One of the most rewarding aspects of my work is when clients ask me to guide their young adult children on the path to financial freedom. It serves as a reminder of the importance of starting early and the impact it can have on one’s future (and that I’m getting older, heh heh).
To help young investors get started, I have compiled a list of the top 10 essential concepts they should understand as they begin planning their personal finances.
Financial Defense:
- Emergency Fund: Aim to save 3-6 months’ worth of living expenses in a liquid account to cover unexpected events.
- Insurance Coverage: Protect yourself and your loved ones with adequate life, disability, health, and property & casualty insurance policies. While investing builds wealth over time, insurance provides immediate protection in unfortunate circumstances.
- Credit Card Management: Pay your credit card balances in full every month, prioritizing those with the highest interest rates. If you struggle to control your spending, consider using debit cards instead.
- Tax-Advantaged Savings: Lower your tax liability by contributing to tax-advantaged savings vehicles such as 401(k) plans, 403(b) plans, Traditional & Roth IRAs, and Health Savings Accounts.
- Budgeting: Track your monthly expenses using tools like Monarch Money to understand your cash flow and identify areas for saving. Remember, you are the CFO of your own financial affairs.
Financial Offense:
- Compound Growth: Understand the power of compound growth, which is the foundation of investing. Educate yourself by watching this informative video, reading this article, and checking out my December 2020 Newsletter – The Magic of Compounding.
- Early Savings: Start saving as soon as possible, aiming to save at least 10% of your gross income. The earlier you begin, the sooner you can harness the power of compounding. Remember – pay yourself first!
- Systematic Savings Program (dollar-cost averaging): Regularly contribute to your investment accounts every month. This practice of paying yourself first helps you stay disciplined and consistent.
- Diversified Portfolio: Invest in a low-cost, diversified portfolio that includes stocks, real estate, bonds, digital assets, and alternatives. This approach helps manage risk and improve long-term performance. Remember, the power of endurance in investing cannot be overstated.
- Continuous Education and Professional Advice: Continuously educate yourself about investing and growing your income to make informed decisions. Most definitely seek guidance from professionals who specialize in these areas. Consult with a financial advisor, tax professional, and estate planning attorney to save time and money and avoid costly mistakes.
By focusing on these 10 steps, young investors can lay a strong foundation for their financial future and work towards achieving both their short and long-term goals. With dedication and discipline, they can set themselves up for a lifetime of financial success. If your child is interested in learning more about financial planning and investing, I encourage you to schedule some time on my calendar here. It would be my pleasure.
Dave’s Picks
Scientific Speed Reading: How to Read 300% Faster in 20 Minutes by Tim Ferriss
100 Couples Share Their Secrets to a Successful Relationship by Polina Pompliano
The Savings Expert: “Do Not Buy A House!” Do THIS Instead! – Morgan Housel
50 Ideas That Changed My Life by David Perrell
Never Look Down the Road Not Taken by Nick Maggiulli