What Financial Advice Would You Give Yourself at 16?


For most people, the start of their financial life is probably around 16.  That is when you can get a job, you start thinking about larger purchases like cars (and car insurance), and you’re starting to handle money a lot more since you’re going to stores on-your-own.  You’re probably given very little financial advice at this point, or maybe you’re given bad financial advice like about the wonders of credit cards or car payments.  Maybe you’ve looked over your parent’s shoulder at tax time and been told of how important it is to keep a mortgage payment so that you have that interest deduction.

Unfortunately, most people don’t get much financial advice from their parents, plus much of what they do get is wrong.  This is one of the reasons that we have so many issues with debt and bankruptcy in our society.  I expect this situation to get a lot worse as the Babyboomers and Generation-X get to retirement age but don’t have anywhere near enough saved up.

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So looking over your life now, knowing what you’ve learned, what advice would you give yourself related to money at age 16?  Here are a few things I would say:

1.  Start an IRA today.

I didn’t have a regular job at a fast food restaurant or anything while I was in high school, but I did do things like mow lawns and maintain yards for money.  I’m not sure what I spent that on back then, but as soon as I had earned income, I could have put the money in an IRA.  Starting at age 16, it would be worth about 512 dollars for each dollar I invested.  For example, $1000 invested then would have been $512,000 at retirement age.

2.  Don’t buy bonds until you’re at least 55.

Bonds offer stability when the stock market declines, at least most of the time.  For example, in 2008 when the stock market fell about 40%, bonds actually increased a couple of percentage points.  The trouble is that over long periods of time, stocks will return between about 10 and 15%, where bonds will return between 6 and 8%.  That means a portfolio of stocks will double on average every 5-7 years, where bonds will only double every 8-10 years.  I’ll take the wild ride for the higher gains any day, so long as I have 10-15 years to give stocks to recover from any declines and slow patches.

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3.  If you’re going to buy individual stocks, pick your favorite three and hold on.

I used to buy 100 shares at a time of a variety of different stocks, some of which I really liked, others I sort of liked.  Then, if the stock went up 10 dollars, I’d sell, being happy to make $1,000.  If the stock dropped by 5 points or so, I’d sell to limit the loss.  Today I pick just a few companies that I really like and buy 500 or 1000 shares.  Sometimes I may even get 2,000 shares.  I then wait for the company to grow and the stock to go up with the growth.  I don’t want to make $1,000 when I’m right – I want to make $100,000.  This might take several years, but I just hold on so long as the company looks good – I don’t worry so much about the stock price.

        

4.  Skip the car payment – buy a used car you can afford.I started out with a leased car because my father thought it was better to not need to worry about the maintenance bills.  I soon discovered that the $350 per month I was shelling out would cover a lot of maintenance.  Plus, I found that cars just don’t break down that often.  I now buy used cars for cash and have been moving up from $3000 for the first car (8 years-old), to $8,000 for the second (4 years-old), to $15,000 for the last one (3 years-old).  Along the way, I have probably saved $120,000 in car payments, which has greatly helped in funding reitrment accounts.

So what would you tell yourself at 16 years-old?

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Get Ready Millenials – Mom and Dad are Coming Home, to your Home


Hey millennials, glad that those in your generation, who came home after college and stayed another ten years, are finally getting their own place.  Sure, Mom and Dad are footing the down-payment, but at least you’re finally starting to venture out on your own like your parents probably did when they were 18 or maybe 21.  I’m sure that plenty of you also moved out and got a modest apartment when you graduated college or high school like your parents did – it is unfair to stereotype an entire generation – but there are more millennials living at home at age 28 than there were in any of the past generations, at least since about 1950.  There are also a lot of 30-somethings who still have their parents paying their phone bills or helping with other expenses, even when they are adult children living mainly on their own.

