For those who have kids who are getting older, getting ready to graduate from college or just entering the workforce I would like to share with you an email I sent to my oldest child when he moved out of our home to begin the next phase of his life.
Hi Son. I’ve been meaning to talk to you about saving and budgeting since you moved out of our home and into your new apartment. I wanted to give you some financial advice that I wish someone had given me at age 23. It is our responsibility as parents to teach our children how to save and manage money. I hope your Mom and I have done a good job of that but just in case I wanted to share some important financial basics that will help you become financially successful in life. So here goes:
- Live below your means – Make sure you set aside 20% of every paycheck and learn to live off the remaining 80%. Do this no matter how much money you make. If you get a raise or bonus set aside 20% of that raise or bonus in addition to the 20% on your regular pay.
- Don’t spend more than 25% of your monthly net pay on housing. It doesn’t matter if you own or rent. Stick to this 25% rule.
- Don’t spend more than 10% of your monthly net pay on entertainment. By entertainment I mean bars, movies, restaurants etc.
- Don’t spend more than 5% of your monthly net pay on auto loans and never lease. Leasing is one of those Poverty Habits you’ve heard me talk about over the years. Buy your cars and take good care of them.
- Stay away from accumulating credit card debt. If you are doing this it means you are living beyond your means and you need to cut back on something.
- Always invest your savings prudently. Never gamble your savings on get rich quick schemes. There’s no such thing. The power of compounding can grow your savings and make you wealthy. Savings and investment are two completely different things. You should never lose money on your savings, whereas, investments represent a portion of your savings you are willing to put at risk. When you invest, you accept the risk that you could lose some or all of that investment. How much you take out of your savings and invest depends on your risk tolerance. Conservative wealthy people do not put any of their savings at risk. Moderate wealthy people put 25-50%% of their savings at risk. Aggressive wealthy people put 50% or more of their savings at risk.
- Max out your contributions to the company retirement plan. If the company matches your contributions, great. That’s free money. Always take free money when you can get it.
- Know what you spend every month. Create a monthly budget and track what you spend.
One last point I want to make. Most of the wealthy don’t make a lot of money. But they do save a lot of money. They make a habit of saving until it hurts. Focus on accumulating wealth and if you get a big pay day, great. It’s icing on the cake. If you stick to the 80:20 Rule you will save a lot of money and you will be wealthy long before you reach retirement age. You will be one of the few among your friends and colleagues because, unfortunately, most parents don’t teach their kids the importance of saving, so nobody saves. Accumulating wealth is not about hitting it out of the park. It’s about getting singles. You get enough singles and you win the game.
I love you very much