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Personal Finance for Young People

Ryan here. This is a post from one of our summer interns, Michael Winaker. If you're a young person, READ below! If you're not (they say gray hair is a crown of glory) then consider passing this on to a young person you know.

However, you might want to make the subject line "Good info, not trying to a drop a hint 😜" when you send this on.

Enjoy!

You might be asking,

“Why does this matter? Why start now? I have the rest of my life to worry about money and bills, I just want to live carefree while I can”.


While it may seem like a drag to start implementing sound money management principles early in your life, it will be the single best decision you can make. What people don’t understand is that a decision made when you are 18 can continue to affect you long after you graduate college. Starting early will drastically improve your life and free you of many crippling problems that the majority of your peers will be facing for decades.


1. Stay out of debt

This is arguably the single most important personal finance tip for current and soon-to-be college students. If you continue to borrow money, especially to buy things you can live without (nice cars, excessive student loans, unnecessary spending, etc.) you will put yourself in a hole that will take decades, sometimes even 40 years, to pay off. While some expenses and borrowing can’t be completely avoided, you must make sure to limit your exposure. If you keep doing the same things that got you in a jam in the first place, you will only compound the issues and dig yourself a deeper hole to climb out of.


The most prevalent issue for college attendees is getting trapped with student loans. If you have the means to fully pay for school, even if it is difficult in the short term, ABSOLUTELY DO IT. While it may seem like a great idea to not have to pay for anything now and worry about it later, that is the worst thing you can do. There is interest on the loans, which means you will have to pay back more than you borrowed.


Now, granted, not everyone can afford to pay for college completely, but there are some sound practices that can help minimize the amount you borrow. The first of which is getting a job. No matter the scale, whether it be bussing tables, lifeguarding, or working an office job, every little bit counts. Most jobs nowadays (even the unskilled ones) pay a decent enough salary that you can pocket a significant amount of money, if you manage it properly. Although it’s not the most fun way to spend the summers, getting paid is a fantastic use of your time.


Next, apply for as many scholarships as you can. There are more scholarship opportunities that you can count and securing even just a few of them can help you out tremendously. One of my biggest regrets is not applying for more scholarship opportunities, mainly because I did not think to cast a super wide net in that area early enough. Often times, the application process is fairly easy, including a few short questions and maybe a page or two essay prompt (you can use the same essay for numerous scholarships). Another aspect of making college more affordable is applying for school and federal financial aid via the FAFSA form. This is all based on your family’s income from two years prior, and the less income made will then result in more financial aid being rewarded (which doesn’t need to be paid back).

In addition to the practices listed above to avoid student loans, there are a few more ways to stay out of debt in general. Instead of buying a brand-new car, you could find an equally durable and practical used vehicle for a fraction of the cost. Additionally, it is prudent to avoid excessive credit card use. Most teenagers don’t necessarily need a credit card at that age, but if you do have one make sure to stay on top of the payments. Finally, think critically about large purchases you might make. While it may seem like you absolutely have to have the newest and hottest item on the market, often times if you wait a week or so you will find that the item in question would be a waste of money. Often times, the richest people still only purchase affordable and regular items because they got rich by not wasting money.

Try your absolute hardest to stay out of debt. A debt free life is a carefree life and will open up so many doors that would otherwise be shut if your money is being sucked away elsewhere.

2. Learn how to budget

The next step is learning how to budget the money you do have. You don’t even need to have a large income to start budgeting. It can be on as long or short of a scale as you like but is most commonly broken-down month by month. Simply put, budgeting is deciding how much money from your income goes to each aspect of life.


Personally, I use the 60% rule: 60% of my income goes toward necessary living costs (bills, gas, food, other things I can’t live without), 10% towards retirement (401k fund or a Roth IRA), 10% towards long term investments (stocks and other trades), 10% towards short term emergencies (new tires if mine pop or other unforeseen emergencies), and finally 10% towards fun/entertainment. This method allows me to cover my bills, start planning for retirement early, make some of my money grow as an investment, and have fun while doing it (let’s face it: you have to place some emphasis on happiness and enjoying life).


While this budget breakdown works for me, it is not the only method! There are plenty of other recommendations on how to divide up your paycheck. Feel free to find whatever works best for you; just remember to satisfy needs before wants and live within your means. If you stick to that principle, the odds are much higher you will be able to live lavishly later in life because you set yourself up for success.


3. Start saving ASAP

As young adults, there is a seemingly endless supply of hot new products that we “absolutely need”. I’ll be the first to admit: it’s really easy to fall into that trap and overspend on stuff we will only use a few times. Although it is not as glamorous to put aside money to save, it is an incredibly important habit to maintain.


While merely putting money aside in the bank is a better practice than spending it quickly, there are better places to leave your money and allow it to grow on interest. Some good places to put your savings include high-yield bank accounts, Certificates of Deposit, money market funds, or bonds. All of the items listed above will earn interest and make you some extra money without having to do anything!


It is essential to have money stored up in savings when the big purchases start to roll in: buying a car, placing a down payment on a house, etc. It is much easier to live in financial peace if you have a significant chunk of money stored away. The key to maximizing interest on these savings accounts is to start as early as possible. Remember, it is never too early to start saving money!


4. Learn how to grow the money you make

The most lucrative (and enjoyable) way to grow the money you make is to invest it. You can invest in a whole number of different things, but the best chance you have at success is to put it into the stock market. Being profitable in the stock market requires its fair share of research, but don’t worry! The time spent combing over which companies to invest in will all be worth it when you double or triple your money.

A lot of you may be asking, “Where do I start?” or “How do I become good at this?”. Quite frankly, the best way to gain experience and get comfortable in the market is to start with a small amount and experience it for yourself. Listed below are some of the basic steps you can take to start.


1. Choose a brokerage service. For a beginner, it is best to find one that does not charge a commission for trades or requires a minimum initial deposit (Robinhood meets these criteria and is easy to use).

2. You deposit however much money you want to invest with. I would recommend starting on a relatively small scale, which will allow you to gain invaluable experience without risking a lot of money.

3. You do some digging and find companies that you like and believe are going to improve. It is a fairly safe bet to choose top companies in whatever sector is leading the market currently (some of the top sectors are financial services and communication services). Make sure you understand a company before you invest in it. A wise man once told me, “Only invest in what you believe in”.

4. The last piece is executing your order.


There are a few rules of thumb to keep in mind before entering into a position that I follow to cut losses early and maximize winners.


a. Don’t be afraid to exit a position if you are unsure about it

b. Don’t get caught up in how much you can make, but rather protect what you have

c. Embrace mistakes; they are going to happen so use them as learning experiences

d. Remain emotionally balanced (don’t get depressed when you lose and elated when you win)


These rules are taken from some of the most successful traders and investors in the last century. What sets them apart is staying disciplined, emotionally balanced, and not trying to outsmart the market. They merely understand it for what it is and take advantage of opportunities when they present themselves.


5. Stay hungry and crave knowledge!

Every massively successful investor and trader has a thirst for knowledge. They are constantly reading, researching, and studying how they can improve. By doing the extra work average people aren’t willing to commit to, you are poised to be far more profitable in life. No matter what you do, whether it be actively pursuing a job to avoid student debt or beginning to trade in the stock market, never give up! Rough times are going to hit eventually; it’s how you react that sets apart the winners from the losers.


My only question now is: why wait? The world of money is calling your name; time to cash in.




Thank you so much for reading this post! My name is Michael Winaker, and I am a college student at Pepperdine University. I have been working with Investing City for a few months now and am looking forward to writing more.


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