Even a small step in the right direction counts. The best Valentine’s gift for young families? Getting on the same page.
As a Certified Financial Planner™ practitioner, I meet with clients from all walks of life. One of the things I say to all my clients is, “I’m never too busy to meet with anyone you’d recommend.” Which, of course, is a nice way of saying – “l’ll meet with anyone as a favor to you.”
Usually clients have a pretty good idea who we’re after from a prospecting standpoint, but on occasion, I am asked to meet with a client’s grandson or nephew – someone who may not be in our “target audience” as it relates to practice growth.
But, I’ll always gladly help them.
Why I’m Telling You This Story
Last week, I had the privilege of meeting with a young couple – Jack and his lovely spouse…Jill. (We’ll change the names to protect the innocent). They were the typical American young family – just out of college, a young child, tons of college debt, a handful of credit card debt, no real savings, and a meager job just to pay the rent. They looked like deer in the headlights when they walked into my office.
I know the type – I used to be Jack and maybe you were (or are) too – young, arrogant, (heck, I’m still that one), confused, unsure of oneself – so much unknown, you don’t know even where to start. That was Jack and Jill, except they wanted help, but they had no idea where to start.
And frankly, hiring our firm wouldn’t help them that much either, and I told them as much. They looked exasperated – I could see it on their faces – “if this guy can’t help, we’re doomed.” So we sat down and started making a list of all the small things – things you can do with under $1,000 – to get the ball rolling in your financial and personal life. I’m narrowing them down to my top 5:
Build a portfolio early
If you search around, you can find a nice discount broker who won’t rob you in commissions, and then buy two exchange traded funds (ETFs): one which tracks the S&P 500 and another that follows a bond index. For example, 5 shares of SPY or IVV (S&P 500 funds) and 2 shares of AGG (Aggregate Bond Index) will give you a 70% equity / 30% fixed income portfolio. That’s quite a start.
I explained to Jack and Jill that if they start early, a little guy called “gains” can work in their favor. Make your money work for you as quickly as possible and you’re reap huge rewards down the road.
Pay attention to tax shelters
If you need the money, save it into a spot where you can get it. But taxes can drain from your returns, so if possible, shelter the funds.
Small steps…investing even $1,000 in a Roth IRA and adding $100 a month from age 22 to 65 would turn into $478,000! As we’ve mentioned several times, you can access your contribution at any time so it could double as a little cash reserve if you need the money.
There’s also good news at the end of this tunnel: in most families, they’re able to contribute more later as they earn more cash. Set a good foundation with small amounts today and
Cash is the key to your debt repayment
I’ve seen too many people attack debt with every dollar, only to find the dishwasher broken or the muffler dragging behind the car. Where do you go for cash then if you’ve drained all of your funds?
Right back into debt.
Don’t start the habit of pulling plastic out of your wallet. It gets easier and easier every time you do it. Keep a cash reserve. By cash, I mean cash. With our increased reliance on ATM machines, credit cards, etc., a simple power outage can cause quite the disruption. Live through the next Zombie apocalypse by keeping $500 or $1,000 in cash at home in a safe. But remember, this is for emergency only! I’ve met too many new investors who spend their emergency funds on vacations or credit card repayment. That’s not why that money’s there.
Speaking of emergencies…with a young family, don’t forget insurances. I told Jack and Jill to focus on disability insurance at work and cheap term life insurance.
Manage your energy
Huh? Are you talking about vacation? Jack and Jill can’t afford anything! Are you nuts?
They thought I was crazy at first, but like I’ve said…I’ve been there before. Let me explain. When you’re buried in debt, the last thing you need is an expensive, week long trip. But you need to keep a clear head to move the ball forward, so take smaller vacations…but still take some!
These vacations aren’t because you deserve them. You don’t. They won’t help your debt in a direct way. But indirectly? You’ll notice a huge difference in your ability to attack your problems when you’re fresh and relaxed.
Find a deal to hop the train to Toronto or Chicago for the weekend if you’re in the Midwest, or Austin if you’re in Texas. Use a travel site like Hotels.com to book your reservation and save money. Take a quick cruise to the Bahamas. Remeber to do whatever it takes to keep away the cobwebs and return fresh. It doesn’t need to be expensive…it just has to be “away.”
Recent studies have shown a direct correlation between physical health and monetary wealth (unintended rhyme…happy Valentine’s Day!) If you’re lucky enough to have short commute – try a different method for a week and see how you feel. Could you walk? Ride a bike? Adding a little cardio exercise to your day will make you feel better and will improve your work attitude and output. Give it a try –if you rode your bike to work only 3 days a week and it was 5 miles each way, you’d ride 1,500 miles a year!
Educate your children
I told Jack and Jill that this was the most frustrating part of my job: meeting too many new investors who had no idea what moves to make first. Stop the cycle by helping your kids become money-savvy. Most people think I’m going to say, “Invest in a 529 plan.” Wrong. IF you do invest in a 529 plan, teach them to track the funds with you. Play board games that help them think about strategy and money. Let them sit in on your budget meetings. Track electrical output in your house and make it a game. Heck, invest in a Kindle from Amazon. They’re $150 or so, and if they’re young enough, sign them up for Amazon Free Time, (a service that pre-screens kid-approved content for one low monthly cost of $3). Don’t leave them alone with the stuff and expect your kids to learn. Make it family time with the Kindle, or heck, with a book. Remember those?
