1. Determine the goals for your money
I put this first for a reason. No one accidentally ends up successful. Accidental success is a myth and there are a staggering amount of successful people who were grinding for 10-20 years before they became an "overnight success". It's funny how that goes right?
Success starts with goals and planning. It ends with focus and consistency. When you have put all the pieces of the puzzle together, you are living a life that you can truly enjoy (this is HUGE!). Your goals are those pieces and you have to be committed to reaching them to "finish" putting together the puzzle. Financial goals can range from buying an Aston Martin to saving up enough money to buy a TV. They can be short-term or long-term and there are no barriers to what can and cannot be achieved. You just have to be focused, disciplined, and consistent in taking steps to reach them.
2. Build up an emergency fund
This is ground zero for a great financial life. You need an emergency fund to reach any of your goals. Let's say you don't have an emergency fund but you do have $50,000 invested in your 401(k). What happens if you have a $10,000 financial emergency? You have one of three options. 1) You can go into debt to pay for the emergency 2) You can pull from your 401(k) and undo all of the amazing compounding in your account (not to mention penalties and taxes). 3) You can just let the emergency go unhandled and sweep it under the rug?
If you have used some forward thinking to anticipate Murphy's Law, you will be presented with a fourth option. Pay for the financial emergency...in CASH.
Start with an emergency fund of $1,000 to get the ball rolling in the right direction. Then begin saving for about 4-6 months expenses. The sweet spot is to aim higher and go ahead and save for 6 months of expenses.
Your emergency fund will fluctuate because your expenses fluctuate. Every year you should add a meeting on your calendar. During that meeting, and among other things, you will check to make sure your emergency fund is adequate. We call this meeting your Money Summit. How do you do this?
By taking a look at your expenses over the last three months and taking the average of your total expenses. If your expenses rose by $300/month then you need to begin saving $1,800 more into your emergency fund. How did we get that number? Multiply $300 (your increase in monthly expenses) with 6 (six months emergency fund) to get $1,800 ( the increase of cash needed in your emergency fund).
3. Your ability to earn income is your biggest asset
Your income is not some static, stagnant thing. The media will lead you to believe that it is, but trust us, it isn't. Wages are stagnant because many of us are not willing to be uncomfortable to see your earnings grow. Need an extra $1,000 for a European excursion? Pizza shops are always hiring for delivery drivers. When it comes to your personal finances, your income is currently your biggest asset, and optimizing it is one of your biggest goals!
No one is going to give you a bump in salary out of the goodness of their heart. That said, you should negotiate a better deal at every single job promotion and new job opportunity. "Always be negotiating" is what we say. The job of your employer is to recruit and retain you for the lowest amount of money possible. It is in their best interest to give you a salary offer that is lower than what they can actually afford. So don't feel bad about negotiating, they low-balled you in the first place...and they know it.
When it comes to salary raises, most people wait until their employer initiates the discussion. This is the most inefficient method of optimizing your income. Why? Because, "the job of your employer is to recruit and retain you for the lowest amount of money possible" You should initiate the "compensation" conversation yourself by simply asking, and do it outside of the performance review or it will feel as awkward as a forced apology. Bring together all of the data on your performance, all of the ways you have increased the bottom line of your company, and practice your presentation. At Ignite, we even role play with our clients to make sure they are over-prepared for this nerve-wracking discussion.
4. Invest early, invest often
Einstein called compounding the 9th Wonder of the World. That accolade is truly deserved, yet a large percentage of millennials fear investing after experiencing the recent financial crisis. So much so that they are hurting their future selves by either investing too conservatively, or worse, avoiding investing altogether.
There is logical, quantitative evidence that investing your money is one of the few, liquid ways to grow your wealth. Savings accounts and checking accounts get eroded by inflation day in and day out. Those are facts. The problem is that money is an emotional topic and we aren't willing to get out of our comfort zone to reach our goals.
If I were to tell you every year, for five years, that chocolate goes on sale the week after Valentine's Day, Halloween, & Easter...and it did...would you not believe me next year? Then why do we as a generation refuse to believe in the wealth-creating power of investments and compounding your money to make your money work for you? It's counter-intuitive, right?
This is where our 9th rule of thumb comes into play. Invest in a financial advisor. If they can help you invest and keep your money from losing its value every year (erosion of inflation), then they will pay for themselves over time.
5. It's okay for building wealth to be boring
This ties into rule of thumb numero quatro. Building wealth is usually boring. And that is perfectly okay! Either you're investing in low-cost funds or you are hitting the grindstone every day to grow a business. Doesn't matter the path, what matters is that you employ focus and consistency regardless of how boring it can be.
