I have been talking with a friend from work, Tom, about finances for some months now. He felt inspired to share some thoughts about finances with others. This is a first, a guest post on MyWheelLife. I hope you enjoy.
Tom’s Finance Tips for Young People (Under 35 years old)
1) Learn to assess personal value. This is the absolute most important thing to master when making purchases. What I mean by this is imagine a young person who wants to buy a table saw, and the table saw cost $400. Should they buy it, $400 is a lot of money for a tool. So it all boils down to value. Value is defined as the price of product / usefulness of the product to the purchaser. Everyone pays the same price but each person has a unique “usefulness”. So simply answering the question based on cost is impossible. You have to be realistic with yourself on how much you will use something and if it really is important to you to justify the money.
The premise sounds so simple, but I continue to see people make terrible decisions assessing value. You have to be honest with your assessment of time, sometimes we have ideas in our heads that are not realistic.
For example, my neighbor has a nice mustang sitting in his 3 stall garage. He wants to protect it because it cost a lot of money so he parks it in the middle of the 2 stall portion, and then the 3rd stall is filled with crap. He doesn’t want to drive it in the winter because it is rear wheel drive or expose it salty roads. He has a beater car that he drives to work and another SUV for the family. All year they park their cars outside, scrape the windshields in the winter, so that this mustang can sit in the garage to be protected. Is this good value? The vehicles they use every day are being taken care of less than the vehicle used a couple of times per year.
Another example, my brother drives a Lexus. For a conservative like me, why would anyone drive a Lexus? Some may argue they break down less or last longer etc., but there are many alternatives that would be more cost effective. I believe luxury cars to be status symbols more than anything. So it is a terrible idea, correct? He is a commercial real estate agent and is constantly driving around high net worth individuals. His car is his office, therefore there is high value. A beater car doesn’t make sense here. It is okay to be expensive things if they have high value.
One more example, I drove a 1999 Pontiac Grand Prix for years. I got it from my parents, and kept it running. The thing was rusted real bad and got in an accident at one point. I had them repair the mechanical portion from the accident but just left the body work as is. That car cost me nothing, great price. The problem was that it was in such disrepair that a break line rusted out in a parking lot, and it was becoming not a safe vehicle to drive. One day as I was going through a busy intersection on my way to work, I realized if my brakes went out right now, or this car crapped out on me, I could be injured or killed. I am cheap, I hate spending money, but then if I can’t work how much money am I really saving. I got rid of that car and bought one from my parents that they were going to trade into the dealer back home. The moral of the story is that sometimes the cost is not just the product cost, but in this case also the cost of the potential injury. If you factor that in, a newer car was cheaper.
2) Financing, be careful. I am a strong believer that there a few things that you should finance and nothing more. Those things are a college education (assuming you have some level of ambition and a plan), a house, and sometimes a car. The things on the naughty list are vacations, campers, boats, ATV’s, marriages, furniture, anything out of a big box store, and home remodeling.
The goal is to knock down recurring monthly expenses as much as possible. With big ticket one time purchases, you are more likely to be realistic with your expectations compared to monthly payments and assess personal value. The auto people love to shove financing at you. I only buy cars with cash, and when we bought one of our cars, the sales person kept coming to me with a new monthly payment. I told them several times that we were paying cash.
For example, let’s talk about a camper. I would like to get a camper at some point, but I don’t think that we will use it enough to justify the cost. When we are at the camper show they are financing those campers for at least 120 months! That is 10 years. If you pay for something for 10 years, the monthly payment doesn’t seem too bad. For $220 per month you can have this $26,400 camper. That does not include interest…. Then for just $10 more per month, you can have a $1200 feature. You will be underwater on that camper every month as long as you own it.
3) Talk about finances with Friends. People are hush, hush about money. It is important to feel comfortable talking about finances with others. If you don’t talk about it, it is impossible to get advice or other perspectives. Sometimes our personal perspectives are not always the best route. My Dad is a money person, and so is one of my brothers, so we have many discussions about money. I like to talk about it with friends, and hear their perspectives. Just because your Mom and Dad did it one way, doesn’t mean that is the only way.
4) Learn to track your monthly expenses using a computer program. I am a strong proponent of Quicken, there are alternatives out there. I started a couple of years ago, and I should have been doing it all along. People ask me if it has changed my habits on spending, and not so much, but it completely changes the ball game on planning. The thing I learned the most on spending is that it is the little items that are the worst. It is amazing how the $1 to $50 purchases add up to large amounts. I like to go through the spending and determine how much it would take to live each month based on the necessities. We need to eat food, we need a place to stay, and we need heat. If you want to cut back on spending, there will be a couple easy hitters that show up, but it really boils down to controlling the little expenses. This skill is so important that I cannot emphasize it enough. The reason being is that it is something that applies to successful business as well as successful people. Learn to manage money, don’t assume like I did that I just kinda knew what we were spending.
I talk to a lot of people and am surprised at how few people track their spending. Quicken is so fast, I do mine one or two times a month, takes about 10 minutes to keep it up to date. The reason for this is that I have the ability to make decisions, and powerful decisions. For example:
A) We had a child and I was not sure if my wife was going to return to work. Having our spending tracked and categorized I was able to see exactly how this would work. It allows a very clear picture of what it would mean.
B) Emergency fund: I am a big proponent of emergency funds. How much do you need? The only way to answer this question is to understand how much its takes to support the family and then how much it takes if you went into conservative mode.
