While we’re working away our days, we have end goals mind (or we should). It might be to buy a house, to set ourselves up for retirement, or to travel and vacation more. But how are we going to get there? Here in Silicon Valley we see people starting major corporations and becoming millionaires before they even hit their 30’s. But how can the rest of us take a more practical approach to financial management?
I recently had the opportunity to interview Jim Wood, author of From Ramen to Riches: Building Wealth in Your 20s, and although I’m no longer in my 20s, I found the information quite useful! He’s also giving away a signed copy of his book to my readers – just comment on this post and Like Us on Facebook to be entered into the giveaway!
Q&A With Jim Wood
What are some of the most common financial mistakes made by young professionals?
Jim: I feel uniquely qualified to answer this question, as I did many boneheaded things with my money in my early 20s. Common mistakes include:
Neglecting to automatically direct a portion of your paycheck into savings. Aim for 10% or more, but start with something! Look to build a 3-6 month emergency fund to deal with unexpected expenses or possible job loss.
Careless use of debt. This is particularly true of credit card debt, which often carries obscene interest rates. Always pay the card in full every month.
Avoiding the discipline required to develop good financial habits. Organize your financial life so that money serves you, not the other way around. Things like budgeting, paying credit cards in full every month, saving at least 10% of your income, and investing for future needs should become automatic if you want to avoid perpetual financial stress.
Not understanding that time is your financial ally. Investing $125/month beginning at age 20 and earning the average 8% historical return in the stock market over 50 years will net you over $1,000,000. The amount required at age 30 to achieve the same result is $300/month; at age 40, $700/month.
It seems like there are so many financial services professionals trying to sell us various products and services that we tend not to trust anyone for advice. What the best free resources on getting legitimate financial advice and suggestions?
Jim: The best way to avoid being snookered is to be an educated consumer. Even if you’re not that interested in the subject of money, it’s a good idea to get acquainted with commonly accepted tenets of personal finance. Many reputable major media outlets publish personal finance articles that aim to educate, not sell. Read them. I have a list of great resources here on my website, including books, financial calculators, periodicals, and websites.
What are some of the biggest drains on our finances, and how can we prevent them?
Jim: Our spending decisions determine how much money flows out of our pockets. Remember, it’s not what you make that counts; it’s what you keep. Here are some of the unhelpful habits to avoid:
Not distinguishing between “wants” and “needs.” The things we “need” to survive are pretty limited—stuff like shelter, food, and basic clothing. Everything else falls into the “want” category. Prioritize the “wants” to fit into your budget. You might be surprised how much flexibility you have in your financial life when you take a hard look at your spending.
Paying full retail price. Most items can be obtained for less than list price. Look for the best price on EVERYTHING! Don’t be afraid to negotiate. It’s your money. Why hand over more of it than you need to?
Not paying attention to the costs of personal transportation. Owning a car is expensive. The fully loaded cost of a new $25,000 car is around $700/month when you include the payments, insurance, registration, fuel expense, and repairs/maintenance. Look at other options. What about buying a high quality used car and driving it for several years? What about highly fuel-efficient vehicles? They save a bunch of money and help the planet. Is public transit an option? Cycling? Using a car-share service?
If we had just $100 a month to save for retirement, what would you recommend we do with it (aside from stuffing it under our bed), in order to make the biggest impact?
Jim: The first step is to understand your risk tolerance. Some people lose sleep if their hard-earned money loses even a dime in an investment. Younger people can generally assume somewhat greater risk in their investments because they have time to make up short-term losses. Take only the risks you are comfortable taking. At the same time, be aware that your ability to accumulate substantial assets over a lifetime is greatly affected by your savings and investment choices.
Remember the earlier example that illustrated how to accumulate $1,000,000 with a $125/month stock market investment earning an average 8% return? To get the same result with a bank CD earning 3% you’d need to increase your monthly savings to roughly $725 beginning at age 20.
A broadly diversified mix of low-cost stock and bond index funds has historically provided returns that are superior to what is possible with a conservative (and safe) bank CD, if you have a very long-term time horizon. Assess your risk profile in advance. Then, set up a mix of well diversified savings and investment choices that let you sleep at night, yet still allows you to accumulate enough to live comfortably when you retire.
Don’t forget to Like Us on Facebook to be entered to win a copy of From Ramen to Riches: Building Wealth in Your 20s! Winner will be selected on Thursday, February 28th. (Winner has now been chosen – keep reading our blog for new giveaways!)
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Jim Wood is a 25-year veteran of the high-tech industry, having held software engineering, information technology management, and business strategy management positions. His first book, “From Ramen to Riches: Building Wealth in Your 20s,” is a popular guide for 20-somethings who are looking to get a grip on managing their money. Jim has appeared on numerous local and national media programs, including PBS television’s Nightly Business Report.
From Ramen to Riches: building wealth in your 20s
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