by Melissa Sotudeh, CFP®
I recently got this text: “do you have any advice for beginner/young adults starting to invest?” from my daughter on behalf of her friend.
I texted back, “Tell her that I do.” My thought was to set a time to talk with this friend and maybe share some articles. After 5 minutes (an eternity in texting), my daughter sent, “would you like to share?” Now I understood...they wanted this advice via text!
Texting investment advice? What a millennial she is…but it got me thinking.
No, I don’t think texting is the best medium for investment advice or education (first of all, because it’s not a secure way to transmit personal information). And I do believe that financial advice should be customized, and that there is a lot of value in understanding someone’s motivations and emotions around money (which are not likely to be conveyed in a text).
But it’s true; the foundations of personal finance do not have to be complicated. They should be simple enough to share in a text, even if the implementation of the advice does need to be customized. Actually, research shows that sticking to a few basic principles results in successful accumulation of wealth.
Spend less than you earn.
Use apps, Excel, or pen and paper to create a spending plan. My daughter and her friends are entering their senior year of college. Most are spending this summer at paid internships. They are earning, and will begin thinking about salary and living away from home. Some of these young people may get job offers where they are currently interning so they should think about what life costs – housing, food, entertainment. Once you know what you will be earning, set a budget below that amount but don’t forget that you will pay taxes, and possibly insurance which means that each paycheck will be less than what you think.
Master cash management.
Keep one month’s worth of core expenses in checking, and 2-5 months’ worth in savings. Identify core expenses. For most recent graduates, this will be rent, food, utilities, gas, insurance and maybe student loans. Figure out that number immediately and determine whether you are spending less than you earn.
Earn interest, don’t pay it.
Pay off credit cards each month. Never keep a balance. Your credit score will increase by making timely payments. Consider cashback rewards cards. Unfortunately, many students are graduating with loans so it is critical to avoid additional consumer debt whether or not you have loans. Pay off high-interest rate debt first.
Strive to save 10-20% of your income.
This may sound like a lot but for most students, this can be doable since they are not used to earning a full salary. Use tax-deferred and taxable accounts. For retirement plans, contribute at least enough to get the match. Ideally, contribute the maximum. You can start with 10% and increase 2% annually. Once you have built a cash reserve account (see above), you can build investments in a taxable account utilizing low cost index mutual funds or exchange traded funds (ETFs). The key here is to automate savings. First to your 401k and then to a more easily accessible account (taxable account).
Invest for the future.
Use low-cost, diversified investments with the proper risk/return profile for your needs. Look at indexed mutual funds or ETFs and diversify across investment categories (stocks and bonds).The key here is to keep costs low and allow for compound growth! In fact, it can be as simple as understanding the internal expenses of a fund (are these low? No commission?) and its investment objective (is this a basket of stock? US? Large and small companies?).
Use a fee-only, independent, fiduciary advisor.
To provide objective advice, your financial advisor should not have ties to any bank, broker, or insurer. Basically, this means that any advice you receive MUST be in your best interest.
Obviously, I couldn’t text this entire blog—but the bottom line is that the basic tenets of personal finance are actually quite simple. And that's why I wanted to write up an explanation of these concepts, so that you can text this link to a young adult in your life!
Building a strong financial foundation early in life does not have to be overly complicated. I congratulate any young adult who is curious and wants to be educated in financial and investing literacy. So start now!
P.S.—While you're thinking about good personal finance habits for your young adult kids—remember, it's a good idea to have certain key documents in place once your children turn 18. Learn more here.