Introduction
This eBook is designed to help you understand the basics of a few key financial points that are necessary for financial success. It is by no means a complete compendium on investing or financial planning. The biggest problem most of us have when it comes to improving our financial position in life is not knowing what we don’t know. My hope in writing this publication is that you will think about things you previously had not considered while also you becoming motivated to take control of your financial future.
If you want the freedom and happiness that comes with financial success, read this eBook. If you have a spouse or significant other joining you on this journey, read it together. Make a commitment to yourself and one another that you will put forth the effort to achieve financial success. If the commitment and the effort are already there, but finance isn’t really your thing, seek professional guidance. You probably wouldn’t attempt to re-wire your home or make a major repair on your car without assistance. The risk of getting it wrong is too great. Don’t be a do-it-yourselfer with something as important as your financial future.
I hope you enjoy the following information and feel inspired by the idea that you really can become financially successful!
Chapter 1
Where to Begin?
Are you ready to make some changes in your financial life? Maybe things aren’t as they should be with your finances. Maybe something is missing but you aren’t sure what’s missing or where to find it. Maybe you know exactly what’s missing, but don’t know how to get it. I’ve always been told the best place to start is at the beginning, so let’s start there.
The first thing you have to know is your “why.” What is your why? Your why is your reason, motivation, or purpose for making a change. People change their diet to be healthier, lift weights to look more attractive, or earn a degree to change careers. Finding your reason is your first step to finding success.
Your dream might be a cruise vacation with friends, a second home on a lake, or season tickets on the 50-yard line. Perhaps your motivation is a little more down to earth. Maybe you want to get out from under a load of debt, save for your children’s education, or retire at a reasonable age. Perhaps it’s simply taking charge of the money you make. You’re paying off debt and saving for retirement, but you still end up with high credit card balances every month. You know there has to be a way to be more efficient with your paycheck.
Whatever your motivation, you must clearly define it if you are going to ever have a chance of getting there. I’d like to ask you to stop and consider your why. Don’t be vague, write it down in detail. Close your eyes and see yourself living your dreams. With your why clearly defined, we will find the how! Let’s start this journey together.
Chapter 2
The Millennial Generation
Before we go any further with plans for that lake house, let’s stop and explain why this eBook is targeted at Millennials. In an effort to understand your current financial situation, let’s consider the current financial situation of America. After all, folks aren’t passing along the family farm to their children anymore. Below is a brief history of the money in this country and some thoughts on where it’s going.
Who are Millennials?
According to the US Census Bureau, a Millennial is part of the more than 75 million people in the generation born from 1980 to the late 1990s.
Table 1. US Generations by Birth Years
Prior to 1941
Silent Generation
1942-1961
Baby Boomers
1962-1979
Generation X
1980-1998
Millennials
1999+
Generation Z
The Millennial generation is now larger than the Baby Boomer generation and is continuing to grow as young immigrants coming into the country expand their ranks (PewResearch.org). The number of Boomers, defined by the boom in births following World War II, is continuing to shrink as they age-out of the population. The Gen Xers are projected to surpass the Boomers in population by 2028.
Each of the generations in the table above have learned some financial lessons the hard way, but fortunately for you, the Millennial generation does not have to repeat them! Below are a few lessons we can learn from the previous generations.
Generational Lessons Learned
Silent Generation
The Silent Generation endured The Great Depression and two World Wars. They struggled financially and became very frugal. They worked hard for their money and saved all that they could. As the years passed, and the economy improved, all of that saved money compounded interest for decades. With their commitment to some basic financial principles, many people in the Silent Generation were able to build a good level of financial success. The Silent Generation taught us that the economy can crash and unthinkable wars can happen, but you can survive by living within your means and saving money.
