2023 EP0916 | Financial Updates | 5 Quick Tips for Young Investors

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Welcome back, everyone. Peter, I want to talk through five quick tips for young investors. It's hard to picture our lives 40 to 50 years into the future, which is why a lot of young adults put off saving for retirement.

I get it. But what should be step number one for any young adult who is now graduated, working, making that money? Yeah, I love this topic and I see so many young adults who immediately want everything that their parents had because it's the lifestyle that they were used to and that they are comfortable.

But understand it took them 30 to 40 years to get there. You're not going to have it all immediately. So let's start with some basics here, right? Number one is as soon as you are earning income and have any kind of bills, let's get the emergency account set up. That will help you in so many other facets. If you've got a little bit of liquid available cash that you can take care of surprises when they come up in life. If you can't, then it's an emergency. If you can take care of it and just pay for it, it's an inconvenience that you can get through. And so again, we're just starting with the basics there, emergency fund. And now let's get into all the whys behind a lot of these tips coming up, which is compound interest, also known as the eighth wonder of the world. Can you explain this? Yeah, well, I mean, he who understands it gets it.

He who doesn't pays it. Right. And Albert Einstein did say it was the eighth wonder of the world. It really is miraculous how money grows over time.

But it takes time. And I tell a lot of young folks, I go into schools actually around our local area and get to teach. And I tell them that I know a lot of millionaires. You've never heard their name, but they understood the power of compound interest and the get rich quick scheme that just takes 30 to 40 years to come to fruition. But if you start saving early, the difference in the long run is fantastic. And I've got this spreadsheet that really, I think, raises the eyebrows of some of the kids that we teach when I show them the power of saving just between 20 and 30 versus if you wait that 10 years and start at 30. And also compares the rate of return that you get being a saver, which is an it is a mentality versus being an investor. It is a shift in our psychological behavior with money. But it is so important to start early with the psychology of investing and realizing and gaining the value of that compound interest. And I just want to pull up one more visual real quick, Peter, because I think that this one is really powerful when it comes to explaining the power of compound interest. Explain what we're looking at here, please.

This is actually a maybe better graphical representation of what I show in my spreadsheet. It shows two different scenarios, one where an investor starts early and then stops investing altogether, and another one where an investor starts a little bit later but saves and invests for the rest of their lives. And between the two of them, the one that started early ends up better, even though they stopped before the other one even started. Now, here's the thing. If this is part of your financial behavior, starting at a young age, you're not going to stop, right? You are going to be so much better off than that other person who realizes the value of saving and investing only later in life. Yeah.

No, I was making no money and I was still saving for my retirement when I was starting my first job. Hey, we got another tip coming up for that, right? Yes. Let's talk through those quick five tips then. And the first tip you have is track your budget.

Yeah, it's so important. And from a young age, I mean, you don't have that many expenses when you're first starting out. So it's not that difficult to track where your expenses and your obligations all need to be met. That list will grow over time, by the way. So start early. And you know what, Aaron, I deal with a lot of people who are well into their careers that still don't necessarily track their budget like they should.

And I get it. For most of my clients, they have been whatever you want to call it, lucky or hardworking or blessed enough to earn a comfortable kind of income. But for that same person, the shift in income when they retire is that much more substantial.

And generally, their lifestyle is that much more expensive. So regardless of the stage that you are in, understanding your budget and expenses is your best asset for wealth accumulation and financial success. Step number two is set aside money for big expenses. So is this different from your emergency fund?

It is. It is because an emergency is an unexpected event, whereas a big expense may be something that you're planning for. Like I've got clients that would like to buy a vacation home sometime in the next five to 10 years. For the younger investors just starting out, maybe it's that first car or first home down payment or a wedding or something along those lines.

Right. If we've got a known expense and by the way, the car is a big one because your car is going to break down eventually. Why not have a sinking fund where you are setting aside money to buy the next car that you are going to need? That's an almost certainty is not if it's when. But if you have a large known expense coming up, regardless of what that is, set aside and save the money to make that happen without touching the emergency account.

Aaron, it's a it's a big one. It's an important one because you want that emergency fund there when the unexpected happens, not the things that you're planning on doing. Right. Right. Third tip here is to open a Roth account.

