The 6 Pieces of Advice I Wish I Received at 18
Recently a young 18 year old former student that my wife taught sat me down and asked what he should do with his first paycheck from his first job. It was a genuine question from someone that had not yet experienced having to create wealth for himself.
I immediately had flashbacks to my 18 year old self and my first job out of high school cleaning and installing network telephones for the university I went to. I thought about the first paycheck I received and how at that time it was the most money that I had ever seen. I also remember feeling a great sense of accomplishment because I made this money MYSELF!
Then all of a sudden, I did not know what to say to this young man. There were so many thoughts I wanted to share because I didn’t want him to make the same mistakes I did when I was his age.
All of a sudden I felt like his dad.
“Don’t go spending irresponsibly!”
“You should save it all!”
I realized that there was a responsibility and a gravity to what advice I was about to give. I had to put some thought behind my words.
The advice I was about to give was what I wished I had when I was his age.
Invest in personal relationships first
We are human beings first and foremost, not financial beings. Establishing personal and professional relationships, no matter if it is with your manager/supervisor, your co-workers, or even your peers that are entering into their own jobs, is very important. When first starting out (in any job), establishing strong personal relationships with those we work with at times can be more valuable than the job itself. Many of the career opportunities I obtained were directly attributed to connections and relationships I had built while in previous jobs.
Control your finances
If you don’t learn to manage your money, then other people will find ways to mismanage it for you. Living below your means when first starting out is an important principle that helps drive things like your budget and your spending choices.
If mom and dad let you live rent free for a while, tell them thank you and take advantage of it. You don’t need the fanciest house. Buy a used car or take the bus to work for a little while. You don’t need the fastest and newest car. Staying in control of where your money goes will allow you to save and invest in yourself for the future.
At times, it will be difficult to go against peer pressure to do or buy certain things and risking not keeping up with the joneses. But you need to do it early and often. It will save you from buying and spending on the things that after a little while, won't mean anything.
Start Saving for Retirement
Because of the way compound interest works, the sooner you start saving, the less principal you’ll have to invest to end up with the amount that you need to retire.
If your first paycheck comes from a part-time or seasonal job, then open up a Roth IRA. Roth IRA’s are a type of retirement investment account that allow you to invest with post-tax dollars so that when you withdraw down the road, your money is not taxed. You can contribute up to $6,000 (2021 Contribution Limit) per year. That’s $500 per month. I would recommend opening your Roth IRA with M1 Finance because of their easy to use and low fee platform.
Company-sponsored retirement plans are also a particularly great choice to start saving once you start a full time job with benefits, because you get to put in pre-tax dollars and companies will often match a part of your contribution, which is like getting free money. Contribution limits ($19,500 for 2021) tend to be higher for 401(k)s than for individual retirement accounts (IRAs), but any employer-sponsored plan that you’re fortunate enough to be offered is a step closer to financial health.
Start an Emergency Fund
One of personal finance’s most-repeated mantras is “pay yourself first.” No matter how much you owe in student loans or credit card debt, and no matter how low your salary may seem, it’s wise to find some amount—any amount—of money in your budget to sock away in an emergency fund every month.
Having money in your savings to use for unexpected emergencies can keep you out of trouble financially and help you sleep better at night. Also, if you get into the habit of saving money and treating it as a nonnegotiable monthly expense, then pretty soon, you’ll have more than just emergency money saved up—you’ll have retirement money, vacation money, or even money for a down payment later on a home.
When you start saving, it will be easy to put your money into a standard savings account. But this earns almost no interest. Put your money in a high-interest online savings account, short-term certificate of deposit (CD), or money market account. Otherwise, inflation will eventually erode the value of your savings. Just make sure the rules of your savings vehicle permit you to get to your money quickly in an emergency.
Don’t Buy That Car!
Since I was working full-time during school, I always had more money than my friends. This led me to believe that it would be a great idea to go out and buy a new car. My parents had let me use their older car, but I really wanted something new to impress my friends and...girls. I ended up taking out a loan for a brand new truck for $16,000.
And guess what? Nobody cared about the truck. After about two weeks of driving, I didn’t even care as much about it. But what I did care about were the monthly payments I needed to make to retain it. What I was never taught, was that until I paid off the loan, the truck was not owned by me, but by the dealer I bought it from.
The lesson I learned was don’t go buy a new vehicle if you don’t have to. Vehicles are just depreciating liabilities, and you want to start early limiting your liabilities.
Build your credit score
Your credit score tells lenders how trustworthy you are based on your financial history. Start to build credit at 18 so you can qualify in the future for a low-interest auto loan, an apartment or even a student loan in your own name.
These factors are most important when building credit at any age:
Payment history: Paying all bills on time is crucial for a good credit score. A payment that’s 30 days late or more will hurt your score.
Credit utilization: This is the ratio of your balances to your credit limits on your credit cards. Aim to use 30% or less of your available credit at all times, the lower the better. When you are starting out with a credit card, you can use it to pay for small purchases, like a cup of coffee, and pay off the balance in full by your due date.
Consider these strategies as you learn how to build credit:
Become an authorized user
Becoming an authorized user on someone else’s credit card means you benefit from the age and usage of their account. The primary cardholder is responsible for making payments, so make sure the person you choose has good credit and responsible financial habits.
You do not need to use the card in order to benefit from being an authorized user. Before you become an authorized user, you should ask the primary cardholder to confirm that the credit card company reports authorized user activity to the three major credit bureaus.
Take out a credit-builder loan
A credit-builder loan are typically available from credit unions and community banks. When you take out a credit-builder loan, the money you borrow sits in a savings account or CD, which you’ll have access to at the end of the loan term. You’ll need income to show you can afford the payments, so choose a low loan amount.
The lender will then allow you to borrow up to a certain percentage of the amount you set aside in the form of a loan or line of credit. As you make on-time payments toward the loan, the financial institution reports that activity to the credit bureaus. At the end of the loan term, you’ll end up with better credit and some money saved, making it a win-win.
Get a secured credit card or no-deposit credit card
If being added as an authorized user is not an option for you, a secured credit card may be the answer. Secured cards require a deposit — usually between $200 and $2,000 — which becomes your line of credit. You can also explore alternative credit cards that do not require a security deposit.
You’ll need an income to qualify, but the amount you can borrow is lower for secured cards than traditional credit cards. Depending on the secured card issuer, you may also need a checking or savings account to qualify. Before applying, double-check that the product reports to at least one credit bureau.
You can use the secured card like a regular credit card. Ideally, pay off your full balance on time each month to avoid paying extra in interest and to establish strong credit as quickly as possible.
When your score has grown, you can apply for a traditional, unsecured credit card. If you’re still under 21 at that time, though, you’ll also need to prove that you have steady income from a full-time job.
Your student loan helps
Most people don't know that you start building a credit history once you open a student loan account. All types of student loans — private, federal and refinance loans — appear on your credit report, and eventually count toward your score.
Borrow federal loans first, since they have better borrower protections, like income-driven repayment plans and forgiveness programs. Most don’t require a credit check. Fill out the Free Application for Federal Student Aid, known as the FAFSA, to apply.
Private student loans are credit-based, so most undergraduates need a co-signer to qualify. The loan will appear on both the student and the co-signer’s credit reports. Compare multiple loan options to get the lowest interest rate you qualify for.
These were the lessons I wish someone had sat me down and given me. Not sure if I would have listened at the time...I am not sure he was listening now. But I felt better giving it and hope that he learns something from it.