Baby Boomers
The Baby Boomer generation is retiring right now, and there are certainly a few lessons to pass along. The first is that Social Security alone will not provide a comfortable life after retirement. The creators of Social Security had good intentions, but the program is outgrowing itself. According to Fool.com, the surge of retiring Baby Boomers will result in more people collecting benefits than those contributing to the program. Baby Boomers have a greater life expectancy than anticipated as well, meaning those beneficiaries will be withdrawing money longer than the program was designed to support. Lastly, Congress hasn’t taken any steps to correct the issues facing Social Security. In summary, retiring on Social Security benefits alone is likely not enough.
The next lesson Baby Boomers can teach us is to believe the college tuition projection rates. In the 1980s, when I had young children, college tuition at a private university was about $3,000. The experts predicted that tuition for my children would be $30,000. I thought they were nuts! There’s no way college would ever cost that much. Well, as you may know, college tuition now costs around $31,000 for tuition and fees at a private, non-profit, four-year university (CNBC.com). Tuition rates increase faster than normal inflation rates, so today’s new parents needs to plan accordingly.
The last lesson we can take from the Baby Boomer Generation is that medical costs also rise faster than normal inflation rates (FactCheck.org). Just as Baby Boomers are pushing the demand on Social Security, they are pushing up the demand for healthcare. Since almost 50% of Americans have either heart disease or diabetes, don’t expect that demand to drop anytime soon (TheBalance.com). The chart below from FactCheck.org shows average premium increases for covered workers with family coverage between 1999 and 2014. The rate of increase on premiums was 72% between 1999 and 2004, but it has slowed more recently to 26% from 2009 to 2014. Even though the rate has dropped, health insurance costs are still growing faster than inflation and wages.
Generation X
The first lesson to learn from Gen X’ers is that participating in your employer-sponsored retirement plan is a must. Unfortunately, many Gen X’ers have only been saving about 30% of what they should be to live comfortably in retirement (Time.com). Some Gen X’ers are having a hard time saving for retirement because they’re stuck supporting their parents in retirement and saving for their children’s college education. This is a tough spot to be in, but they still need to take advantage of tax-free savings through 401Ks and similar employer-sponsored programs.
The Gen X’ers have also learned that the housing market can crash. Yes, Millennials and Baby Boomers were hit by The Great Recession of 2008, but not as hard as Generation X (Buck’s Blog – NY Times). As you know, Generation X is not saving for retirement as well as the Baby Boomer and Millennial generations, so it should be no surprise that losing 50% of their already low savings was a crushing blow in 2008. Generation X has a lower rate of home ownership than Baby Boomers and higher rates of debt than all other age groups. These two factors resulted in nearly double the drop in net wealth of Generation X compared to Baby Boomers in 2008 (~50% vs 28%). Clearly, this market crash was salt on the wound for Generation X.
Millennials
Millennials have a lesson to teach, too! No other generation has had to deal with as much student loan debt as the Millennial generation. Millennials lag behind other generations by carrying an average of 39% of their total consumer debt in the form of student loans (Gallup.com). What’s even more worrisome is that Millennials have adopted an “out of sight, out of mind” approach when it comes to paying off their student loans (Forbes.com). Consider the following results of a Citizens Bank survey of Millennials with student loan debt: 45% of those surveyed didn’t know what percentage of their salary went to paying off student loans, 37% didn’t know the interest rate on their student loans, and 15% didn’t even know how much they owe. Ignoring this problem will only lead to financial failure.
Moving Forward
Those who do not learn from history are doomed to repeat it. Most of the hardships endured by previous generations are preventable! Even the unpredictable issues such as war and market crashes can be eased by smart financial planning. Don’t let problems of past generations become problems of the Millennial generation. The following chapters will teach you how to get out from under your existing financial burdens and prevent others from creeping up on you.
