A good resource for financial advice to share with people in their twenties?
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You can't really receive meaningful financial advice without taking position on the following:
1) Are you comfortable committing to a lifetime of working?
2) Is there reasonable scope for a high risk high reward venture? Eg, entrepreneurship, acting.
3) Do you determine your personal comfort in terms of how other people perceive it (expensive & common option), or do you use your own metrics?
4) What is your personal understanding of retirement?
Without that orientation, there isn't really a generic position to take on debt (it might be good or bad). There isn't a generic position on investments (might be good or bad). If someone is really being taken to the cleaners maybe there is a quick change to be made, but really "personal finance" is more about expectations and habits than knowledge ad howto guides.
The fundamentals of personal finance intuitively easy to grasp, to the point of absurdity - if you consistently spend more than you earn, you will run out of money. End of the story. If you spend a lot less (10-20% of your earnings go into savings), you will weather surprises easily. If you earn a stupid amount less (40%+ pre-tax earnings saved) you will have a very easy later life.
That all only scratches the surface of orienting a strategy, let alone the details of how the myriad investment options and retirement mechanisms work.
Our society encourages outrageous consumption of unnecessary goods at ridiculous prices. It's not hard to live much more cheaply if you can get over (difficult) psychological hurdles of (1) disregarding marketing that we're bombarded with every day, and (2) getting out of the competition for social status. What's more, you will tend to lead a happier life if you can do this. A good book that I don't think was mentioned in the linked page is "Why Smart People Make Big Money Mistakes".
Also, my mind has been boggled by what people seem to take from even good books on finances. For example, _The Millionaire Next Door_ is a good book. But I have friends who have read it, claim to believe it and try to adopt some of its advice, but the life they lead is ridiculously extravagant, not at all consistent with the book. Self-awareness of bad psychological attitudes towards money is not always easy.
This is probably the most important thing to remember. For many years every time I received a raise, I just upped my savings/retirement by the same amount. My take home never changed, so it was easy to stay at the lifestyle I had become accustomed to.
Perspective is also important. I did not have much growing up, so while what I have now is modest it is way more than I ever thought I would have. Another trick is to listen to old rap ;) In the 90s it was extravagant to have 50" TVs and game systems.
My being 28, sorry, but I wouldn't call this good advice. My dominant expense is and always has been rent. I can cut everything else to the bone, and it won't make half as much impact on my savings rate as finding a way to just live somewhere less obscenely expensive -- and yet having work for me to do.
How true!
This comment shows that you'd awful at giving advice since you seem completely unable to introspect on your own preferences, see them as preferences, and understand that other people have other preferences that lead to different optimizations.
No one thinks twice about checking the map/GPS to make sure that the road they are driving on actually goes where they intend to end up. Yet, many will work hard and pay loans for years without minutes or a couple of hours of upfront critical thinking and very basic grade school math.
- A summary of the different kinds of retirement accounts, e.g. 401ks, IRAs, Roth vs traditional, etc.
- Basic understanding of compound interest, and its impact on loans and investment growth
- The importance of having savings for an emergency
These things can be taught to young people without requiring a psych eval and a detailed questionnaire.
Life can be diverse in experience (speaking as a man unemployed for over a year at one time) and ultimately finance is about risk management
https://www.reddit.com/r/personalfinance/wiki/young_adult
https://www.reddit.com/r/personalfinance/wiki/early_career
And the rest of the links https://www.reddit.com/r/personalfinance/about
Also the UK one https://www.reddit.com/r/ukpersonalfinance/wiki/lumpsuminves...
The number of participants, and the source of those participants (reddit main), pretty much guarantees that the advice there can't/won't be high-quality, and will only get worse over time.
An example is telling everyone, no matter their circumstances, to always buy used cars and learn how to fix them themselves. They give this advice to rich doctors as well as poor single mothers.
It also seems that many of the contributors have had bad experiences with debt, and now treat it as something to be avoided like a cancer. Debt is a useful tool for people who understand money. I remember a thread characterized by total incomprehension in most of the comments when someone said he would rather take a low-interest loan to buy a car than sell some of his stock and pay cash, because selling the stock would have triggered capital gains taxes far greater than the interest he would have paid on the car loan.
It's also very common in that subreddit to recommend that people who are in debt should basically live like monks for years, when living in a modest amount of comfort would only prolong repayment by a few months. Giving up your $14.99 monthly Netflix account is not going to make a big dent in your student loans over time -- over a 10-year repayment, that savings will add up to less than $2k. But the commenters there will pile on you if you point that out.
