You’re going to get a lot of advice, graduates, as you embark on whatever journey you are about to take. You probably won’t hear the advice I’m about to give you, however.
Don’t worry about $5 lattes and $9 avocado toast. Folks who pick on you for that are living a lie. What;s the real problem? Half your generation will spend half its money on rent by 30. Be in the other half. You’re used to living with roommates. Don’t get un-used to it until you are really financially secure.
In fact, don’t sweat the small money mistakes. Focus on avoiding the really big ones, and you’ll probably be fine. That means don’t be suckered into buying a condo before you need one. Don’t buy a pretty car just to have one. Don’t go right to grad school unless you feel you have to. Don’t rush into marriage and get suffer an expensive divorce. Have children with a plan. It’s the big mistakes, not the occasional cable bill late fee, that can crush your future.
So, go to Europe, but don’t go into debt to go to Europe. Shop at outlets. Wait for sales. Avoid late-night Amazon bingeing. Bingeing on Netflix (or, I’d prefer, podcasts) is much cheaper. Don’t do too much of that, however. Loneliness is the biggest problem young people face, and that’s an expensive problem, too. So focus on friends. They’re free.
Don’t be in too much of a rush to pay off your student loans; most such loans actually aren’t that bad a deal. But do beware grad school student debt, which is the real problem for many graduates (be *sure* you’re going to get the return out of that degree. I’m looking at you, law-school-because-you-have-no-better-idea 20-somethings).
Don’t fret about occasional credit card debt. You’re going to move, you’re going to need professional clothes, stuff’s going to happen. Carrying a balance for a month or two isn’t the end of the world (do the math). What is the end of the world? Getting used to carrying a balance. True “revolvers” are the ones in big trouble. If that’s you, STOP USING YOUR CARD now. Get a second card, use that one, and pay if off every month, all the while slowly paying down your in-the-red card. It’s revolving that’s a big mistake, not occasional borrowing.
One of the best predictors of financial strength in your 30s is whether or not you tolerate living with roommates in your 20s. For more proof, check out this Dan-vs-Dawn parable I told over at Grow magazine. In short, because Dawn got a side hustle, lived with roommates, and put money in her 401(k) from day one, she got out of debt by age 30, which Dan….pretty much will never get out of debt.
One of the best pieces of advice I ever heard was, “Live like you are still in college for a few more years.” Watch for happy hours, split all your bills, hang out with thrifty friends who like free museums.
Being young and broke is hard, but there is one amazing advantage you have that everyone else on the planet would trade for: Time. And, as the saying goes, time really is money. The biggest mistake of all would be wasting the time advantage you have. To demonstrate this, I’m going to once again share the Parable of the Two Twins, with math so dizzying, you’ll hardly believe it. But if you are lucky enough to have read this far, you will learn a piece of advice that every 40-something, 50-something, and 60-something wishes they’d been told.
Essentially, it works like this. Put aside money for retirement in your 20s, and you can stop at 30 and be better off than people who start saving at 30 and save for the rest of their lives. That’s how valuable time is when applied to money.
Here’s one example of the math.
Liz Pulliam Weston, in her book “Deal with Your Debt,” offers this version of the story. One twin puts aside $3,000 every year in a Roth IRA starting at age 22, and stops at 32. She never adds another penny. Her brother starts saving $3,000 annually at 32, and continues until age 62.
Assuming an average 8% return annually, the twin sister wins easily. When both turn 62, she has $437,320, compared to her brother’s $339,850, even though she contributed far less of her own money than her brother ($30,000 vs. $90,000).
Let me put this another way. The rule of 72 says that if you are earning 7.2% interest, your money will double every 10 years. The reverse is basically true: earn 10% interest, and your money doubles in 7.2 years. So let’s say you start at 23 with $10,000. Here’s a rough example of how it works:
- 23: $10,000
- 30: $20,000
- 37: $40,000
- 44: $80.000
- 51: $160,000
- 58: $320,000
- 65: $640,000
But note, if you skip that first tier…if wait until 30 to save that $10,000, you cut off an entire round of doubling before age 65. In other words, you end up with half the money, missing out on $320,000. There’s a lot of assumptions in this math, of course, but it’s done to illustrate this absolutely critical point: You can’t make back time. That’s why I’m here to tell you that you should take those lovely graduation checks you get from family and deposit the money in a retirement account. I know, boring. Not a Europe trip. Put it into retirement. You’ll thank me later. And if you are tempted to take a few thousand dollars you get and use it to pay down debt, well, that might be a bad idea, too. If you have high-interest credit card balances, then that might be a good idea. But if you have a student loan with a decent rate, just make sure you can make the monthly payments and save the rest.
So don’t sweat the small stuff. Instead, plan long term. Avoid the killer mistake. Avoid the big ripoff. And you’ll probably be ok.
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