C) Investments: If you are able to invest money, you can gauge how much you can invest and when.
5) Investing is a key and the time value of money is amazing. Don’t try to time the market, just invest as much of your paycheck as you can every month and let it ride. I tried timing, and I was an idiot. The goal is just keep buying and buying. If the market is falling, great, you get to buy cheap, if the market is rising, great you are making money. Having your expenses tracked will tell you how much you can invest.
6) Do your own taxes. It is worth filling out the Turbo Tax thing even if you still take it to a professional. The $100 of working through the program can be considered an educational expense. The key is that you need to have some understanding so that you can make good decisions. It isn’t always fun but is well worth it. If you really hate it, sit down with someone and tell them your situation at the beginning of the year so that they can help you through it. It is worth paying someone for the advice, even at $100 per hour, there is still a lot of value. For example:
A) 401K Roth vs. Traditional tax savings
B) HSA is important and saves a ton of money
C) Dependent care FSA saves a ton of money
D) Knowing if you take standard deduction or itemize can save you a ton of money. Funny story is that I bought our first house in Texas citing tax reasons. I told the realtor we needed a tax write off (I was using stuff I had heard people say, thinking I was smart), we took a standard deduction every year we lived there.
7) Balance is the key to life. I have a friend who is cheap, I mean cheap. I heard a story on how his car locks didn’t work so when he would buy something at Walmart, he would use zip ties and bungee cords to lock the car doors. I have another friend that is so cheap that he would transport his young kid in a car that was unfit for the road, saving money. They both save a lot of money, one of them is young and has his house PAID off. A 250k house paid off.
Each person has their own strategy, and that is a good thing. The moral of the story is the guy that has his house paid off is so cheap that he won’t take a vacation, he hates his job, and always is a glass half empty type of guy.
What I am trying to get at here is that you need to go back to the most important thing, and that is the ability to assess value. I take vacations, if I look back, those are some of the high points of my life. We went to Alaska, Ireland, the Caribbean, the mountains, etc…. If I take out a photo album, I don’t get excited about talking about pictures of my car parked at work, or what my cubical looks like. That killer whale off the front of the boat in Alaska, or seeing a sea turtle in the crystal clear Caribbean waters are something I get excited about. It is important to get away, and take time to enjoy life. Don’t let being cheap ruin it, that is an important life lesson. At the same time, be realistic with the spending. You need to track your spending, and understand what you can spend on vacations. I would not try to cut it completely out of the budget, but also don’t fly first class.
8) Home owner ship is not all that it is cracked up to be. This is really important. There is a lot of misinformation out there. Here are a couple of key components:
A) Houses are not a great investment: There are exceptions where some folks make it out real good, on the contrary there are plenty were people lose a lot of money. So don’t think you are “Throwing your money away by renting.” The reason is simple, houses have a lot more cost than just a mortgage. They need upkeep such as roofs, plumbing problems, yard work, windows, and people fail to include these in the cost. They also require taxes and insurance. The cost of moving is extremely high. Real estate commission alone will knock out most people’s equity.
B) My rule is simple, if you don’t like doing handy work, are young, and single, RENT!!!!!
C) If you have a family, plan to stay somewhere for a while, and are being realistic with yourself on spending, BUY!!!!!
9) Being cheap is not always the answer to wealth. I personally feel that being cheap has cost me a lot of money. The reason is that knowledge is money, and it is important to always keep learning. Being cheap and not buying the proper tools, or investing in myself will cost me more in the long run than the money I saved. This one is a little harder to wrap your head around.
If you are young, it is very important to learn as much as possible in the primary environment that you make your money, OR in a secondary environment that has the potential for income.
A primary environment example is that as a young person, you can quickly become the EXPERT in a field even within a very large company. The reason being is as people advance in their career they tend to go to management roles that are non-technical. The technical stuff is left to younger employees and is constantly evolving. Older people tend to have kids and more commitments outside of the normal working hours, where young single people can invest more time in learning new tools, concepts, and expertise. When it comes time for promotions or layoffs, the extra knowledge is surely going to help keep you employed, or make you more money. It might be worth spending 10 extra hours a week working on building expertise within your role, than trying to save money by buying a house that needs restoration. I used to make fun of young people with new cars sitting in front of an apartment building, in hindsight, I think that is the most brilliant route to take for young people.
Another example of this is as an engineering student in college, does getting a job at the food service place making $10 an hour make sense? It seems like the young student is being fiscally responsible by working during college to help offset the debt. At the same time if the student is working 15 hours per week, this time could be used for studying or better yet getting involved in an extracurricular engineering activity such as a design competition. The design competition does not pay an immediate salary, it may lead to better job offers, and higher job satisfaction than the $150 per week gained during the food service job. Clearly if the student is not able to maintain greater than a 3.0 GPA, they should clearly focus on studying as opposed to the food service job. Don’t let short term gains impede long term gains.
For a secondary environment example, I should have tried to start my own business on the side instead of trying to fix up my house. I saved a lot of money doing my own housework, but I have always wanted to try to make a business work. With the housework side of things, the most money that I saved is the cost of having someone else do it. For example if a painter cost $50 per hour, and it took them 20 hours, then I saved $1000 doing it myself. The problem is that I took those 20 hours doing a task that will never get me more than $1000, whereas a business could make that weekly. Only do this if you have an opportunity cost that is higher in value. Paying someone $1000 so that I could watch football on TV is not a good use.