The thing that annoys me the most is the way people who have succeeded in tackling their debts are criticized for having high incomes, as though having a high income was something that just happened to them because of luck, rather than being a result of hard work and skill development.
You'll find highly upvoted submissions there encouraging people to go into debt for a vehicle, for example. They'll justify it saying the interest rate is 3% which is less than the average return of the S&P 500. The problem with that argument is that the financing was also used as a justification to buy a more expensive vehicle, which is a rapidly depreciating asset.
Vehicles are a massive drain on wealth. They're a cost center to be minimized as much as possible, but in that subreddit they're treated like a game where you do numbers on financing to get into the nicest car you can. That isn't personal finance, it's financial debauchery.
Some examples:
https://www.reddit.com/r/personalfinance/comments/521p56/bes...
^ 13.8k net upvotes encouraging people to take on 3 years of auto loan debt. Brilliant.
https://www.reddit.com/r/personalfinance/comments/63eukr/pay...
^ Here the subreddit encourages a couple who doesn't even have enough for a down payment on a house, to go into debt and make minimum payments on an 18k car. Brilliant.
https://www.reddit.com/r/personalfinance/comments/6wkiv6/how...
^ Here the subreddit basically reveals that almost everyone in that subreddit is in auto loan debt, feels good about being in auto loan debt, and they all pat each other on the back and encourage each other to keep being in auto loan debt.
Cars depreciate in value by about 20% annually. It's on average the worst-performing financial asset that people own. To go into debt so you can get as much of your wealth into the -20%/yr asset is just about the stupidest thing I can imagine. It's right up there with payday loans on the stupid scale.
So that's one example.
What the subreddit does with credit cards is spend a lot of time arguing and doing math over cash back percentages and point rewards systems. If you spend $1000/month on credit cards, the difference between 1% rewards and 2% rewards is $10/month. It doesn't fucking matter.
What actually matters about credit cards is that people have a strong tendency to overspend when they use credit cards. They also have a strong tendency to incur annual fees and interest and penalties. If you're disciplined enough to use credit cards without letting them effect your spending and without ever incurring any fees or carrying a balance, then go ahead and use one if you want. If you can't, then cut them up and use cash or a debit card. The rewards points don't matter and neither does the interest rate.
[1] https://m.imgur.com/CcEVQAV (image seems to be compressed to hell and back on mobile)
1. Never pay interest on your credit cards. Pay off your credit card balance every month.
2. Save at least 20 cents of every dollar you earn.
3. Buy an S&P 500 index fund.
4. Contribute as much as possible to your 401(k), if you have one, and at least enough to get the full employer match.
1. Take stock of your finances. Track all your expenses and income for a month or two. If you find your debt is growing make changes to bring your costs down.
2. Pay off high interest debts like credit cards. Once this is complete, build up a rainy day fund of at least 3 months of expenses in a savings account. Consider this money hands-off except in emergencies.
After all this is implemented the person's finances are "stable" and they have a budget, and I think your advice is solid (but should be modified depending on salary). I'd also blend in some safer investments with the s&p 500 - perhaps using a robo advisor to manage the risk for you.
https://www.bogleheads.org/wiki/Three-fund_portfolio
and I haven't seen any reason to change this in ~10 years.
I'd recommend poking around that site to learn about the philosophy of index investing. (You might still want to actively invest after reading that, but you should probably first understand some of the reasons not to.)
For some basic investment literacy, it would not hurt to read "The Bogleheads' Guide to Investing" (https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Lar...). I've also heard good things about John Bogle's "Little Book of Common Sense Investing" but haven't read it.
Basically everything taught about finance and economics is a half lie and the half that isn’t true is very difficult to understand. In economics ,Consider that private debt has no role in economics but is critical for understanding bank flows. So why do we teach that private debt has no effect under islm? Or consider in finance traditional options strategies of selling covered calls, on etfs. In the past few days you’d notice you lost a ton of money due to the way tracking error is manipulated vs options on the etfs. I was just talking to a billionaire who actually understood black scholes and didn’t understand why he lost so much money on a hedge. Or consider how much growth has gone solely into a few tech stocks while people are still advising you to buy s&p. Realistically smart exposure to the underlying is Generally so much better. Finally on tax advice, especially on crypto, which I believe should be somewhere between 2-5 % of any young persons portfolio, no one suggested a charitable remainder trust and it ended up saving me huge amounts of cash and avoiding long term capital gains while allowing me to do well.
The financial industry is a business dominated by sales people. The people you will talk to with less then a half million In savings hardly know shit about Shit. It’s like anything else, if you took the time to understand these financial products you’d realize they are powerful cool abstractions worth learning about
Maybe because you're suggesting that people"invest" in the crypto bubble but the overall advice ("take time to learn about your investments") is sound. Plenty of young people on HN understand the underlying mechanisms of crypto-tokens.
