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?