Many of us in GenX were worried about this development of delayed maturity.  The hashtag, #adulting, is truly assinine.  Note that Jack Daniels started his brewery at age 14, so it is possible to become self-sufficient and even do some pretty remarkable things way before you turn 25.  We wondered what would happen when your parent’s generation started to retire and people were needed to do all of the important jobs that they had done.  I’m sure your grandparents were also worried about who was going to pay for their Social Security if no one was working.  Also, what would happen if your generation never grew up and moved out before your parents retired or died and were no longer able to take care of you.  Solar Charger, 8000mAh 3-Port USB and 21LED Light Solar Power Bank Portable Battery Cellphone Charger, Solar Panel for Emergency Outdoor Camping Hiking for IOS and Android cellphones (Black)

But this morning I realized that we were worrying about the wrong people.  I’m sure that while 35 is the new 20, eventually those student loans will be paid off and you’ll be working your way up the corporate ladder.  I know that many of you are just waiting for your parent’s and grandparent’s generation to retire and get out-of-the-way so that you can advance.  I’ve also got to believe things like having kids will make you want to get your own space and a refrigerator on which to hang artworks from your elementary schoolers.

The real issue is your parent’s generation.  They don’t have anywhere near enough money to continue to live on their own all the way through a 30 or 40-year retirement that the are expecting to have.  To generate a $50,000 per-year income, which is probably about what it would take for them to continue to live in their home and continue to live about how they are now, they will need to save up about $1M by the time they retire.  Really they should have about $2M since there are also medical bills and a lot of retirees want to do some traveling when they retire.  The trouble is that the average person approaching retirement has about $135,000 saved up.  And that is the average, which includes some people who have several million saved tipping the scales.  There are a lot of people who have $50,000, or $20,000, or $2,000 saved beyond their home.

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In the past, many in their situation would have had the option of selling their home and moving somewhere cheaper.  If they were to move to a small apartment in a safe but unspectacular neighborhood, and not a condo on the beach or in a high-rise in downtown, that would help them get maybe a decade or more before they ran out of money. The issue is that a lot of them still don’t own their home.  They refinanced their mortgage and took out money to put you through college, or upgrade the kitchen, or pay off your student loans or credit card bills.  Many people bought bigger homes in their late forties or fifties and started all over again with a 30-year mortgage.  That means their home won’t be paid off until they’re 80, and they’ll only have maybe 20-30% equity when they hit retirement age since you pay mostly interest at the beginning of a loan.

So what happened with your parent’s generation that didn’t with your grandparent’s?  The issue is that your grandparents had a pension plan where their employer put money away for them and paid them less in salary.  Because they had a lower salary, they had smaller homes, took fewer vacations and cheaper vacations, and cook at home most meals.  Your grandmother is probably a much better cook than your mom, and that is because she has had 30 years of practice.  She didn’t do take-out unless it was a casserole she took to a church potluck.  Your grandparents also probably didn’t have two cars, the expense of two sets of work clothes, the daily lattes, and the cost of childcare.   They also had college tuition costs of about $3,000 per year in today’s dollars since they could not afford any more than that so universities kept frills to the minimum and didn’t ask for high tuitions.   In exchange for this more meager living, they had a pension plan waiting for them at retirement.

Your parents instead got higher salaries with the expectation that they would then save up for their own retirement.  This was actually a better deal since the returns on pension plan investments aren’t as great as returns one can get investing for oneself since the pension plan manager needs to be conservative (and get lower returns) all of the time to ensure there is enough money to keep the payments for current retirees flowing, but an individual can be aggressive during the first 30 years and then shift to a more conservative mix near the end.  The trouble is that your parents used the extra salary to buy bigger houses, take more lavish vacations, pay high college tuition costs and living costs for their college students, and eat every meal out.  Retirement was always something that they would worry about later when they didn’t have this need or that crisis to take care of.

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With $130,000 in savings, living in a standard home even without a mortgage, they’ll probably be able to eek out 5-7 years before they’ll run out of money.  This is assuming that they don’t have any major medical expenses, don’t travel the world, and that the stock market cooperates to a good extent.  A bear market, a mortgage payment, or a big medical bill could cause them to run out much sooner.  And what will happen then?

The most likely thing is for them to give you a call.  At that point you’ll be over at their place, having a big yard sale to sell off all of the stuff they’ve collected over the years (some of it will end up at your house), then they’ll be moving into that home office, guest bedroom, or workout studio you’ve made at your home.  Maybe you’ll still be living at your parents home, so you’ll just take over the mortgage payments and the grocery bills.BarksBar Original Pet Seat Cover for Cars – Black, WaterProof & Hammock Convertible (Standard, Black)

It will be nice to have them around to help out with watching the kids, assuming they’re interested in that.  But the house will suddenly feel a lot smaller, and there will be the inevitable power struggles and in-law struggles that come with multi-generation households.  Meals out will become a lot more expensive, as will vacation since you’ll be getting extra hotel rooms and tickets.  This is not a terrible arrangement, with many advantages such as your children getting to really know their grandparents, the ability to share some of the household chores (assuming your parents don’t decide it is your turn to take care of everything), and an easy transition when they become old enough to need a lot more help with things.  It is actually very common in Asian countries, especially in areas where housing prices are astronomical, and was the standard in the US for many families when most people were farmers.

