I am currently on vacation in and was discussing my blog with some family and friends. One of the questions that came up as we were discussing personal finance and investing was, “what is the advice you would have wanted to hear when you were 18?”
This is a really great question. I think there is a big opportunity for those of us who have experience investing to share what we have learned and the painful experiences we’ve gained with the younger generation.
In fact, about five years ago I had an older and wiser person share with me some concepts from Dave Ramsey that were extremely helpful to me. Even as a CPA, I benefitted from getting an understanding of the value of living debt-free and the value of being disciplined with my finances.
So here are the pieces of advice I wish had been shared with me!
Don’t Try to Get Rich Quick
This is something that is a big temptation for people who are young and talented. It is very tempting to be caught up into multi-level marketing schemes or trading systems that guarantee great wealth. These schemes are designed to take advantage of those who are inexperienced and naïve. The best way to avoid them is to focus on legitimate career goals and to get good advice from people you trust (who are not currently caught up in the scheme). Sometimes even trustworthy and wise people have momentary lapses where they get caught up in something they later regret! What is the point of getting rich quick anyway?
Open a Brokerage Account Now! (Begin Early)
The most powerful tool for wise and successful investing is time. In fact, time is the single most important factor in the growth of money over time. If you compared the impact of doubling your rate of return on one hand or doubling your time horizon on the other, you would find that the doubling of the time horizon in years has a bigger impact on the final value of your investment. See below table:
Yes the difference is only a few percentage points of increase but consider this; with most investments you don’t have complete control over your rate of return. The stock market can have highly variable returns and there is nothing you can do to control that. But you can control your time horizon by starting to invest early.
The best time to start saving and investing is as soon as possible. It is unfortunate that many people do not get interested in saving for their future until their late twenties and even into their thirties. Understanding the way that compound interest works is very important and I would encourage you to read about how powerful time is in the post I did called “Why Only a Million?”
I have found that the average person is kept from getting started early because they don’t actually know what to do. They don’t know how to open a brokerage account or place a trade. They don’t know the first place to look to do research.
Do Not Trade Frequently
This is the biggest tip for young people who are interested in taking a lot of risk and having an exciting experience with their investments. Listen, if this is what you want to do then that is fine but you need to do it completely separately from your real investments and you need to make sure that you start investing for real first.
I got interested in investing and started my brokerage account when I was 14 years old. However, I wish that I had started systematic and disciplined investing at that time as I outline below. I was very interested in a lot of different financial concepts at the time as well as in trading. So instead of starting investing for real at the age of 14 I spent many years learning (the hard way) about trading stocks and options. I did learn a great deal of valuable information from my trading and my experiences. But I would much rather have learned these lessons while focusing the bulk of my account on systematic investing for the long-term.
Invest a Set Percentage from Every Paycheck
This is a behavioral item. It has nothing to do with picking the right ETF, Mutual Fund, Stock, or making that killer futures trade in oil. But this is probably the factor, along with time, that will make you most successful in investing over the long-term. Sporadic investing in a brokerage account and then stopping or worse taking money out is destructive to your long-term investing strategy. The key here is to create a good habit and to stick to it. I believe that this is where millions are made or lost.
If you were to set a habit of investing 20% or 30% of your paycheck then your expectations will automatically adjust such that for every $1,000 you make you will only plan to have $700 to spend. A better habit still is to begin giving 10% to 20% to charity.
When you are saving and giving half of your income from a young age you will develop incredibly good financial habits. This discipline will help your character grow by practicing delayed gratification and by learning to constantly be giving to help others.
Consider the alternative, you spend every dollar you earn and still feel unfulfilled and do nothing towards helping your long-term financial future or towards helping others.
By automatically saving a portion of your income free up capital to invest on a regular basis. This good habit puts a natural collar on your spending expectations and patterns. It automatically precludes you from spending your savings on items you don’t need because your savings have already been removed from your paycheck each and every time you get one. You can do this by having automatic direct deposit to a separate account, or having automatic contributions to a 401(k) or other investment vehicle.
This is a huge huge piece of advice. This is one of those difference makers that will probably be responsible for more new millionaires than any other single factor.