Want to know why passive investing is having its day in the spotlight now? Because low-cost funds when invested over the long term can greatly increase your returns while minimizing your fees (and risk). Yes, there are arguments that actively-managed funds (we'll talk about this later) will never outperform "the market" over the long-term, but let's set that aside. Look at the fees and probabilities of the market completely failing. If the market never comes back "up" after a downturn we have more to worry about than your investment accounts. Stuff is about to go down.
There are tons of people who lose money by investing with their emotions and selling out of the market when it dips. Which is by far the dumbest thing you can do when investing unless you need the money to survive. Why? Because they are buying high, and selling low.
Would you go to a store and ask them to let you know when your favorite item or shirt is OFF sale? No. Would you see the price of your dream car and say "hey, I see this car is on sale but I want to wait until it's price goes back up to normal before buying!" No. Yet that's what people do every time the market makes a serious dip. Instead of buying more at a discount, they sell, and then buy more when the prices are "marked-up". Doesn't make any sense does it?
5. Avoid debts with double digit interest rates at all costs
We get many questions asking if it's okay to incur debt. I don't see a problem with is as long as it is done in moderation and paid back as soon as you possibly can. But, and this is a huge but, avoid double-digit interest rates at ALL costs. The things that you can get with double-digit interest rates are likely not going to be the things that will increase your quality of life or your income. If you think it will...hire our firm, and we will talk you into a better use of your money.
There is smart and dumb debt, and ironically it is usually priced accordingly. "Smart" debt is generally referred to debt with single-digit interest rates (except for financing new cars). "Dumb" debt generally being in the double-digit interest rates (credit cards, advance loans, title loans, etc...). You could also look at dumb debt as debt incurred to purchase depreciating assets.
Keep your eye out for destructive debt that can be detrimental to whether or not your reach your financial goals. When you kick your debt payoff into hyperdrive, there is an unstated "return" on your efforts. Think of it this way: paying off a 24% debt is the same as increasing your discretionary income by 24%. Get it? Good. Pay off those high-interest debts as quickly as humanly possible.
6. Not saving up to your 401k match is stupid
This one will be short because you are literally giving up free money. And in actuality...they factor your 401(k) match into your salary, so you are also leaving a piece of your salary on the table.
After you save up for an emergency fund, this should be your priority as far as saving/investing money is concerned. At least get as far towards maxing out your match as possible before feeling extremely uncomfortable paying your bills.
Shift your perspective in how you think about your 401(k). If anyone tells you it's a sham, talk to a financial advisor. If anyone tells you not to invest in your 401(k) (if there's an employer match), talk to a financial advisor. If anyone tells you to invest with anything besides a 401(k) first, talk to a financial advisor.
Look at your 401(k) as a built in 3-8% raise. How did we get that? Let's first assume that your employer match is 3% and you earn 5% in investment returns, net of fees. This 3% match is money you've used to invest that you would have never had to invest in the first place. Right? So, why not take advantage of the free money and built-in raise?
7. Cash flow management is alpha and omega of financial success
Cash truly is king. The majority of millennials believe that cutting down debt is the most important financial priority. Other generations believe that investing for your future is the top financial priority.
We believe the most important financial battle is a little more big picture. Managing your cash flow (budgeting) is the root of it all. A great financial plan is based on an efficient use of your money. This should be your first, second, and third biggest priority when it comes to your personal finances. Cash flow management is how you recognize that if you can cut out that cable you don't use, and subscribe to Netflix, you can continue getting your twice weekly Starbucks while still getting in your favorite shows.
All in all, the point of managing your cash flow is to maintain or increase your quality of life while pursuing your financial goals. It is NOT about telling you what you can't buy with your money. Budgeting is about discovering what you CAN buy with your money. If you're not excited about that statement, you need to shift your mindset around budgeting.
To do this you have to be intentional about where you deploy your money. The number 1 reason that businesses go out of business is due to their lack of cash flow management throughout good and bad times. Think of your financial independence as a business. You want to grow your wealth to the point where your money (or in the metaphor your "business") will begin generating income for you. We have to put in the painstaking work of designing a budget/spending plan that will help you live life the way you want.
8. Invest in a financial advisor
Not too long ago Vanguard came out with a study that found financial advisors can add up to 3% of return on their client’s life. We link to the article here (link to article). 3% is pretty insignificant in itself, but let's compare it to something that I refer to often, inflation erosion. Even if your financial advisor only helps you with the financial management aspect of your life, not with investments, their added value will provide you with enough "return" to keep pace with inflation.
What does this mean? Even if you keep all of your money in a savings account earning 1% ( which a "good" financial advisor will never recommend) and inflation keeping pace at 3%, you would come out 1% ahead of the game just by hiring a financial advisor! This is called financial advisor alpha. Financial advisor alpha represents a quantifiable value that a financial professional can bring to your life, and Vanguard thinks it is the equivalent of 3% in investment returns.