If you’re under 35, you may think investing has nothing to do with you – you just started making money, how can you possibly already start investing? But that couldn’t be further from the truth. You’re never too young – or old – to hire a financial advisor, San Antonio.
We call people in this situation, those between 18 and 35 years old, Preparers. Prepare is the long season in life before retirement. We have to acknowledge that at some point in the future, our minds and bodies might not work the same, which means we have to be smart and disciplined with money now.
In this preparing stage of life, we need to unpack the most salient financial issues and the necessary strategies to implement money disciplines for the benefit of you, others and your future self.
This is an uphill battle in America. We know how challenging it is to overcome the subconscious decision-making that impacts our ability to save over time. But it’s not impossible. I have seen individuals push aside American consumerism. It just takes discipline.
Recognizing the threats and our own personal weaknesses are key character qualities when accumulating wealth. If you tend to spend everything you make, then force yourself to save 15 percent before your paycheck ever hits your bank account.
If I quizzed you on the spot, could you tell me what you spend?
Don’t feel bad, most people can’t spew out household budget numbers off the top of their head. But it is time to get familiar with your numbers more regularly.
Here is a starter approach to slicing up your budget.
Spend 50 Percent on Needs
Generally, 50 percent of your spending should be on things you need. This is a critical boundary, should life take a turn. If you have a major health issue, become disabled, become unemployed or are forced into early retirement, then this 50 percent number is your most important. Knowing what it takes each month just to survive is critical because of life’s uncertainties.
Spend 20 Percent Paying Down Debt and/or Saving
The reason I like this 20 percent rule is because I find it to be consistent when working with those who are about to retire, or PIVOT as I like to call it. Many people in this situation, ready to leave their working years behind them and pivot into retirement, find themselves needing around 80 percent of their pre-retirement income. This is not an overnight fix. It happens when you pay down consumer debt and stop funding Roth IRAs. Then, a chunk of the 20 percent in the budget goes away.
Spend 30 Percent on Wants
This 30 percent rule of thumb gives you freedom to enjoy life and have fun. According to a Gallup poll, two-thirds of all Americans don’t stick to a budget. This means that two-thirds of all Americans have no cap on spending “fun” money and eating out. Following this plan allows you some free spending money but not too much.
If you are in debt, lowering this section to 20 percent or 10 percent will get you out from under your pile of debt much faster.
To go a little deeper, it is critical to respect the subconscious influence marketing has on our decision-making. Marketers will use clever psychological tools called anchoring, repetition and priming effects to influence our decision-making.
For example, let’s say that a retail store wants to sell you a designer-name jacket for $195. At first glance, it may be expensive. However, if the store puts a similar jacket next to it for $225, they know you’ll grab the cheaper one, thinking you got a good deal. This is one of hundreds of tricks retailers use to influence the way you purchase.
To minimize the risk of this retail influence and marketing overload, put a firm cap on wants. It can be a cap on all wants or just areas that need self-control, like dining, vacations, clothes or entertainment.
Does this approach make sense? Yes.
With that said, this rule of thumb does fall short. It reminds me of many different weight-loss strategies. Weight-loss and budget strategies are only as good as your discipline and focus.
Here are 10 other things Preparers should consider doing before they’re 35:
- Set up an online money-tracking system.
- Pay cash for a car.
- Set aside a minimum three-month emergency fund.
- Set up a consistent (monthly) charitable giving plan.
- Start saving an automatic 15 percent.
- Develop leadership skills to maximize employment opportunities.
- Receive pre-marital counseling, if applicable. Divorce isn’t just an emotional hardship; it can be an expensive one too.
- Get a 15-year mortgage with 20 percent down.
- Buy the four types of insurance coverage.
- Establish a detailed budget.
Investing Is Also Important at This Stage in Life
In 2008, we experienced the Great Recession. Many investors who had exposure to the stock market saw the value of their 401(k)s drop dramatically. The running joke in the midst of tears was that a 401(k) was now a 201(k). Then, the skeptics, critics and opportunists seized the opportunity to discourage Americans from investing in their 401(k) plans.
Don’t be discouraged.
The 401(k) is one of the best ways to accumulate wealth.
Our team at PAX Financial Group encourages our clients to contribute the most possible in a 401(k), depending on the person’s debt load.
A 401(k) is a section of the tax code that allows employers to take money from your check and put it in an investment account. This money reduces your taxable income, creating an immediate benefit for you. Then, many employers will match a portion of what you put in.
Remember, you aren’t actually investing in a 401(k); you are investing in what is inside of it.
Here’s another interesting thing about 401(k)s that not many people talk about: For long-term investors, historical returns have generally been positive. For the 89-year period between 1825 and 2013, the stock market was up 71 percent of the time. However, when you catch a negative year (the other 29 percent) and you are putting money in each month, you are buying shares on sale!
Finally, the sweetest spot of a 401(k) is employer contributions! It is free money and simply foolish if you don’t get it.
The idea of your money compounding more rapidly due to the tax deferral in a 401(k) is a powerful long-term tool.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.