Financial tips for the twenty-somethings in your life
Recently, I spoke with a 27-year-old who works at a local manufacturing company. Our office helps to manage his employer’s 401(k) plan, and, on this particular occasion, he called to discuss a recent case of FOMO, or the “fear of missing out.” He expressed that he feels he’s foregoing the perceived giant gains his peers are making from trading in speculative stocks like GameStop or investing in cryptocurrencies like Bitcoin.
Then, just this morning as I was writing this column, I received an email from a former intern — a 21-year-old college student who had just received his latest Federal coronavirus stimulus payment. He explained that he had been thinking of using the money on prudent investment options, but some of his friends were calling him “lame” for not jumping onto the Bitcoin or nonfungible token (“NFT”) bandwagons.
While this is not a scientific sampling by any means, I think these two 20-somethings are tapping into a trend that should give some of us pause: a growing societal message about how to build wealth in the 21st century. And it reads like a threat. “If you’re not here for the party, then you’re doing something wrong — and you’re going to regret it for the rest of your life.”
If you have a 20-something in your life who is willing to consider your advice, you may want to share with them the following tips about building wealth and financial security over a lifetime.
Tip №1: At this stage of life, focus on developing your human capital: the sum total of your educational and work experiences, as well as the hard and soft skills you acquire along the way. Your human capital will be a significant determinant of your work earnings over time. Invest in yourself, but be careful about taking on too much debt in student loans. College is one path to maximizing your earnings potential, but training that can build a valuable skillset over time counts as well.
Tip №2: Borrow responsibly. It’s better to take on debt for assets that are likely to appreciate in value, such as a home, rather than for things that tend to go down in value, like a car. Pay attention to interest rates, not just the monthly payment quoted to you. Check your credit report once a year from all three national credit reporting agencies (Equifax, Experian, and TransUnion) at AnnualCreditReport.com. It’s possible there’s some junk on there that’s not yours.
Tip №3: Be clear with your financial goals. Write them down, whether it’s saving for a house or for retirement, paying down high-interest debt, or saving for a vacation in Belize. Set a timeline for these goals.
Tip №4: Spend less than you earn. Many financial professionals suggest saving at least 10–15 percent of your gross salary.
Tip №5: Make a budget and give every dollar a job. You can use a spreadsheet or a budgeting app that automatically aggregates your accounts. Read your paystub and have a general sense of the taxes that impact your take-home pay.
Tip №6: Unless you’re counting on a significant inheritance, your accumulated savings and Social Security will be your main sources of retirement income. But Social Security likely won’t account for all of it — and don’t count on a pension, either. While 52 percent of those age 71 and older have access to a pension, only 14 percent of Millennials do, according to recent data from JPMorgan Asset Management.
Tip №7: Save early and save often to harness the power of long-term compounding. Time is the powerful ingredient, here. Even Albert Einstein is said to have once called compounding “the most powerful force in the universe.” As a young person with an assumed long life ahead, you’ve got time in abundance. Harness the power of time to your advantage.
Tip №8: When you invest, have a sensible asset allocation tailored to your time horizon, risk tolerance, and financial goals. Studies have shown that asset allocation accounts for approximately 86 percent of portfolio returns. The performance of different asset classes varies year to year, so having a well-diversified portfolio is one way to capture consistent returns over time.
Tip №9: Have an emergency savings account of at least three to six months of basic living expenses, and be sure to take full advantage of any employer matches that may be available in your retirement plan.
Tip №10: If you feel compelled to invest in speculative things such as Bitcoin or NFTs, scratch that itch with no more than five percent of your total investment portfolio — but, preferably, much less than that. Just be aware that these are, by definition, high-risk investments. And don’t check this account every 15 minutes! Go outside and enjoy the sunshine instead.
Talking about money with young people can be hard. But if you’re an influential adult in a 20-something’s life, your financial wisdom and different perspective may just steer them in the right direction, allowing them to navigate the many money messages out there right now.