1. Live within your means. Spend less than you earn. But it's okay to take a vacation and splurge a little, too. Or if you need to buy something like a suit that stretches you a bit think of it as an investment for your career.
2. Use credit cards responsibly. They can be great for their rewards programs, but you can easily get into trouble with them. Be very careful.
3. From a financial perspective, it's never too early to think about retirement. Take advantange of your employer's 401k program if it's offered. Additionally, setup and contribute to a Roth IRA retirement fund through Vanguard or Fidelity.
4. Buying a house makes sense as a long-term investment. Location will primarily determine how good of an investment it will be (which sometimes is hard to predict into the future).
5. In terms of what to invest in, buy a low-cost index fund from Vanguard or Fidelity (e.g. S&P 500) and make monthly or quarterly contributions to it. And don't touch it (i.e. sell), especially in a downturn.
I don't really care what he did after this point. The fact that he multiplied his net worth many times thanks to blogging doesn't mean he is financial independent thanks to it.
He is selling shovels and jeans to gold rush miners. "Financial independence" when supplemented by the $$ he makes while telling people how he got rich surely makes a huge difference.
He's not saying people can, though. He's giving financial advice based on something he achieved following a plan when he was making $67k/year, years before he ever even had the blog.
Also, shovels and jeans to gold rush miners?? Pretty sure people can still make $67k/year. Pretty sure people can also still make simple investments, live frugally, pay off their mortgage and retire early. It's simple math. Comparing that to taking advantage of gold rush miners is quite a stretch.
Yeah, a Google /FB /x employee can sacrifice for 10 years and then retire, at least outside USA. Live like immigrants that send all their money back to their home country, do.
It's like if Rich Hickey gave simple programming tips, and you said, "He's a genius, of course this works for him." Yes, and? If the advice works, what does it matter how the giver is positioned relative to you?
He's actually probably the least divisive, unless we're including people nobody's ever heard of.
Also not sure what difference it makes whether he fits anybody's definition of "retired" or not. I don't think anybody actually cares if he's still saving money by doing his own yard work, or earning passive income from his blog. The point is that he attained the option of retiring at 30, which is true.
Whether you consider how he chose to live his life after that point "retirement" is kind of subjective and irrelevant.
That's not retired.
That's just changing your career. Of course it's relevant. He's still earning to make money to do more stuff, he just changed the way he does its.
Now he makes money off blogging. That's, again, just changing your career.
You can define the term any way you want for yourself, but it seems arbitrary to exclude those who enjoy doing things that others happen to be willing to pay them to do.
He still needed to work to support his lifestyle as far as he explained it, he just did a different job. At very best you might term it semi-retirement.
I know multiple people who are retired, but still do random jobs because they are bored or just like to have a bit more cash at the time. I still consider them retired because when they work, they are doing it on their own terms.
https://en.wikipedia.org/wiki/Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.
1. get a time machine
2. go back 20 years
3. exploit your peers
He's full of it. I recall reading one time about him speaking about having a pound of oats in his hand and what a lot of raw energy that represented if used wisely.
That at then income of two other families whilst they struggle.
This is how we got to this total mess.
Secondly - and this shows you are living in a dream world - banks are not intermediaries of funds. When you borrow to buy a house credit is created not sourced.
Of course, moving into an area drives up demand making prices go up, but that comes from taking up space someone else could use, not from buying versus renting. The only way to avoid that is to use less space or move away.
I actually don't think software engineering is the best career (in financial / lifestyle terms) for someone who might also excel in business, finance, law, or medicine. But there is one hack to our industry:
You can make a good salary starting in your early to mid 20s, with only a bachelor's degree or less, while most of your peers will still be in school for years, then paying off loans, and finally beginning at the bottom of the corporate ladder.
Now unfortunately, by 35 or so, most of your smart friends will have caught up - paid off their loans, and now be earning similar high incomes. And software engineers tend to hit a glass ceiling, run into ageism, etc.
But having lived frugally while making over six figures for over a decade, you can have accumulated $500K - $1M, and if you forget about that money, can coast into early retirement by 50 or earlier, or take career risks that others can't afford. A million in net worth at 40 opens up a lot options.
Tax advantaged account pro-tips: put your least tax efficient instruments (eg income generating assets etc) in the retirement accounts. Use a Roth IRA to be able to maximize amount of tax-advantaged investment per year).
