Financial Advice I Would Give My Twenty-Year-Old Self
What financial advice would you give to your twenty-year-old self? My twenty-two-year old son recently asked me that very question. My first thought was that he must not have been listening, because as a financial planner, I have constantly given him financial advice since he knew a dime was worth more than a nickel even though a nickel is larger. But in contemplating the subject on a deeper level, I realized there are many financial lessons parents don’t necessarily share – not because they are too private but since questions like his can be unusual and the subject doesn't necessarily come up.
When you think about
advice you’d give yourself, the mind tends to go to what we did wrong. Of
course we all have made mistakes, but we also have done some things right so
I’ll include those. However, twenty year olds today face additional challenges.
The expense of college was much lower on a relative basis when I was a student
while today the tuition at universities across the country has almost doubled
in the past decade. New graduates are currently saddled with an average
of $27,000 in student loan debt, which makes it harder to run out and put a
down payment on a rental property.
If I had been faced with that as a young
person, I would have attacked the debt by living incredibly frugally and made
paying off the debt a priority to get it out of the way. Then, I could focus on
other goals.
That being said, if I could go back in
time and talk to my twenty-year-old self, here is the financial advice I would
give her:
Learn to negotiate. This
goes for everyone but especially for women since women are 2.5 times more
likely to have a “great deal of apprehension” about negotiations.
According to Linda Babcock and Sara Laschever, authors of Women Don’t Ask, failing to negotiate your first salary
and starting your career at just $4000 less in salary can result in a career
income loss of over $500,000 by age 60. Since men are four times as
likely as women to negotiate their first salary, this may have a major impact
on the salary gender gap. It may actually be a “negotiation gap” rather
than a gender gap in income. Understanding the market value of your work is not
too difficult to find on sites such as Glassdoor.com and Salary.com.
Taking that knowledge into face-to-face negotiations with your employer or
prospective employers can have a significant impact on your finances.
Start out saving a higher percentage of
your income. The
difference between saving 10% of your income (which is the rule of thumb) and
20% of your income is significant over your lifetime. A 25 year old who makes
$50,000 a year and saved 10% of income would have over $800K at age 65 if they
earned 6%. That doubles to over $1.6 million when you save 20% and right out of
college is the best time to do that since you are used to living on the
cheap. Recent graduates today are saddled with student loan debt, which
does make this more of a challenge but that said, starting early and committing
to saving a high percentage of income is a sure wealth builder.
Marry someone you deeply love and stay
married. Obviously
no one goes into a marriage planning on getting a divorce but nearly 50% of
marriages end in divorce. Divorce has an extremely negative impact on
finances. Just the legal cost of a divorce itself runs about $20,000 per
couple, which instead could have grown to just over $64k in retirement savings
if invested at 6% over 20 years instead.
There are
other hidden costs. Splitting assets may have tax implications with an
investment sale triggering capital gains taxes. Selling property may also
result in a “fire sale” at an inopportune time in order to dissolve the
financial union, resulting in thousands of dollars in losses. When the going
gets tough in a marriage, I would like to tell my twenty year old self
that 86% of married couples who reported being unhappy in their marriage reported that things had improved
within a few years. Though this is not true for all marriages and some
couples aren't meant to be together, being happily married can be a
great boost to your financial health.
Invest in real property. Buying real estate can be an excellent
long-term investment if you don’t mind being a landlord and you have
six months of a mortgage payment lined up as a back-up plan to make the payment
when tenants move out. The beauty of investing in real estate is the tenants
make the payment over the years and when your property is free and clear, you
have an income stream for life. One strategy is to buy your first home
with the intention that you will turn it into a rental property
when you've saved enough for your next down payment. You can
also exchange properties using a 1031 tax free exchange to either trade up or
to purchase like kind property in a better location – such as a resort property
you rent to tourists and then can use two weeks a year yourself.
Learn how the tax system works. Focusing on your career
and moving up the ladder or starting your own business makes you money but you
don’t want to give it all to Uncle Sam. With the Federal
deficit still hitting over a trillion dollars this year, the writing is on
the wall that taxes are going to have to continue to increase. Become a tax
expert and consider the tax implications of your financial decisions. For
example, if tax rates are expected to be much higher in the future, choose the
Roth 401(k) instead of the traditional pre-tax 401(k) at your workplace – see
this Roth 401(k) versus traditional calculator. All of your employer
contributions will be taxed at ordinary income tax rates when you withdraw them
at retirement but your Roth 401(k) contributions and earnings can be withdrawn
completely tax-free at age 59 ½ (if you've had the account for over
five years).
Pay close attention to deduction phase
out limits. I wrote about this earlier in “When to Refuse Your Year End
Bonus” because just a few thousand dollars in income can lose you thousands of
dollars in tax deductions as your income increases. For example, when you own
rental property, the tax deductions are phased out when your adjusted gross
income is over $150,000 – you have to “carry them forward” instead of being able
to use them now. For a taxpayer in the 25% tax bracket who has passive
real estate losses of $20,000, that translates into a $5000 tax
deduction. Being proactive about your taxes can save you thousands of
dollars annually and in retirement.
Obtain an advanced degree or professional designation. Whatever your chosen
profession may be, the time and effort in earning an advanced degree or
professional designation is worth it. In my case, early on in my career I
decided to obtain the Certified Financial Planner™ designation. The
knowledge I obtained as well as the ongoing continuing education required has
been valuable to me but the contacts I made were just as valuable. I was
given several job offers from financial professionals I met in my classes –
they called me when they had openings. Also, when the banking industry
was going through massive change in the 1990’s with merger after merger, I was
always picked up by the new company when other very capable professionals
who didn't have the designation were laid off since I held the CFP®
designation. Many companies offer a tuition reimbursement program as an
employee benefit if the education has a direct impact on your current
position. In that case, all it costs is the time.
Looking back, I am also very glad to have
hiked in Yosemite, danced in Buenos Aires, walked in Monet’s garden
in Giverny, France and went skiing on the “Greatest Snow on Earth” in
Park City, Utah – never going into debt to do so. With the
holidays here and families spending time together, the time is ripe for sharing
financial advice. You never know, it just might make for some interesting
conversations.
By: Nancy Anderson
Source: Forbes
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