It’s really great how things come full circle sometimes.
Tomorrow, I’ll be speaking to an undergraduate class at UCSD (my alma mater). Dr. David Barner was kind enough to invite me to speak to his class about early financial planning.
So, I thought I’d write up this post specifically for those of you attending or any young student who may need these insights. May these ideas inspire you, prompt you to action, and lead to a fruitful and fulfilling financial future.
Here are 8 things about money that I wish I knew in college.
Table of Contents
1. Start Saving Early
Like many college students, I thought retirement was ages away. But one thing I learned early on was the power of compound interest. It’s not just about how much you save, but WHEN you start saving.
The earlier you save, the more time you have to earn interest upon interest. This is the easiest way to make money and the more time you have, the easier it is to do this. Imagine this…
Sara and Joe are best friends from college, both majoring in software engineering. After graduation, they both land good jobs with the same salary. They’re also given the same advice: save $300 each month for their retirement.
Sara, eager to secure her future, starts investing her $300 per month right away in a mutual fund that has an average annual return of 7%. She does this faithfully for ten years, from age 22 to 32, contributing a total of $36,000. Then, life gets busy. She gets married, has kids, and decides to stop contributing to her fund, but leaves her investment to grow.
Joe, on the other hand, thinks his twenties are for fun, not worrying about retirement. He decides to start saving when he’s more ‘settled.’ At 32, the same age Sara stops investing, Joe starts putting $300 into his mutual fund every month, continuing until he’s 62. He contributes for 30 years, totaling $108,000.
Fast forward to retirement. Sara, who only invested for 10 years, will have around $502,000 in her account, thanks to compound interest. Joe, who invested three times as much money over 30 years, will have approximately $372,000.
This scenario demonstrates the power of compound interest and time. Even though Sara invested less money overall and stopped contributing earlier, she ends up with more money at retirement because she started saving and investing earlier. Joe, despite saving more money over a longer period, ends up with less because he started later.
Remember, it’s not just about how much you save; it’s about how early you start saving. The earlier you start, the more time your money has to grow, and the greater the impact of compound interest. That’s a lesson both Sara and Joe will never forget!
** Here’s a strategy I share all the time for young people just beginning their career – The Basics of Saving with a Twist
2. Understand Credit
It’s easy to fall into the trap of thinking credit cards are free money. It couldn’t be further from the truth despite what our society tells us implicitly.
Getting your first credit card can feel like you’re invincible! But that invincibility can quickly turn into a mountain of debt. It’s essential to understand that credit is not free money; it’s borrowed money that you have to repay with interest.
And if you’re not paying off your credit cards each month, you’re paying the bank a ton of interest which can compound against you.
Always pay your credit card bills on time and in full. If not, the interest will accumulate, and it can quickly spiral out of control. A good credit score can help you in the long run, from getting a better rate on loans to even affecting your job and rental prospects.
Learn about credit early and leverage technology apps like Credit Karma to help you track your score over time. It’s never too early to build a strong credit score.
Once you have established healthy credit, know that you can actually turn the tables on the banks and allow them to pay YOU for holding credit cards and no cost to you (eg. travel hacking, travel rewards, credit churning).
3. Don’t Ignore Student Loans
Many of us graduate with student loan debt. It’s easy to ignore it, thinking, “I’ll deal with it when I start making real money.” or “The interest rate is so low, it doesn’t really matter.”
But this approach can lead to substantial financial pain down the line. Make a plan to pay off your student loans as soon as possible, even if it means making sacrifices.
Did you know that student debt cannot be erased even after declaring bankruptcy?
The sooner you can free yourself from the weight of student loan debt, the sooner you can start directing that money toward saving, investing, and living the life you want.
There are creative ways to pay off this debt quicker, faster, and more efficiently in the form of grants, consolidation, and of course applying extra principal payments to your balance.
4. Budgeting is Your Friend
In college, I thought budgeting was restrictive. It felt like putting a leash on my fun. But what I didn’t realize was that budgeting doesn’t limit your freedom; it enhances it.
A budget is just a spending plan for your money. It helps you understand where your money is going, so you can make conscious decisions about your spending. It can be as simple as tracking your income and expenses in a notebook or using a budgeting app (eg. Mint.com).
Being intentional about your money not only allows you to get more joy out of the things you love, but it also gives you a guide rail from which to live. And, when you combine this with investing, it becomes the key to unlocking your early retirement.
As you begin to build a lifestyle that has automatic savings/investing built-in, you can eventually ease off the need to “budget”.
That said, it’s always a good idea to track your financial metrics as best you can. Learn how to calculate your monthly cash flow and net worth.
5. Learn to Invest
I was in college before I really understood what a stock even was. In college, investing seemed like a foreign concept, something only rich people did. But investing is crucial for building wealth and achieving financial independence.
Start by learning the basics of investing: stocks, bonds, mutual funds, and ETFs. Then, open a brokerage account and start investing. Even if it’s just a small amount, the key is to start early and keep learning.
Also, take the time to learn the different risk factors of each type of investment.
If you choose to invest in the stock market, it’s infinitely easier to beat the market by simply dollar cost averaging into a broad index fund slowly and methodically over time (eg. VTSAX).
If you still want to “play the market” that’s fine too, but only use a small portion of your funds as this type of “investing” is more volatile and many times just ends up gambling.
6. Emergency Fund is a Must
One thing I learned from Dad early on was the importance of having an emergency fund. When I was facing a layoff just a year and a half into my first job, I felt okay because I had saved up over half of my salary from the prior year.
This gave me the confidence to take the risk of starting up my own company which was one of the best decisions I’ve ever made.
An emergency fund is a safety net that can cover 3-6 months of living expenses, or more if you like to be conservative.
Start by setting aside a small amount from each paycheck into a separate account that is completely liquid.
It might seem unnecessary when things are going well, but when life throws a curveball, you’ll be glad you have it.
7. Money Can’t Buy Happiness, But It Can Buy Freedom
In my early 20s, I equated money with material possessions – a fancy car, nice clothes, and the latest gadgets. While I did indulge a bit in some of these things, I never lost sight of my main financial freedom goals.
I quickly realized that money’s real value lies in the freedom it provides.
Being financially independent means you have the freedom to pursue your passions, take risks, and live life on your terms.
So, I believe it’s important to live a balanced life and practice relative frugality.
All that means is if you’re able to increase your income, your expenses can go up relative to your income. That way you always ensure you’re saving/investing and continuing to invest in your financial freedom.
Money is just a tool. Use it wisely and you can find happiness on the journey to financial freedom AND once you reach it and beyond.
8. Continuous Learning is Key
Financial literacy is not a one-and-done deal; it’s a lifelong journey. The economy changes, new investment opportunities arise, and personal circumstances evolve. It’s important to stay informed and adapt your financial strategies accordingly.
Remember, you don’t have to know everything. But a little bit of knowledge can go a long way. Read books, listen to podcasts, attend webinars, or even hire a financial coach. There’s always something new to learn about managing money.
And keep in mind no one will ever have as much vested interest in your financial well-being as you should. Consider building a team as you begin your career or business, but never give away your power as CEO of your own finances.
In conclusion, your 20s are a time of exploration and growth. And it’s also the perfect time to build solid financial habits. The goal is not to be perfect but to continue to grow your investments so they can begin to take care of you sooner than later.
The sooner you start, the better off you’ll be. So take these lessons to heart, and here’s to your financial success!
Readers, what other things are important to know at this age?
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