Looking at other people my age, I consider myself lucky to have already made the failures in finance that I have. While they are starting their first jobs, I have already learned how to function properly in the workplace. While they are only starting to come to terms with how to spend a lot of new income, I have already misspent enough to learn the lesson of budgeting correctly. While they are saying no to a 3% matching retirement plan to slightly increase their monthly budget, I made the calculations long ago to see the benefit of saving for retirement early on. While they are buying huge purchases on credit since they can obviously pay them off with the $36k they are making, well, I wouldn’t be doing this blog if I hadn’t made that mistake already and learned from it.
Don’t get me wrong, I don’t have all the answers either. But watching them go down the same roads I have already travelled gives me the opportunity to alert most of them to decisions I know are definitely bad, and hopefully save them from a pile of debt when they are 30. Knowing other 30 year olds that are worse in debt than myself makes me even happier that I’ve started now. When I am 30, I will be debt free and well on my way to a comfortable retirement.
There is no college course, or high school course, for real money management and personal finance. I find it appalling that most graduates can at least draw a supply-demand curve, yet cannot calculate how much they can be hurt by credit card misuse and calculate amortization tables to see how long it takes to pay off that new TV. Granted, the easiest way to learn is by experience, but I think we can all agree that there is far too much “experience” going on these days. Thanks to the internet, however, people have the opportunity to learn these things ahead of time. If just one young person comes across this blog, or one of the other finance blogs, and decides to be proactive about finance, it’s worth the whole thing. In that spirit, here are some lessons I’ve had to learn the hard way.
1. Money will bring happiness.
It is often said that money does not bring happiness, but I think we secretly believe money will indeed make us happy. At least, we act and spend like it. We look at drunken celebrities and say, “If I had that life I would never act like that,” ignoring the obvious fact that so many celebrities do act that way, meaning it may not be as glamorous as we think. We buy new things and trendy clothes since the companies say that we too can be happy, like the people in the advertisements. Look at them all smiling! They’re not worried about debt and budgets! Also, we think the right car or house or clothes will make other people like us more. The truth is that material goods can make for a more comfortable life, but only the intangible things of life can bring any sense of true happiness. I have seen happy poor people, happy rich people, discouraged poor people, and discouraged rich people. Money clearly plays no role in happiness, only the types of problems that detract from it.
2. Credit is an easy way to get that happiness now.
If you need proof we actually believe money brings happiness, then look straight to the credit industry. I would love to know the ratio of legitimate credit spending to “feel good” purchases; I bet it’s astronomical. In fact, the truth on this one is so twisted that the entire credit industry shouldn’t even exist. People think credit will make for a more comfortable life, when in reality the mounting debts causes more stress, fatigue, and depression than having nothing at all does. Yet the credit card companies insist that yes, you too can have a great life, and oh yeah, they also care about you as a person, and in fact, you happen to be an awesome person! They say you can flash that plastic and make friends. In reality, every time that card goes out of your wallet you’re building a higher wall to imprison you. The creditors are your wardens.
3. It takes a large income increase to make drastic financial changes.
While more income certainly isn’t a bad thing, the reality of personal finance is that time, not income, is the major component of change. I was shocked to see that adding only $40-50 extra per month to my debt cut the entire payoff time almost in half! In the same way, it only takes a little extra money to save each month to retire with an extra million. While doubling my salary would be nice, I think finding an extra $40 in my budget is a little more realistic right now. Yes, you sacrifice a little bit now on the front-end, but the return is always worth it!
4. Rebates, coupons, and sales are great ways to save money!
This is only true if you are buying something you would have bought anyway. Yes, you may have bought a $200 pair of shoes for $20, but you didn’t save $180, you lost $20! I would estimate that about 80% of the time I have seen a friend (or myself) buy something on sale, it was not something I would have bought anyway. Really, in any situation there is a winner and loser, and I can guarantee the stores aren’t losing. Otherwise, they wouldn’t put on sales! Sure, if you can replenish your wardrobe within your budget on sales, great for you! But do not get into the habit of finding deals on things you were not planning to buy anyway!
5. If you’re renting, you’re throwing away money.
I used to believe this as gospel. After all, if I were putting that money into a mortgage, I would own a house earlier, or at least build equity for later. The truth is, if I would have bought a house when I was thinking about it, I would be far much worse off right now. The simple fact is that owning a home costs way more than renting, in terms of both money and stress. It also makes life decisions more difficult to make; it’s no longer just breaking a lease to take a new job, you have to sell a house. If you are certain you can pay the mortgage, and certain you are willing to live there almost a decade, then buying is a smart decision. However, the cost-friendliness of renting an apartment (no unexpected maintenance costs!) almost always wins for young unmarried people, and likely a lot of young married couples too. A home purchase is a serious decision, and should be well calculated out beforehand. And with the market as it is now, it is clear that you are not guaranteed to make money on the sale of your home as the advice has been for a decade now.
6. You can save money by rolling debts into a mortgage or home equity loan.
If you spend $350 on credit card per month, you can indeed save $100 per month by paying them off with a longer loan with smaller interest. However, without calculating it out, you may very well be spending more in the long run by letting the debt ride for 30 years than if you had paid it off at the higher interest rate. If you really need the extra $100 per month (if your financial situation changes or something), it may be an acceptable loss. However, long-term consolidation loans are rarely the great deal they seem in such a situation, unless the interest rate is dirt cheap. A much better way is to negotiate for lower interest rates for the credit cards and try to pay more than the minimums consistently. Drop that magazine subscription if you have to.
7. All credit is bad.
Now, everyone is entitled to their opinion on this, but I personally believe that not all credit is inherently bad. If you have student loans at 3.5%, it is sometimes better to put any extra money into a 4.5% interest savings account and earn a little extra on it. Sometimes, peace of mind is more important and you might want to pay everything off first. Credit, when used wisely, is not always bad. The unfortunate reality is that credit, as used by the majority of people today, is indeed a bad thing. But if you have control of your finances and a stable income, and are paying rent anyway, taking out a mortgage is not a bad thing, as long as you’re purchasing within your means. Be pessimistic about your financial situation whenever credit comes into the picture (i.e. assume you will be making less next year, not more).
8. Having a very detailed budget is necessary to control spending.
I’ve seen a lot of support for this view out there, with hundreds of Quicken categories and microanalyzing every small subcategory of a budget. However, as a mid-twenties guy who procrastinates, I can say with confidence that normal people will give up if the budget is too difficult to handle. I personally use a 5-category budget, and am trying to figure out a way to get it down to four. Realistically, there are only a few things that change from month to month, and only a few things you’re flexible in. Why bother microanalyzing every little thing? It’s much easier to sit down and sort into 5 categories than 50, and takes less time. At first, consistency, not detail, is the key. Work on being consistent with 5 categories first, and then start getting creative with how you analyze. This is why I love systems like Wesabe or hopefully Mint will be, as they allow for tagging expenses to whatever you want (giving you organizational flexibility).
These are just the major lessons I’ve learned thus far. What are some major financial lessons you learned, that you wish you would have been taught in high school?