Chapter 3
The Three Commandments of Financial Success
Now that we have clearly defined our why, and you understand the financial climate of the Millennial generation, let’s get down to the nuts and bolts of achieving your goals. The primary financial rule for becoming financially successful is so simple, but unfortunately many have failed to consider it or actually choose to ignore it. I’ve been in the financial services business for over 35 years. I’ve seen the industry grow and change in ways we never considered. I‘ve seen vast improvements in financial products, unbelievable technological advancements, and various methods of financial professionals mentoring their clients. However, the number one basic of becoming financially successful has not changed and never will.
So what is the rule that will allow you and your family to become secure and financially successful? Are you ready for this? Get ready to take a screenshot! Here it is… Don’t spend more than you make. That’s it! Not too scientific. Nothing sexy or elaborate. Nothing so need a PhD. Sadly, the high-balance credit cards used to buy “stuff” and the personal storage units built to hold all of that “stuff” tell us that Americans have a problem learning this simple rule.
Through the many years in my financial practice, I’ve heard all the excuses people make for spending more than they earn. I can also tell you that the people who were truly committed to their family’s security and long-term financial success found ways to reject those excuses. Excuses are just ways of letting ourselves off the hook for breaking a commitment. They sabotage our ability to succeed to the level of our potential.
What does it mean to succeed to the level of our potential? I know very well that not everyone brings the same level of opportunity to the table. I know some people were educated at a more prestigious university than others, some are working in their family business, and some just happened to fall into a great paying job; while others are working hard in lower paying positions, or working two and even three jobs to make ends meet. I also know that if you ever say or think any of the statements above about your own situation, you are falling back on excuses.
I have observed many people over the last three decades in the financial services business, and there has been one thing that always rings true: the people who spend less than they make are financially successful to one degree or another. They didn’t all become millionaires, but they did all learn to live within their means. Many were able to retire and continue to live the lifestyle they were accustomed to living.
Commandment #2
The second financial fundamental that must be in place to become financially successful is another very simple concept. Just like the first principle, if you are willing to commit and adhere to this fundamental, you will be able to build financial wealth and security.
This principle is pay yourself first. Here’s what this means: before you do anything with your paycheck, some amount of your paycheck must go into savings. I know you have bills, student loan payments, and plans with friends this weekend, but if you can’t commit to putting some amount of your weekly paycheck into savings, you will never reach any level of financial success no matter how much money you make. Do this with every paycheck for the rest of your working career. This may be difficult or uncomfortable in the beginning, but if you haven’t started doing this basic financial concept don’t put it off another day. Start small. If you’re putting nothing into savings now, go open a savings account today and put $10 into it. Put $10 into the account next week. Will $10 per pay period make you a millionaire? No, probably not, but at this point, you need to understand that timing is critical when it comes to saving money.
We’ll talk about how to determine the appropriate savings rate in Chapter 4, but for now, it’s critical that you understand why it matters when you start saving. Some people suffer from what I call “analysis paralysis.” They think they have to know everything about saving or investing before they start because they might make a mistake, invest in a low performing fund, or even lose money. My response to that way of thinking is, if you never start saving, losing a few dollars here or there is the least of your worries. Below is a chart that proves it is more important to save with a low rate of return today than with a high rate of return later in life.
Savings Versus Investing
Rate of Return
Saving Rate (Savings Per Year), Value After 30 Years
1%
$493
2%
$896
3%
$1,479
4%
$1,972
5%
$2,465
5.5%
$2,712
1%
$17,149
$34,298
$51,447
$68,596
$85,745
$94,319
2%
$20,000
$40,000
$60,000
$80,000
$100,000
$110,000
3%
$23,455
$40,000
$70,364
$93,819
$117,273
$129,001
4%
$27,650
$55,300
$82,950
$110,600
$138,249
$152,074
5%
$32,754
$65,509
$98,263
$131,017
$163,772
$180,149
6%
$38,976
$77,951
$116,927
$155,903
$194,878
$214,366
7%
$46,569
$93,138
$139,708
$186,277
$232,846
$256,130
8%
$55,849
$111,697
$167,546
$223,394
$279,243
$307,167
9%
$67,200
$134,399
$201,599
$268,798
$335,998
$369,598
10%
$81,096
$162,191
$243,287
$324,382
$405,478
$446,026
The chart above assumes a median U.S. household income of $58,000, which leaves $49,300 after a 15% federal income tax. If you save 1% of your income, or $493 per year, at a 10% rate of return (not very realistic) for 30 years, you would have $81,096. On the other hand if you saved 5.5% of your income, or $2,712 per year, at only 1% rate of return (very low) for 30 years, you would have $94,391. As you can see, saving more money right now in a low performance fund is better than saving less money in a high performance fund. Right now you need to know that it’s not how well you invest in savings, it’s how much you save.