Still, you had better start thinking in terms of how you will handle having a full household, both in managing expenses and living arrangements.  In the next post, I’ll go into some steps to take to get ready, starting with having a frank conversation with your parents about their finances.

New to investing? Want to learn how to use investing to supercharge your road to financial freedom?  Get the book: SmallIvy Book of Investing: Book1: Investing to Grow Wealthy

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Find A Broker and Start Investing


 

If you’re interested in investing, you’ve probably spent some time looking at different websites and blogs on how to invest, and you’ve probably found several sites giving strategies.  There are some sites that give information on different investing strategies.  Even more talk about how to do important things like diversify.  Once you’ve spent some time learning, hopefully reading a few books on investing, and you have your financial house in order (no debt beyond your home, $9,000 to $12,000 in a bank account for emergencies, 10-15% of income going into the 401k at work and/or an IRA, and a budget to help control your spending), you may be ready to take the plunge and actually invest.  The question then becomes, now what?

If you’re investing in mutual funds, it is pretty easy.  You just go to one of the mutual fund provider’s sites, such as Vanguard or Schwab.  You can setup an account, send in funds, and then choose and buy funds, all from the site.  That is a big reason many people buy mutual funds – ease of use, in addition to automatic diversification.



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If you’re looking to invest in ETFs or individual stocks, it is a little harder, but not much.  What you will need then is someone called a broker.  This is an individual who works with one of the big brokerage houses who has access to the stock exchanges.  Personally, I have always invested through a broker and called in orders over-the-phone.  I started investing in about 1982, way before the internet, and have just stuck with the same methodology.

I also work with what is known as a full service broker.  This means the account has all kinds of extras, and also that I have access to research on stocks and other tools.  It also means I pay a good amount when I trade.  Typically, if I were to buy shares of a stock for $3,000 say, I would probably pay $60 to $80 for the trade to be made.  The amount  I would pay would increase if I bought more shares, but the percentage would drop.  This is expensive, but then I don’t trade very often, so it really doesn’t matter much.

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A cheaper way to trade is to use an online broker.  Here, you would enter orders through a website and pay a lot less, like $25 per trade or maybe even $5 per trade, depending on the brokerage firm.  You would probably not have a specific individual you would deal with, but probably a help desk you would call if needed.   In general, there would be few frills like stock research.

A good article ranking online brokers is available through reviews.com here.  They evaluated several different brokers to find online brokers that offered both low trading prices and extras like stock research.  They really do a nice job of going through the online brokers and providing some great suggestions.

 

        

Now just because you may be able to trade for $4.95 per trade through an online broker, doesn’t mean that you should be constantly trading.  Study after study has shown that those who trade a lot will have dismal returns when compared to the markets.  When you are buying and selling short-term, you are basically just flipping a coin and betting on heads or tails.  Some studies even suggest that trying to buy individual stocks at all instead of mutual funds is a fool’s errand in any case.

I do feel that, in addition to a core of mutual funds, especially in an IRA or 401k account, you should add a few individual stocks, but you need to buy the right kinds of stocks and buy them in the right way.  These should be companies that you buy for the long-term.  You should pick these companies based on the business, including things like a solid record of profitability and growing earnings, low or no debt, room to expand, and steady growth in the share price.  Try to pick just one great company each in a few different industries, rather than spreading the money around to several different companies.

Find stocks you plan to hold for 10-15 years, buy a significant amount (build up to 500 to 1000 shares, buying a few hundred shares at a time on dips), then ignore the noise.  Just concentrate on earnings growth and whether the company is expanding their business.  Don’t worry about analyst ratings, stories about where the economy is going in the next year, or stories about consumer sentiment.  Hold as long as the company is doing well, sell off a few shares if the position gets too big, and other wise just leave things alone.  Do this and find a great company or two, and you may be able to beat the markets with your individual stock picks.

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.