5 Money Tips For My 18 Year Old Self

Jose at 18 years old

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If you could, would you like to talk to the younger version of you? What would you say? What pearls of wisdom would you like to pass on?

Last week I had trouble finding something to watch on TV (big surprise, right?) so I decided to instead choose a movie from our collection. I picked the 2009 “Star Trek” movie which rebooted the beloved franchise.

In the movie, time travel and altering the timeline are a major part of the story (those are usually my favorite story lines). If you have seen the movie, you know you end up with 2 Spock’s and they eventually meet. The older Spock has some words of wisdom for his younger self. You can watch the clip here.

So that gave me an idea. If could travel back in time, what sort of financial advice would I give to the younger me? After thinking for a while, here are the 5 Money Tips for my 18 year old self:

1. Don’t Work so Hard to Build Your Credit History with Credit Cards. 

Midway through your third year in college (around 21 years of age), you will receive a wonderful opportunity to have a paid internship with a large technology company. This will be something that you will treasure for years to come and that will prepare you for your professional career later on.

While you are gaining all that experience and making some money, you will receive some conventional advice. Well intentioned people will tell you need to get a couple of credit cards before you finish your internship so you “can build your credit history”. They will tell you, that you can’t live without credit cards and without a credit history.

Don’t fall for the trap of credit cards! You will end up with 2 of them and no income because you will still be in college!

Instead what you should do is to work to build up your savings. If you take that advice, you will get used to credit cards and those first 2 will eventually turn into 7 or 8 and debt. And by the way, those first 2 won’t really help your credit history (see the next piece of advice below).

But you can live without credit cards. They are simply a crutch that will not allow you to walk on the strength of your income. Stay away from them!

2. Don’t buy a brand new car right out of college with a high interest loan.

You will work hard for your college degree and you will get a very good job to start your professional career. The temptation will be to reward yourself with that nice car that you earned with your degree.

If you pursue this course, you will end up with a 5 year loan and a nice interest rate of 11%. The finance manager will tell you he is doing you a favor. Don’t believe him.

Instead take your time and save some money from your nice pay check for a few months to save for a nice, reliable used vehicle.

You could save $400 for 10-12 months (the average monthly car payment) and then move up in car with cash later. And remember: new cars lose 70% of their retail value in the first 4 years.

3. Don’t Mistake Your Credit Lines for an Emergency Fund. 

While you are carrying those 7 or 8 credit cards, you will also have a couple of credit lines open. You will feel pretty good that everyone is trusting you with so much credit. You will feel that if something were to happen you would have access to money and you could deal with it.

What I would tell you is that a credit card/credit line always represents risk and not security. The “convenient access” to money is really a mirage. You will get into trouble and start carrying balances on those cards.

For real security, what you should instead is to build an emergency fund to cover 6 months of expenses.

4. Don’t Borrow Money from your 401K Plan

As a result of having too many credit cards, and a car payment you will eventually want to reset everything and start over. More conventional wisdom will tell you that consolidating your debts into one easy payment it’s the way to go.

You will do some smart things and you will begin to save money in your company’s 401K plan early so you will have a nice balance. Guess what? One debt consolidation option available to you will be to borrow from the money in your 401K plan.

People will say, “You are borrowing from yourself and the interest you pay goes back into your account”. Great idea right? Not quite.

Why is this a mistake? First, you will unplug that amount of money from your investment vehicle missing on the growth opportunity for the length of the loan.

Second, if you lose your job, the money is due back within 60 days of leaving your job. If you don’t pay it back, it is considered an early withdrawal with the associated penalties and tax implications.

You will make this mistake 3 times but be blessed enough that you will keep your job during those times. But don’t take that first chance ever. Instead, get on a plan to pay your debts without borrowing money.

5. Don’t buy a house without a nice down payment and don’t take a 30 year mortgage. 

You will eventually get tired of paying rent and you will set a nice goal of buying a home by the time you are 30 years old. Nothing wrong with and it’s good to set goals for yourself in all areas of life.

However, more conventional wisdom will say to look for creative financing and programs that help first time home buyers. You will barely have enough money to cover your closing costs and nothing more (and you will borrow that money from your 401K plan). And you will also take the conventional 30-year mortgage because no one will challenge that convention.

