I have the pleasure of enjoying a high school graduation for a member of our family this year. Instead of just giving the expected cash gift – which we also did – we crafted a financial game plan for our special graduate and offered free money coaching for the entirety of her adult life. It felt good. Please see below for a sample of this letter. And please feel free to insert your graduate’s name and pass it forward!
Financial Blast Off
You, Insert Graduate’s Name Here, can retire at ANY age. You just need to be smart with your money. Time is your greatest asset. Think: Compounding Interest. It’s much better to invest a little money now than a lot of money later. Start Now.
Take these steps to financial freedom:
- Learn about money and investing. Don’t be intimidated. Google is your friend.
- Start saving for retirement with your first check. Remember, retirement isn’t just for old people. If you’re financially savvy, you can retire at ANY age.
- Track your spending and expenses. There are 2 excellent programs for this that are both FREE. You can easily find both of these programs online and as apps
- Track your Net Worth. Personal Capital and Mint will do this for you.
- Stay out of debt. Use credit cards WISELY. And always pay them off each month.
- Aim to save/invest 50% of your after-tax income. No, I’m not kidding.
How to accomplish this:
-Keep your living expenses low. Really low.
-Increase your income AND still keep your living expenses low.
-Invest the difference between your income and living expenses.
-Investing doesn’t need to be difficult or confusing.
-Pick a standard total market index fund. SET IT AND FORGET IT.
Make A Plan For Your Money
- Establish your monthly expenses and save the equivalent of at least 3 – 6 months in cash in an easily accessible account for emergencies, such as a job loss.
- If you have access to a 401k or equivalent, contribute the MAXIMUM amount you can afford each year. Currently, the maximum allowable contribution for a 401k is $18k/yr. If you can’t contribute the maximum allowable amount, contribute as much as you possibly can and increase that amount incrementally each year until you hit the maximum. Do NOT deviate from this. One of the best things about employer-sponsored retirement plans is that they usually come with an employer matching contribution up to a certain percentage point.
- Employer matching contribution means FREE money. Never pass up FREE money!
- After you make 401k contributions, or if you don’t have access to one due to the nature of your work/income, your next goal is to invest the maximum allowable amount every year into an Individual Retirement Account, known in the financial world as an IRA. Currently, the maximum allowable amount equals $5,500/yr There are 2 types of IRAs:
- Traditional IRA
- ROTH IRA – This is the one you will want to fund because your earnings grow TAX FREE! There are also a ton of other benefits to Roth IRAs. There are, however, income limitations for contributing to Roth IRAs, but they don’t kick in until you’re making well over $100k/year.
- You want to focus on maximizing retirement account contributions first because by doing so you are reducing your taxable income. Taxable income is the income you earn that you must pay taxes on.
- For example, if you make $50k/yr and you contribute $18k/yr to your 401k (or equivalent), the amount you are now taxed on becomes $32k/yr.
- After you’ve maxed out retirement accounts, you’ll want to direct your investing dollars into taxable accounts. The difference between taxable and retirement accounts is that they’re just not sheltered from taxes. Remember, historically, the stock market has returned roughly 7-10% each year on invested money over the long-term. Real estate is another possible long-term investment with similar, and sometimes greater returns; however, real estate is much more active and requires more attention than stock market investing.
-Resist lifestyle inflation when you start earning more money. Always keeping your living expenses low, regardless of your income – until you’re a multi-millionaire, of course 🙂
-Find FINANCIAL HACKS for everything from your home to education to entertainment.
- Live with roommates.
- Buy a multi-unit building. Live in one unit and rent out the rest. Voila – you’re now living for almost nothing while having other people buy an asset for you! And don’t forget to invest the difference.
- Pursue higher education without accumulating massive debt.
- Avoid debt whenever possible. Don’t go into debt for a car and don’t spend recklessly with credit cards.
- Once again, invest the difference between your income and living expenses. This is key.
BUY assets NOT liabilities. Assets CREATE more money for you, liabilities TAKE money from you.
“In times of crisis, assets will feed you, liabilities will eat you.”
You don’t need to make $100k/yr or have a PhD to become financially independent before you’re old. You just need to be smart. Pursue your passions and be smart with the money that comes into your life along the way.
Congratulations, Insert Graduate’s Name Here, you now know WAY MORE about finances and investing than most of your peers…and probably most full-fledged working adults. Now, go rock your financial future.
This is my graduation gift to you,
<3 Mrs. Mad Money Monster
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