My children are starting to leave home and start their independent adult lives. What are the top five pieces of advice you offer to young adults newly on their own?
M. Jansic, landscape architect and mom
Sometimes the oldest advice and adages are still the best to give. This week my family will gather to celebrate my grandmother’s 100th birthday. Since her birth in 1911, she has witnessed a fascinating time in our nation’s history in terms of world events, technological advances, and yes, personal finance.
Over the years, she has imparted some valuable advice while giving a glimpse of the financial challenges she and my grandfather faced. Ironically, the advice she offers as someone who’s seen it all parallels what I say as a banker.
Here are the top five most solid pieces of advice I would offer a young person just starting out or anybody else looking to build a solid financial base for the future:
1) Save, save, save. The sooner you start, the better off you will be. Getting into a savings habit is the first major step. Start now, even if you can only allocate a small amount to savings. It is much harder to play catch-up with your savings goals than it is to add to a good base. When people start saving later is life, they miss out on the mathematical wonder of compound interest. The key driver of that equation is not so much the interest rate you receive but the duration of the investment growth. A healthy savings will not only guarantee a comfortable retirement but it will serve as a contingency plan/emergency fund in the event of reduced income or unexpected expense.
2) Use credit wisely. My grandparents paid cash for their first house. That is not a viable option for most people today, but responsible use of credit is. Obtain credit terms and monthly payments with which you are comfortable. Understand your lifestyle and how you choose to allocate your financial resources. If you enjoy travel, an expensive mortgage payment may tie up cash you could use for travel expenses and leave you homebound. If you have acquired some credit card debt, never pay just the minimum, but apply a bit more to reducing the principal with each payment.
3) Diversify your investments. The expression my grandmother used is, “Don’t put all your eggs in one basket.” Spread your investments across industries so if an entire industry experiences a recession, not all is lost. Also, have a basic understanding of the investments you hold and how the investments in your portfolio fit your risk tolerance. If you don’t properly understand the risks, you may not be making the best investment choices for your situation.
4) Leave equity and retirement funds alone. The equity in your house is not a piggy bank or an ATM! Do not use a home equity loan as a vacation fund or for other unnecessary purchases. The same premise applies to retirement accounts. Retirement investments are meant for retirement. The fact that you can access these funds prior to retirement does not mean you should. Plan and save for large purchases or dip into a separate savings account for unexpected emergencies.
5) Don’t count on Social Security benefits to get you through retirement. Social Security was not available when my grandparents were first beginning their financial journey. At best, Social Security benefits may account for only one-third of what you need for retirement. When it was introduced to the American public, Social Security was to supplement one’s retirement savings. Social Security benefits were never meant to be the nest egg! According to some economists, Social Security may be limited or not available at all to younger generations once they are of retirement age. Take matters into your own hands and refer to tips 1-4.
Simple financial advice is only a small part of the legacy my grandmother has shared with her family. We would all do well to learn lessons of the older and wiser generations.
Kimberly Yaglowski is a vice president and commercial loan officer at Commerce Bank of Arizona. She can be reached at 797-4001 or by email at firstname.lastname@example.org.