However, this is what you should do to get ready to buy a house. First, run the numbers and target a house that leaves you with a monthly mortgage payment (taxes and insurance included) that is not more than 25% of your monthly take home pay.

Second, wait and save at least 20% of the home cost as a down payment (so you can avoid paying for the Private Mortgage Insurance -PMI-).

Finally, take only a 15-year fixed rate mortgage. There is no law in the land that says you have to take a 30-year mortgage.

What money tips would you give to your 18 year old self?

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Why do we stay in Debt?

Debt Ball ChainSubscribe to future posts from Figueroa Financial by e-mail

Have you seen those funny AT&T commercials with the kids? There is one adult sitting around with a group of kids and he asks a simple question comparing two options.

For example: “which is better, slow or fast?” or “which is better doing one thing at once or 2 things at once?” Here the video of one of my favorite ones:

The point is to hammer down that choosing AT&T over any other mobility provider is not complicated. As I watch that commercial it reminds of our general attitudes about debt.

Which is better, having tons of debt or being completely debt free? It’s not complicated right? Debt free is the best way to go. Which begs the question, why do we stay in debt?

As of January 2013, the average household consumer debt stood around $23,000. Why do we continue to carry debt on our credit cards? Why do we continue to sign-up for car loans or car leases? Why do we assume that the only way to get a college degree is to sign-up for thousands of dollars in student loans?

I have written before about why we go into debt. Today I want to give you the 3 main reasons we stay in debt:  

1. We buy into the Culture of Debt

In this day and age we are focused so much more on what we think we need and what we want. We live in a day and age where waiting for something good to happen is almost completely foreign to us. We want it and we want it now.

So the culture says that it is perfectly ok to stay in debt as long as you can manage it. Don’t carry 9 or 10 credit cards, but 1 or 2 is ok (you know, because you can get those rewards). You can’t afford to pay for cash for a car? No problem, just “rent” (i.e. lease) one. It’s like getting a brand new car every 2 years. After all, old cars breakdown all the time and you “need to be safe on the road”.

Wan to buy a home but don’t have enough saved for a down payment? No problem, borrow from your 401K plan. Need an emergency fund? Sure, get a home equity line of credit (HELOC) so you can access it in case of an emergency (which sometimes is defined as doing that home renovation we desperately “need”).

Do you want a college degree? The culture has defined that a student loan can be classified as financial aid. They never put too much emphasis on the fact that they expect you to pay for the loan. In some corners of the financial world, they call student loans “good debt” because it’s an investment in your future. Don’t get me wrong, I think education is a great investment. But there has to be a better way to obtain a great education than going deeply in debt.

You see? Our culture today says is ok to be in debt and stay in debt as long as you get what you want now.

2. We are not Willing to Sacrifice

If I asked 10 people on the street or did a Facebook poll, 9 out of 10 would most likely tell me that they would like to be completely debt free. Again, it’s not complicated. Debt free is the best way to live.

But you will never get out of debt until you are willing to do something differently. There is no victory without sacrifice.

But a lot of people that are in debt will not get on a budget, will not get a second job, will not cut back on expenses, and will not sell stuff to generate more income.

When you are not willing to sacrifice, you will find every possible objection of why it does not apply to you.

3. We have lost all Hope

This is probably the most dangerous reason of them all for staying in debt. You may think that this is the way it will be for you between now and the end of your days. You have lost your hope that it can be better.

You may think that it is impossible in your current situation to live a debt free life. You may have convinced yourself that you will always have a car payment, that you will always need a credit card for emergencies, and that it will be impossible for your child to go to college without student loans.

You may have convinced yourself that you will never make enough money to deal with everything that you have to do. So you stay in debt, because “that’s the only way” and “everyone else is in the same boat.

Do you want to know a secret? It does not have to be that way. You don’t have to buy into the debt culture, you can sacrifice, and yes you can hope for a better tomorrow. I know this the case because I used to be in debt and deep financial distress.

But I am no longer there. I know it can be better and I know you don’t have to stay in debt. I can help you, just say the word!

What are some of your reasons for staying in debt? 

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