The reason that saving now works in your favor is a concept called compounding interest. Without going into the details of compound interest, know that “The Rule of 72” reveals about how long it takes your money to double. Divide the number 72 by your interest rate to see how many years it will take for your money to double. If your investment could average 7.2% return per year it will take your money 10 years to double. (i.e. 72 / 7.2% = 10 yrs.) If you were 25 years old today, and had $10,000 invested at 7.2% return, 10 years from today you would have $20,000 without any additional deposits. Obviously, if you continued to deposit more money into your account each pay period, you would have much more than the $20,000. Twenty years from now you would have $40,000, and at age 65, your original $10,000 would be worth about $160,000! If that looks pretty good to you, consider what happens if you can wait to age 75 to begin withdrawing your money. Your $160,000 would double again, growing to about $320,000. That is the beauty of compounding interest. Once again, this compounding all happens without any additional deposits.
I’m sure you’ve heard the phrase, “Time is money.” This definitely applies to the compounding of interest in your accounts. The later you start saving the less time you will allow compounding of interest to work in your favor. Don’t put it off. Start saving today!
Commandment #3
The third rule of financial success has less to do with mathematics and numbers and more to do with your own personal discipline. You will have to discover the difference between two little four-letter words: want and need. I like to say, “You do not need what you want.” You must be able to distinguish the difference between wants and needs, and be able to control which one drives your financial life. If you choose not to commit to controlling the idea of wants and needs, you are more likely to spend more than you make, and skip your periodic savings deposits. This third commandment is critical to meeting the first two.
Most people have the money to cover what they need. They start getting into trouble when they are more focused on what they want. You need food, clothing, shelter, utilities, transportation, healthcare, and insurance. These are the basic necessities of modern life.
You want a 4K TV, a fancier car, the more stylish and usually more expensive clothing, or the $50 dollar bottle of wine instead of the $20 bottle. Do you see the difference between need and want?
You have the skill set required to become financially successful, but do you have the will and the desire to take control of your money? Notice that I called it YOUR money? The bottom line is that it is YOUR money, and YOU are the only one that can take control of it. Don’t get me wrong. I think it is perfectly fine to buy some things that you want, but only if the financial goals you’ve set for yourself are on track. I’ve always found that once my clients have their financial goals on track, all of that “stuff” they wanted doesn’t seem so important anymore. You see, being financially secure and successful brings a happiness that all the stuff in the world can’t replace. This is why financially successful people usually just want to become more financially successful!
The biggest risk in this want vs. need debate is debt. If you allow yourself to habitually buy things you don’t need, it’s easy to build up debt. Car payments on top of student loan payments; credit card payments on top of car payments; it can get messy! Debt is a mean, ugly monster. If you are just getting started on your own, this is a perfect time to deal with this monster. If you’ve been out on your own for a while, and you haven’t tamed this beast, it’s the next critical step in helping you reach financial success. You can control it, you can defeat it, but you will have to apply these three commandments. See Chapters 4 and 5 for more discussion on debt. We’ll explore the allowable levels of debt, and ways to defeat it.
To summarize the three commandments, financial success is not complicated, it just takes commitment and self-control. Don’t spend more than you make. Save money every pay period. Focus on what you need, and have patience for the things you want. You can do this!