Updated: Mar 29, 2021
What investment advice I wish I knew when I was their age.
One of my younger employees, a 20 something year-old, asked me what investment advice I wish I knew when I was their age and my mind immediately went to taxes. No one talks about the tax consequences on successful investments or on a lucrative career. I believe that we continue to provide a huge disservice to the younger generations by not putting a greater emphasis on financial literacy in general, which is why I want to impart some knowledge that I believe any 20 something can benefit from.
If you are in credit card debt and reading this, the first thing you need to do is empty your wallet of the credit cards. It is hard to be disciplined when you are carrying around a rolodex of credit cards. One credit card is sufficient for life’s emergencies. Last time I checked, a major credit card works at Macy’s, Home Depot, Kohl’s, and Southwest. You get my point, and yes, I know the offers can be tempting, but remember the goal is to save to invest in your future. Most credit cards, even with a perfect credit score, charge double-digit annualized interest and there are very few double-digit annualized returns on investments. Starting at a deficit will not work. Reducing or eliminating credit cards is one step closer to financial freedom.
“ I believe that we continue to provide a huge disservice to the younger generations by not putting a greater emphasis on financial literacy in general,”
As a 20 something, you are still finding your bearings in the workforce. I know it seems as if there is not enough money to pay the bills and you want to fall back in to credit card frenzy, but do not give in. Instead, get another job. You are young and can handle it, and who knows you may discover another career path. This is a time in your life you should explore all options. Better to have two jobs in your 20’s then in your 60’s. The harder you work to save money, the closer you will get to financial freedom.
At 20 I wish I understood taxes better, but we will talk about this more as we delve into this discussion during the investment advice for 40 somethings. The one thing you need to know in your 20’s is that now is the time to start building upon tax free shelter investments for the future. If you start in your 20’s you will thank me as you enter your 40’s. I wrote a blog for Preferred Trust Company regarding this topic and every young person should read it: “Coffee or Retirement – Which Benefits You More?”. I know I am no fun, first I tell you give up your credit cards, then I tell you to get a second job, and now I tell you that you should not drink coffee. I am starting to sound like your mother, but it is these financial habits that need to be taught to our younger generation. The rich did not become richer without applying these very same tactics. If you do not open a Roth IRA after reading this blog, shame on you because you are missing out on your future financial freedom.
A Roth IRA is only one way to avoid taxes on future income. Another way is taking advantage of a company sponsored 401(k) plan that offers a Roth 401(k) contribution option. I know that means you pay taxes now, but all income generated in the future you will not. Have you ever heard of the Rule of 72? Investopedia provides a good explanation of it, click here to learn more.
Now follow me on this one…if you get off your butt and get the second job and it pays you $15,000 after you pay your taxes and you put this $15,000 in a Roth IRA ($5,000) and a Roth 401(k) ($10,000) and this $15,000 is not touched by you until you turn 60 and it earns 8% annually for the next 40 years, do you know what you will have amassed for the one year you worked two jobs?
Let me show you how this works:
The numbers do not lie. Your $15,000 investment is now worth $325,867.82 and you only paid taxes on the $15,000 and you will never pay tax on the $310,867.82. Imagine if you followed these principles for a few more years.
Do not wait until next Monday to get started. Every day you wait is another day you will be behind on securing your financial future.