Boy, I wish I had seen this video, Peter, when I was in my 20s. Right. Yeah, this is the big one for especially younger savers and investors. And again, the value is there for anyone, but especially as we are just first starting out and enjoying the lower income and therefore the lower tax years of our career.

Wow. If we can get that money put away after tax, be done with taxes forever, and then let all of the power of that compounding work to grow tax free dollars for our retirement. I mean, I hope that every young person is paying attention to this and takes advantage of the value and the opportunity of Roth IRAs, Roth 401ks. You will thank yourself later and you will have a much cheaper retirement because in retirement taxes are probably one of today's generation's largest expenses. And the next tip, I feel like we do hear this one lot contribute to a 401k.

Yeah. And the benchmark really it should be about 15 percent. And I've heard pay yourself first, pay yourself 10 percent. But if you add it up over a 30 year career, if you're only saving 10 percent by the end of a 30 year career, that's three years worth of the income that you are accustomed to. And that's imagining that we make the same thing over the entire career, which is not what happens. And yes, of course, we hope to invest that and double it and double it and double it again. But retirement is very long.

So let's take advantage of that 401k. The savings is automatic. I love that it happens because otherwise it might not happen if we had to bring it home and then get it saved.

Just the way that we are. Plus, the match is there in most cases. So at the very least, take advantage of the match. There's nowhere else that you can guarantee yourself that kind of immediate return on investment that a match offers. I don't love the term free money because you're working for it, whether you get it or not. But you just don't get it if you don't put skin in the game and make those contributions.

So let's make those contributions to the 401k, at least capture the match, but strive to be saving 15 percent toward your retirement somewhere in a traditional kind of retirement allocation and investment approach. And the last tip to our young investors focus on the long term. Yeah. Again, the younger generation, I understand it.

I mean, it's something it's what they're accustomed to and used to. And we all deserve to have nice things. But it is a long term game. And you will thank yourself later if you start small and just form good behaviors. Now, it is a get rich quick scheme. It just takes 30 to 40 years to make it there.

But I am I have the luxury in my position of what I do. I meet with millionaires all the time, people who have been highly successful and will be highly successful even long after they stop working. And the reason why is because they understood the power of saving and investing early on and focusing on that long term.

I'm going to throw one bonus out there as well, Aaron. And it is avoid debt. Today's interest rates.

Debt is not your friend. And if you can avoid debt, those credit cards, car, car loans, personal loans, the kind of interest that you pay on debt is a negative return on investment. And I've seen credit cards as high as 30 percent. That means that if I had money in one hand and debt on the other, I would have to make 30 percent before I started making a profit before paying off that debt.

Let's avoid debt at all, if possible. Now, that's typically not possible when buying a home. That's just part of the natural financial progress of most people's lives. And I don't think there's anything that that that could be qualified as good debt. But when you take debt to purchase an asset that generally appreciates quicker than the interest rate, by the end of paying it off, you've got more value than what you've put into it. So that is not bad debt.

And it's sort of natural because most people don't have enough money to plop down and buy a house. But any and all the rest of debts, let's try to avoid them if at all possible. Great tips for young savers and investors.

Great tips for anyone looking to better their financial outlook. Right. Right.

And now let's go and make this mandatory watching for our kids. OK, Peter? Absolutely. Yeah. And if you want to have a conversation or you wouldn't like someone to have a conversation with kids or or younger adults that that that gets them on the right track or thinking about the right thing, I am happy to have those conversations.

I will I will make time available for a younger person to try to get them on the right path any time I have available. Yeah. So how do we get a hold of you, Peter? Give a call.

Nine one nine three hundred five eight eight six nine one nine three zero zero five eight eight six nine one nine three hundred five eight eight six. You can also go online. Lots of videos available there as resources with other tips as well. Aaron, you know, we put them together all the time. Rich on planning dot com is what it looks like.

It's my last name. We're Sean planning dot com rich on planning dot com because you don't get rich or stay rich on accident. Well said. OK, Peter, thank you. All right. I appreciate it.

As always, Aaron, thank you. This has been planning matters radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment tax or legal advice from an independent professional advisor. Any investment and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooke's own capital management. A registered investment adviser fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.