This is a cautionary tale for recent graduates, or those who will be graduating high school or college in the coming months. Today’s society of mass consumption has made it increasingly easy for you to guarantee a certainly level of being broke by the time you reach 30 years-old.
How so? By consuming everything thing under the sun in your twenties, with no serious thought given to saving money and avoiding debt.
It’s sad really, because young adults have an incredible opportunity to begin building wealth by taking advantage of compounding interest for the next 30 or 40 years.
Instead, most young people spend their first decade of adulthood racking up credit card debt on things that go down in value, or are immediately consumed and are of no lasting value.
Blame a consumer-driven society. Blame young adults’ parents, and an education system that goes out of its way not to teach anything related to Personal Finances 101. Blame advertisers and big media companies perfectly willing to go to any lengths to get their products into the hands of young people.
Most of the blame has to fall on the young people themselves. After all, we are talking about adults, albeit young ones. We are ultimately responsible for our own decisions, and even those of us who had less than stellar financial examples in our parents and teachers have to learn things for ourselves. Some of us learned the hard way. Hopefully, if you are reading this, you will have a less painful path.
Two Critical Financial Concepts to Grasp By 22
If I could boil down all of the advice I wish I could go back and share with my 22 year-old self into two concepts, it would look like the following:
1. Save Half of Your Income Beginning Day One. That’s right. 50%. Right out of the career gate. Start socking away money for retirement. Contribute to your employer offered 401k up to any matching funds. Contribute to a Roth IRA. Build a solid emergency fund of 6 months worth of household expenses. Save to pay cash for your next vehicle.
But how can I save 50% of my income and pay my smartphone bill, my car insurance, my car payment, my gym membership, my high-definition cable bill, and my rent? Good question. Something has to give. Which leads to the second concept I wish I had practiced when I was 22.
2. Delay Gratification. This is probably one of the hardest concepts to succeed at over a lifetime. We are in fact a microwave society. When we want something, we want it now. I’ve made my share of impulse purchases in the past, and had a stack of credit card bills to show for it.
Don’t rush out and buy a home when you first get a job. Who says you have to own your home when you are 26 years-old? There is nothing wrong with renting. In fact, most of the time it makes sense for young people to rent.
You don’t have to drive a brand new car when you have no money saved and are just starting your career. Late model used cars that are “new to you” are just fine. People next to you at the stop light won’t know if you bought that car new or used, so who are you trying to impress?
Now, if your goal is to be broke by 30, ignore concepts one and two. Get a big mortgage of about 35-40% of your take home pay – most lenders will allow it. Finance a new car and justify that you need it because it is “reliable,” and you don’t want to buy “someone else’s problem.”
Be sure to load up on designer clothes, too, and buy an 80-inch LED television on a credit card. Don’t start saving for retirement, or emergencies, just tackle those issues when they come up.
That should just about do it.