Recent studies have shown a direct correlation between physical health and monetary wealth (unintended rhyme…happy Valentine’s Day!) If you’re lucky enough to have short commute – try a different method for a week and see how you feel. Could you walk? Ride a bike? Adding a little cardio exercise to your day will make you feel better and will improve your work attitude and output. Give it a try –if you rode your bike to work only 3 days a week and it was 5 miles each way, you’d ride 1,500 miles a year!
Bonus: Communicate
The closest we’ll get to a good Valentine’s gift today is this: communicate. Especially communicate if you’re worried, but also when things are going well. Practice our weekly meeting plan. Real budgets are about keeping the family on the same page, not about dollars on a spreadsheet. Especially in married or cohabitating couples, I find that one generally knows what’s going on with the money while the other is in Fantasyland. Don’t make this mistake. When you both own your financial life,
Jack and Jill left looking relieved. They didn’t have to hire an expensive financial advisor and had a pretty clear road map on how to start down the road to prosperity.
Who delivered your first financial lesson?
I used to work in disability insurance and it is amazing how many people do not have any idea about their policy until they are injured. Then they find out that they are only getting 156.99 which is how much it was in NY Stat plan back in the day after taxes. Now tell me can you live on that much per week? I certainly cannot. It was disheartening when I had to tell people thats all they were getting. It did make me aware of that now though when i look for jobs.
“Make your money work for you as quickly as possible and you’re reap huge rewards down the road.” I could not agree more OG! This is some great insight and much is lost on many people today. They think because they can’t knock out debt/fully fund IRA’s right away then they’re doomed. Don’t let that stop you, but instead make a plan to achieve that as a goal and you’ll get there much quicker.
$1,000 at 20% APR is costing $200 per year, I would put the $1,000 on credit card repayment and charge the card in case of emergency. Not the grocery shopping, nothing else. Keep one card that I never use, as an emergency fund. And if you do use it you still have 50 days interest free credit, that is 2-3 paychecks to make a good dent while it is still free.
Sounds great until you see it in action with lots of clients, Pauline. It doesn’t work. People use the card and continually stay in debt. First, get rid of the function. Second, eliminate the debt. That strategy has worked countless times while the “charge your emergency fund to avoid high interest” doesn’t work for 90% of people. I know…it makes no mathematical sense, but it’s far more effective.
Having an cash emergency fund or a good line of credit?
I would vote for the credit as long as you are disciplined. It is possible to pre-charge a credit card so there are no repayments – we’ve done this recently. Sensible use of these things can save a lot of money.
We play CashFlow regularly with our son. He now has a good idea about getting out of the rat race but still wants those toys! It takes time:-).
My early financial lessons mostly came from books – and the two that stick out in my head from early on are Nice Girls Don’t Get Rich and the Millionaire Next Door. I’ve recommended them both at different times for people looking for a beginner’s perspective.
I think teaching the kiddo is a very important point. I’ve seen young couples lavish their kids with tons of things they had to put on credit. Small kids don’t really need that much stuff and will someday thank you for showing them how to manage money and stay out of debt, even if they are whining for it at the moment.
I received continuous lessons from parents who modeled good financial responsibility. It probably contributed to my good fortune. When I was young, I was always around my parents because they worked 24/7 and saw how they did things. I include dmy children into my businesses and rental property businesses. I think the more you expose your children to the things that go on in life the better off they are.
I was pretty lucky growing up. My parents did a great job teaching me and my brothers about money and I think it has benefited us as we got older.
The only thing I can criticize them for is that they were over conservative with their money and they didn’t ever look into investing their money outside of the traditional retirement fund.
Nice blog article. Educating young couples is really the way to go. Helping them see how saving money to purchase a home (within their means) can give them stability and build good credit. Even more than that, showing how investing in real estate can build compounding wealth is important and will help prevent another real estate crisis as investors learn to balance debt and risk.
My first financial lessons came from my parents who taught me that if I wanted something I had to pay for it myself. That meant I had to get out and make some money. I started out as a paper boy, picked weeds,gardening, washed dishes at the local pub whatever I had to do. It really opened my eyes being in the working environment even as a child. Me mum said I would hold on to my money and never spend it unless I really had to. I think I knew how hard I worked to earn it I was just going to blow it out the window on crap. I’m still that way today, thank goodness.
Educating the kids is so important yet so often overlooked. One of my unspoken reason for starting a blog is to document my experiences so that my kids have somewhere to go for a refresher on some of the conversations we’ve had on personal finance.
Joe, love this article! I wish I talked with you when I was 22. I learned about that little guy called “gains” when I was 25 and started saving. Unfortunately I was still cocky and didn’t balance my portfolio so I didn’t see the gains I expected. On the bright side after 2 failed years I got on track and did just like you’ve suggested here.
I’m interested to know about the rest of the list you gave the couple. I am not a young couple starting out, but still I see I could learn a lot from you. Any more advice?
I can completely attest to having cash. We were dumb last year and used our refund to pay a large part of our debt and then saved a little cash for something special. We didn’t have an emergency fund….cash or in the bank. Then the car broke down. So something special never happened. And we didn’t get to get “away.” Not how we had been planning at least. Love love love this.
Great tips! Especially as a young couple, these are relevant to us. Emergency funds are important…hell, I just had a plumber deliver the sad news that I need my main sewer line cleared…and that the only access is through the toilet…lets just say about to sink (at least) a few hundred dollars into it. Glad I didn’t put that as an extra payment towards my mortgage :/
Saving starts at home. You need to practice living within your means if you want to save or just to pay off all of your debts. That’s a tough tough thing to do but once you made up your mind, you are on your way to a debt-free life.