on what you know about yourself. This is true whether you are choosing a career, a financial plan or a life partner. But just knowing yourself is not enough if you do not know what options you have which is why my second piece of advice to learn as much as possible and speak to as many people as possible.
I believe the best advice involves harnessing the “power of compounding”. Advice: “When you start investing outweighs how much you invest”. Time is your greatest resource- and the younger you are the more of it you have.
In a nut shell, the sooner you begin saving, the less you need to save over your lifetime for retirement. So starting to save now can free up cash in your 30’s and 40’s and create the opportunity for the financial freedom to meet other financial goals like; buying a house, paying off your car, saving for children’s college, starting a business, taking trips, maybe even buying a vacation home.
Using the rule of 72 can help you understand compounding and I have included a link with a graph that helps illustrate this point. https://www.chase.com/online/private_client/investing-snapshot-article.htm
Albert Einstein said” “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.” ...
Excellent question and a very easy one to answer. I also see that many of the answers provide more than one piece of advice, but i am going to stick to the intention of the question and only provide one.
The number one piece of advice I would give you at 22 years old is exactly what I followed at your age: Pay yourself first and pay yourself as much as you can, but a minimum of 10%.
So what does this mean? I would suggest you read "Richest Man in Babylon" to give you some insight into this time tested principle. Make sure you start contributing to whatever retirement plan is provided or set up your own retirement account with a combination of investment account. It is better to utilize the retirement accounts as there may be current and future tax benefits of those accounts. Then start putting a minimum of 10% of your earnings and invest it. This is a surefire way to accumulate wealth by using compounding and you will also learn to live well within your means so as you earn more you will be able to put away a significant portion of those monies too.
Best of luck in your quest to build wealth! The fact that you are asking these great questions at an early age will certainly give you an advantage over the large majority of those your age.
There are 3 basic ideas that I would recomend implementing into your life as soon as possible
- Create a budget. Fine tune exactly what you are spending your money on each month and always pay yourself first. Remember to put money in your retirement plan and savings before allocating bar money and your fantasy football entrance fees. If you need some extra cash to make your expenses and savings goals work look into picking up a second gig like driving for Uber or Lyft.
- Know how and when to use debt. This ties into number 1. Don't get yourself into credit card debt buying new clothes and taking trips you really can't afford. If you do have a credit card make sure you pay off the balance every month no exceptions.
- Start saving for retirement on day 1. As soon as you can set up your 401(k) start saving what the company will match at a minimum. I recommend implementing some sort of automatic increase, like annually on your hiring anniversary, and don't forget to increase contributions at every pay raise.
Keep it simple. People over complicate their personal finances and it ends up being a mess. Remember this order for prioritizing: budget, savings, debt, retirement, children's education savings, savings for other goals. Of course, children's education savings only applies when you have children. The trick is this: When you're having trouble with one thing in the order of priorities, you can backtrack and usually find that your priorities are out of order. For example, when people find themselves taking a lot of retirement plan loans, I usually examine their habits to find that they can't budget, don't have savings, or have a lot of debt. Sometimes they have two of these problems, and other people have a problem with all three. When people can't dig their way out of credit card debt it usually means they don't have savings. Example, someone has four credit cards with $7,000 in debt he's paying down. He successfully get's it down to $1,000 but then the air conditioner goes out in his house. It's going to cost $5,000 to replace and he doesn't have savings. He ends up with $6,000 in debt again. Budgeting requires the formula Income - Expenses > or = 0. If it's not greater than or equal to 0, then you have a negative number and that deficit has to be paid out of savings or with debt. If someone can afford to save, pay off debt, and has access to an employer retirement account then he or she should at least make sure to get the full match. When there isn't a match, then he or she should definitely still be contributing. It means there's a greater need for saving when a match is absent. If there isn't an employer retirement savings plan then consider an IRA or another retirement savings vehicle.