You’re making money for the first time in your life and you’re also paying your own rent, bills, and student loan debts. This may be the first time you’re on your own. You want to have fun. You want to enjoy the rewards of your hard work. You want to go out with your friends, go to concerts, travel.
You may have thought about saving, but you don’t know how you’re going to do it. There are so many things you want. You try to stop spending money, but it’s difficult. Other people buy things like iPhones and designer clothes, so why can’t you? You feel the need to keep up with your peers, whose successes and acquisitions are plastered all over Facebook and Instagram.
Saving money is difficult to justify. It takes too long to see any meaningful results. Retirement is not a priority for you. It may not even be a thought.
Senator Elizabeth Warren (D-MA) wrote a book with her daughter, Amelia Warren Tyagi, called All Your Worth: The Ultimate Lifetime Money Plan. Their rule of thumb is 50/30/20. Fifty percent of your take-home pay should go to your needs, 30 percent to your wants, and 20 percent to savings. This is great advice.
Most professional financial planners will tell you to take advantage of your workplace’s 401(k) plan—if one is offered. This is also great advice. Always put enough money in to at least get the company to match your contribution. The average match is usually in the 3 to 4 percent range. Ignoring the matching contribution is like turning down a 3 to 4 percent raise every year. This is a painless way to start building a retirement savings balance. Roth IRAs are also a good way to save money and minimize taxes.
Some professional financial planners will argue that young people are in the perfect position to take on risk. Their logic is that young people can buy stocks and allow the markets and compound interest to work for them in the many decades they have to allow their money to grow.
The stock market is great for people who know what they’re doing. The problem is that most people who invest in the stock market don’t know what they’re doing and they are competing against professionals who know much more.
Buying mutual funds, where your risk is spread over multiple stocks, may be a great idea. Buying individual stocks is a different proposition. When you buy a stock, someone who thinks he knows more than you do is selling that stock. Unless you know more than most or can devote hours to studying stocks, the market has significant risks.
While it is true that you can better afford to take risks when you are young because you have more time to recover from your mistakes, that does not mean you should play the market. Depending on the timing of your entry into the stock market and the timing of your exit, the results can vary widely, resulting in significant losses or gains. There’s an old saying that “timing is everything.” Therefore, most people who counsel you to invest in stocks will recommend that you buy and hold stocks in established companies and hold them over the long term.
Personally, I invest very little in the public stock markets. My cousin, legendary short seller James S. Chanos, is heavily involved in the stock market. He loves it. Many of his trades, like being the first to recognize that Enron was a house of cards, have gained national attention. He also predicted the 2008 housing crisis years before it happened and was one of the first to warn of major instability in China’s economy. He has been consistently successful in researching, identifying and evaluating significant opportunities in the stock market for over thirty years. He’s brilliant and he studies the markets and the stocks he trades relentlessly.
Understand that while you may be investing in a high-flying stock, others who have far more information than you do may be shorting the very same stock. Over time, you may want to give the question of investing in the stock market further thought. It’s an important decision. Read and learn more about investing in the stock market and determine what level of involvement, if any, makes sense for you.
Many financial advisors will tell you that you should save from three to six months of your expenses for emergencies. If that is too diffcult, consider putting aside $1,000 or more in a savings account for unforeseen expenses. Consider online savings accounts, which offer higher interest rates than brick-and-mortar banks.
Avoid debt. If you have debt—pay it off . You should be laser focused on getting rid of any student loans or credit card debt. Debt is your enemy. Don’t get comfortable holding on to debt. If you have outstanding debts, consider paying off the smallest balances first. It’s important to establish the behavior of both saving and debt reduction.
Buying a bigger car and moving into a more expensive apartment are normally very bad choices when you are just starting out. Those aren’t just short-term spending decisions; those are long-term commitments that permanently commit you to higher spending in the future.
Invest in yourself. Invest in your “human capital” and future earning potential. Investing $2,000 in yourself on classes that improve your job skills and get you a $1,000 raise can, over time, be one of the wisest investments you can make. Anything that actually increases your earning potential is a good investment.
But the investment you make really needs to improve your earning potential. Some for-profit schools do just the opposite. They saddle you with crushing debt while doing little if anything to increase your true earning potential. Make sure that any investment you make in education is with a reputable institution that can truly improve your earning potential in a meaningful way.