When I travel the country speaking to high school and college students about exactly what they need to do to become financially successful in life, I always begin my presentation by asking three questions:
“How many want to be financially successful in life?”
“How many think they will be financially successful in life?”
Almost every time I ask the first two questions, every hand rises in the air. Then I ask the magic third question:
“How many have taken a course in school on how to be financially successful in life?”
Not one hand rises in the air, ever, with this last question.
Clearly every student wants to be successful and thinks he/she will be successful, but none have been taught by their parents or their teachers how.
Is it any wonder that so many people live paycheck to paycheck?
The fact is, everyone’s life is a series of stages: childhood/young adulthood, entering the workforce, marriage, starting a family, buying your first family home, balancing work and family while managing your career, empty nest stage and finally, the retirement stage.
Money mistakes you make in one stage can have a ripple effect, impacting one or more subsequent stages. Make too many money mistakes and you will find yourself in perpetual catch-up mode, the rest of your adult life.
The foundation for sound financial decisions are smart money habits at every stage of your life. Those who make the right financial decisions at every stage, prime themselves for financial success.
In my book, Effort-Less Wealth – Smart Money Habits at Every Stage of Your Life, I share all of the Smart Money Habits you need, at each stage of your life. These Smart Money Habits will help you to eventually become financially independent, if not wealthy.
Below is a list of some of the top Smart Money Habits, at three of the most important stages of your life
Entering the Workforce Stage
The best time for forge Smart Money Habits is when you enter the workforce. Here are some of the top Smart Money Habits at this stage:
- Learning to Save/Invest – Learning to save and invest once you enter the workforce is critical to every future stage. Most of the Saver-Investor millionaires in my Rich Habits Study began saving and investing as little as 5% of their net pay as soon as they entered the work world. Every year they would increase their savings rate until it reached 20%. The best way to consistently save and invest is to automate the savings and investment habit. Have a certain percentage automatically withdrawn from your bank account and immediately invested in savings and retirement accounts, if your employer offers you a retirement plan. Also, have about 2% of your net pay automatically directed into Health Savings Arrangements, if your employer offers one. You can do this with each pay check or on a monthly basis.
- Rent an Apartment or Live with Parents – Today’s millennials are often forced to remain in their parents’ home, due to student loan debt. This is a smart move as it gives you the opportunity to pay down that debt, while saving money, at the same time. Those who are not burdened with student loan debt have the option to rent an apartment, once they join the workforce. In order for these individuals to be able to afford to save and invest, it is critical to keep housing costs at or below 25% of your net pay. Paying more than 25% of your net pay on rent makes saving money very difficult.
- Limit Car Expense – Cars are expensive. Besides the monthly payment on owning or leasing a car, you will have to pay auto insurance, registration fees, car maintenance, car repairs and parking fees. If your job or life does not require a car, don’t buy or lease one. Do without a car. This will save you thousands of dollars a year that you can invest. If your job or life does require a car, your goal should be to spend 5% or less of your net pay on car expenses. Buy a high-quality used car, coming off a two or three year lease. A good used car should give you six to seven years of use.
- Lunch – Bring your lunch to work. This will save you about $5 a day, which can help increase how much you are able to save.
Balancing Work and Family, While Managing Your Career Stage
Money becomes a limited resource when you are raising a family. Therefore, it is critical that you forge certain Smart Money Habits at this stage, in order to be able to save and invest. Here are some of those Smart Money Habits:
- Be Frugal, Not Cheap – Frugal means spending the least amount of money on the highest quality goods or services. The key here is to seek quality first and then focus on finding the least costly, high-quality, goods or services.
- Keep Vacation Costs Low – When starting out, avoid expensive vacations. If you must spend money on a vacation, keep your total vacation expense at or below 5% of your net pay.
- Avoid Gambling – Keep any gambling to a minimum and infrequent occurrence.
- Clothing Costs – Once again, strive to keep your clothing costs at or below 5% of your net pay.
- Restaurant Expenses – There are many restaurants that do not sell alcohol, beer or wine and allow you to bring in your own spirit of choice. They are often referred to as BYOBs. Make BYOBs a habit.
- Associate With Other Savers – Bad spending habits spread like a virus throughout social networks. If you want to forge the savings habit, you must surround yourself with friends who have the savings habit. Minimize contact with friends who are spenders and not savers. If you hang out with spenders, they will infect you with their bad spending habit.
- College Savings for Children – Your goal should be to save and invest about 3% of your net pay in college savings plans. 529 Plans allow your college savings to grow tax-free. And tell everyone you know about the 529 Plans you set up for your children. Family and friends can help you fund these plans by sending the plan money for birthdays, christenings, Bar/Bat Mitzvahs, graduations and other life events of your children.
Empty Nest Stage
At some point, your children will leave home to begin their adult lives. For most people, this is usually age 55 or younger. No longer burdened with the costs of raising children as well as funding college, means you should have more disposable income. The Empty Nest Stage is your opportunity to play catch-up. Most individuals in the Empty Nest Stage have ten or more years to play catch-up. Here are some of the Smart Money Habits at this stage:
- Financial Planning – It’s hard to do financial planning when all of your money is going out the door when raising a family. During the Empty Nest Stage many of those costs go away. This is an excellent time to meet with a financial planning expert, who can help you develop a financial plan to enable you to boost your investments and retirement accounts.
- Boost Retirement Savings – During the Empty Nest Stage, your goal should be to max out your contributions to your retirement accounts, until you are able to retire.
- Pay Down Debt – The Empty Nest Stage is a great opportunity to pay down your mortgage and get rid of your debt.
- Continue to Stay Frugal
- Continue to Keep Vacation Costs Low
- Keep Clothing Costs Low
- Moderate Your Spend on Restaurants