The Best Financial Advice for Young Adults: 2015 Edition


A picture of you once you follow the best financial advice for young adults.

A picture of you once you follow the best financial advice for young adults.

Millennials rule. Boomers drool.

Except when it comes to money. The Boomers have all of it, and us Millenials, well, we’re broke. Just starting careers, paying off student loans, whatever.

It doesn’t have to be this way. With my help, you too can reach financial stability and security in the future. As your career takes off and your earning potential improves, you’ll soon find yourself with a new problem: too much money.

When this happens, there are two paths before you. You can, like most people, spend it all, and live your life from one paycheck to the next. Or you can start saving and establish good financial habits. Provided that you absorb the best financial for young adults, you’ll soon find yourself with a lot more money than your peers.

Maybe you won’t feel rich, but you will be. So without any further ado, let’s get to it.

The Best Financial Advice for Young Adults

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1. Establish good saving habits.

Except for winning the lottery (and, if you do win the lottery, check out my post on financial advice for lottery winners), nothing, and I mean nothing, will grow your net worth faster than a consistent savings program.

Allow me to illustrate. Let’s imagine two people: Jack and Jill. Jack starts with 1,000 dollars at age 25, and then saves 10,000 dollars for every year until he retires at the age of 65. Jill starts with a substantial inheritance at the age of 25, 100,000 dollars, and then saves 1,000 dollars each year until she retires at age 65.

With a modest 6% return on their investments per year, here’s how their finances end up looking:

  • Jack’s net worth: $1,650,763
  • Jill’s net worth: $1,192,619

Jack, thanks to his saving habit, ends up with almost half a million dollars more than Jill. A more aggressive savings program will return much more.

Start today. Even if you’re only saving 10 dollars a week. The important thing is to get into the habit, and then carry that over to when you have more money in the future. It’s not the amount that matters right now. It’s the habit.

2. Pay off your credit card debt.

The median interest rate on credit card debt is about 15%. For almost everyone, it’s impossible to consistently earn 15% or more on an investment.

This means that you should 1) never rack up credit card debt in the first place and 2) if you have a balance on your credit card, pay it off as soon as possible.

Let’s consider another example to illustrate. Imagine Jack and Jill again. Both need a new washer for their homes. Jack puts it on his credit card, but pays it off at the end of the month, incurring no interest. Jill also puts the washer on her credit card, but only makes the minimum payment.

Let’s say that they both pay 500 dollars for a washer, and Jill pays it off at a minimum rate of 2%.

  • Jack’s total: $500
  • Jill’s total: $650.87

Jill ends up paying 30% more for the exact same purchase.

Avoid credit card debt.

3. Invest in knowledge.

In these examples, what separates financially savvy Jack from airhead Jill? Jack has more knowledge about finance and, as a result, is making fewer mistakes.

This illustrates the importance of investing in knowledge. One huge advantage that Millenials have over older adults is that we know how to use the internet to collect and process information.

Nothing pays dividends like an investment in your own knowledge, just ask Warren Buffet.

4. Don’t speculate.

Okay, so, let’s say you have a good savings plan going, no credit card debt, and you’re investing in your own knowledge. What’s the easiest way to lose all of your savings?

Speculating. There are many forms of gambling in life, and most don’t even look like they’re gambling.

Again, imagine the year is 1998. Jack and Jill are both at work, talking with coworkers around the water cooler. Fellow work Bob tells them about a hot new stock tip: WorldCom. He got in at 10 dollars, he says, and today the stock is at 20. He’s made 10,000 dollars.

Jack, operating under the principle that he refuses to by a share in a company that he doesn’t understand, ignores the tip. Jill, on the other hand, not wanting to miss out, puts her entire savings in WorldCom.

And, for the next few years, Jill looks like an absolute genius, as her investment triples, peaking near 65 dollars. But then the dot com bubble bursts, and WorldCom is worth nothing, and Jill loses all of the money that she’s saved.

Moral of the story? Never buy an investment you don’t understand, and the fastest way to lose your money is to buy the stock that everyone is talking about.

5. Everyone wants to sell you something.

The second fastest way to lose all of your hard-earned income? Buying stuff that you don’t need.

Everyone wants to sell you something. Trust me. Reading a blog like this one? Ever wonder why there are so many book or product recommedations? Probably the author is part of an affiiate program and gets kickbacks on every sale.

Same thing with financial advisors, like I covered in my post on financial advisor rates. They take a cut of your money.

Look, whatever you’re thinking about buying, you don’t need it. Humans are not natural consumers: why else is there so much advertising?

It’s to convince you to spend money on something that you never even wanted. They’re manufacturing desire where none exists.

6. Live a modest lifestyle.

“It ain’t what you make, it’s what you keep.”

Do you think that richer people are happier than you? Don’t believe what you see on the media: a powerful body of academic evidence suggests that the very well-off are only slightly happier than the middle class.

There is one big difference, though: the rich have become so used to their lifestyle that any downsizing will be painful. Though someone spending 5 million a year may be about as happy as someone spending 15 thousand, cutting back from 5 million/year to 15 thousand/year will be extremely painful.

This is hedonic adaptation. We get used to a level of consumption, such that we no longer derive any utility from it. But any decreases are painful.

What can you do with this knowledge? The obvious answer is to never grow your lifestyle in the first place. If you live like you’re making 50,000/year while making 5 million/year, you can retire basically whenever. On the other hand, if you spend everything you make, you’ll be working for the rest of your life.

Live modestly. Charlie Munger (net worth $1 billion) likes to say that the only difference between him and friend Warren Buffet (net worth $62 billion), wealth-wise, is that Buffet lives a more modest lifestyle. I’d say that a $60 billion dollar payday is worth it, wouldn’t you?

That’s all, folks. You’re looking Scroogier already.

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