This week we are starting our 11th Financial Peace University Class. One of the thing that always excites me in leading FPU is when I have young people in the class. It’s a great class for anyone, but especially for young people just getting started out. The principles work for anyone, but they are so much easier when you get started while you are young.
Along those lines I was thinking this week about what I would do if I had a time machine and could go back and talk to my 22-year-old self. At 22 I had just graduated from college and was starting on a brand new career working in information technology at a quality local company.
So if I had the opportunity here are 8 things I would tell my 22-year-old self.
Max out your 401K!
Fortunately, almost from the start of my career I put some money in my 401K. At the time the company I worked for matched 80 cents on the dollar for the first 5% and 20 cents on the next 3%. I was putting in 5% to get the big match but for the most part that was it.
It wasn’t a huge mistake because over the years what I put in has grown nicely and I’ll be ok come retirement time, but I was just throwing away that extra 20% I could have been getting.
I would tell myself to at least put in the full 8% to get all the match I was eligible for and better still save even a little more on top of that.
There is nothing you want bad enough to go into debt for and better yet build up an emergency fund so that emergencies don’t mean more debt.
Fortunately, I was smart enough that I avoided ever having a crippling amount of debt, but I always seemed to have just enough debt that I couldn’t ever seem to make much progress.
I would tell myself do whatever it takes to get out of debt. The Bible isn’t kidding when it says “The borrower is a slave to the lender.” That debt will steal your peace of mind for the next 20 years. Nothing you want to buy is worth that.
You know those beliefs you have that “You’ll always have a car payment” and “You need a new car for reliability”? Well both of them simply aren’t true. In fact those car payments are one of the main reasons you’ll struggle with debt.
For many years I believed that no one could ever pay cash for a car unless you were a millionaire or something.
I once traded in a perfectly good used Corolla I had because it had a couple mechanical issues and leased a new car (because I couldn’t afford the payment to buy it out right.) Then a couple of years later I traded it in on a leased SUV because my car didn’t do very well in the snow and I neeeeded to have 4 wheel drive!
What I needed was a $300 set of snow tires and a little more patience.
Those dumb decisions cost me several thousand dollars.
We are now driving a nice used Toyota Camry and a nice used Honda Odyssey both of which I paid cash for and both of which are very reliable vehicles.
No one needs a $450 vehicle payment! That’s how you stay broke.
Don’t be in such a big hurry to buy a house. I know you think you are making a wise decision because your house payment isn’t much different than your rent payment would be, but there is a lot more to home ownership than the mortgage payment.
I bought my first home when I was 23. I did get a pretty good deal on it as the seller was pretty motivated. My reasoning was the payment was low and no more than I’d be paying for rent. I saw rent payments as simply throwing away money, so buying was much “wiser”.
In general, buying is preferable to renting. However, there is no harm in renting for a while when you are just getting started.
When the water heater breaks or the roof leaks or a host of other things happen and you are renting, you call the land lord. When you are a home owner, guess what? You get to pull out the check book. Or the credit card when you don’t have the needed savings.
Home ownership is great. It’s a worthy goal for everyone. But you shouldn’t be buying when you have a bunch of debt and no emergency savings. All those bumps in the road that are sure to come will guarantee you are mired in debt.
My mistake wasn’t too bad since the home I purchased was very modest and the payment was pretty reasonable. Still buying a home when I had debt and little savings is one of the reasons I struggled with debt for many years.
While we are talking about homes, refinancing your mortgage every few years to pay off credit cards is a really dumb idea. Don’t do it.
If I had kept that original mortgage I’d have had a paid for home years ago.
Instead I had the bright idea of refinancing every few years and using the extra money to try to catch up on my credit cards. As a result every few years I was back to square one on paying off my mortgage.
There’s nothing wrong with refinancing to get a lower interest rate or better terms for the loan. Just don’t use the refinancing to extend the time you are in debt. If you are 5 years into a 15 year mortgage and have the opportunity to refinance to get a lower rate, go for it. But look for a 10 year mortgage. That way you aren’t increasing the time you’ll be in debt.
The guy trying to sell you whole life insurance as an investment was more interested in his wallet than yours.
Shortly into my working career I had the opportunity to see a financial adviser. I reviewed what I was doing with my 401K at work and asked what my next steps should be.
A financial adviser who was truly looking out for my best interests would have told me that my best move would have been to up my 401k contribution at least enough to get the company match.
Instead this adviser told me what I was missing was a whole life policy.
What he didn’t mention was that if he had told me to increase my 401K he would not have made any money off that advice. On the other hand whole life policies usually come with large commissions for the sales person. It is clear in retrospect that he was more interested in lining his wallet than he was in lining mine.
In the first place, at that time of my life I was not married and didn’t have a family. I didn’t need the life insurance. And second, whole life is just a really bad investment choice. It’s life insurance that you pay extra for to include a savings program, except the savings have a really poor rate of return and if you die they keep all that extra money you saved. Really bad product.
I cancelled that policy after a few months mostly because I needed the extra money to pay my debts. Thinking back now perhaps I finally found an instance where debt was good!
Don’t rely solely on work-based life insurance. You need more coverage than they provide and you need coverage that isn’t tied to your employment.
For many years I just depended on the life insurance I received as a benefit at my place of employment. It was fairly cheap and it was convenient since it came out of my pay as a payroll deduction.
There is nothing wrong with life insurance that is provided by your employer if you had that option. However, that shouldn’t be your only insurance if you have a family that is depending on you.
In the first place, the coverage provided usually isn’t enough. I had 4 times my income but that wouldn’t have nearly been sufficient to replace my income had something happened to me. You really need at minimum 10-12 times your income. More if you can manage it. You want to have enough money so that if the worst happened those you left behind could invest it and live off the proceeds replacing your income. Most work-based plans won’t allow you to purchase enough to do that.
Second, and perhaps even more important if you lose your job, you probably also lose your insurance unless there is some option available to convert it. When you just lost a job is not the time you want to be shopping for insurance.
Don’t be so tied to grades that you miss your calling
Ok, This is probably more aimed at my 18-year-old self than my 22-year-old self.
When I was young I loved math and science. Physics was one of my favorite subjects because it combined the two.
I was also a very good student. In fact, in many ways my identity was wrapped up in my report cards. The problem was when I got to college I realized after the first semester that I couldn’t be a straight-A student and continue in Physics. I could have done well, but not well enough to get A’s. So, I decided if I couldn’t get A’s I’d just give up on Physics.
I’ve always regretted that decision. While I have had a good career in information technology, I have always thought I would have enjoyed a career in engineering more. I might have enjoyed my work more as an engineer with a transcript filled with B’s as opposed to an IT guy with a close to 4.0 average.
My point being make sure as you are making career choices that follow your dreams. Making choices that may seem expedient at the moment but are contrary to your life long desires will usually lead you down a path that is less than the best for your life.
Be encouraged. You’ll make mistakes but they won’t be fatal. You’ll learn from them and life will be good.
Sure I’ve made some dumb financial decisions in my life. But the truth is we all have.
There’s an old saying that Good judgment comes from experience. Experience comes from bad judgment. I think there is much truth in that. I am fortunate that the mistakes I have made were not insurmountable. I’m wiser now than I was when I was 22.
My encouragement to you is to spend a lifetime learning. Read good books. Find people who have been successful and emulate them. Learn from your mistakes. You’ll do just fine.