Asset allocation wise, there was an interesting article (and followup) entitled "The Benefits of Low Correlation" a few years back I thought was particularly interesting. Link to both: http://www.etf.com/publications/journalofindexes/joi-article...
My current take is that even if the tiniest minority of activity exists outside of low-turnover ETFs, continued advancements in automated algorithmic trading (whether it's ML or regression or something that hasn't been invented yet) will get us closer to the perfectly efficient market and the only impact to low-turnover ETFs will be reduced volatility.
Another possibility is that so much money gets parked in passive ETFs that the valuation of the indexed stocks becomes more tied to the influx of money than to the underlying enterprise value, then once the influx of money slows down the stocks revert to enterprise value and start to consistently depreciate, triggering a massive sell-off. If that happened it'd probably be bigger than the subprime mortgage crisis, right?
What's your take?
Recommends automatically paying a share of your income each month into index funds, and gives recommendations on how to distribute this across risk categories according to your life situation.
I do both, since I'm a develop, investing is also trying out projects. I don't want to calculate my ROI om that part just yet. But the rest is fine, 16% on stocks last halve year, 200% on crypto currency ( wouldn't recommend though) and my own online shop which is a nice monthly extra on top of my full time wage.
PS. I never had to spend anything of my full time wage :)
What's worked for me and others I know is to get out of debt and stay out of debt. This guy has a reasonable program to do that: https://www.daveramsey.com/get-started/debt
I would love to not need a mortgage and have to work more to pay the interest but what other choice is there?
A house can be a blessing or a curse. You should first decide if you want to own one, regardless of the economic pros/cons. Owning a house means you always have a job to do. If that doesn't appeal to you, maybe get a condo?
In the US, the best approach is usually to get what's called a conventional mortgage. That means putting 20% down. There are some good reasons for going this route. First, it makes you prove to yourself you have the discipline to put money aside for a house, without actually having the responsibility of a house hanging over you. Secondly, its better financially as you can usually get a better rate and don't have to pay private mortgage insurance.
In addition to the 20%, you really need 6 months of money set aside in case something happens. The last thing you want is to default on a loan because something unexpected happened and you have no income for a few months.
One of the worst things that happens is someone goes and gets a house with 0% down and without the real financial wherewithal to weather a financial storm. The house quickly becomes a curse when the unexpected happens.
- on one hand, it's ridiculous to seriously recommend young professionals (in their 20s) to long-term save 20+% pretax income if they don't have substantial assets (e.g. their parents' house) or if they are not in the top 5% of their age group (think finance in London). I bet most millennials don't have the kind of income that allows that _and_ having a life quality comparable to their peers. In London and I suspect in SF it's very common to have 30% of your pre-tax income to go to rent; taxes will eat another 30%, groceries and eating out is another 10-20%. What's left is measly 20-30% of income that must be divided between shopping (clothing, hobbies, car, gadgets, whatever) and long-term saving. If we throw in absolute income numbers and property prices, it all comes to "question any expense, live in misery and MAYBE you'll be able to afford a downpayment in a decade".
- on the other hand, a lot of people can expect to double, triple or quadruple their income in a decade of their career. If not, on the scale of a decade it's possible to change the career.
So maybe there is a point where one should focus on earning more instead of saving. Maybe it's more important to have that expensive hobby that reduces your stress levels and allows to work harder.
Maybe the only right kind of advice is "raise your income and don't get into debt".
The mantra is "try to be average, at very low management fees", that way, your performance will always be average, and never worse than average.
As far as I know, the advantages of investing in index funds are global. The idea is that index funds charge less fees. Actively managed funds charge more because they have a team of experts deciding what to buy and sell, but it has been shown that in practice most of them don't manage to significantly beat the indexes, so as the returns are similar, you tend to be better off with lower-fee funds (i.e. index funds).
This is definitely true in Spain, in fact, even truer than elsewhere if you are buying funds from big banks (e.g. the funds offered by Santander, BBVA, etc.) as these typically only want to sell you their own funds and they charge really high fees, higher than in other countries AFAIK.
In fact, if you aren't already doing so, you should look at the fund catalogues of smaller banks and online banks (e.g. I use Self Bank, but there is also Renta4, Tressis, and probably some more). Those offer international funds from management firms other than themselves, and charge smaller fees.
BTW, this is supposed to become less of a problem with a new European directive being passed (MIFID II), which will impose a cap on the fees for distributing funds. Then probably Spanish banks will start offering international funds (BBVA is already preparing for this, I think) with less fees. They're lobbying against it, though, so who knows.
But in any case, index funds will still have cheaper fees than actively-managed funds.
PS: For pension funds ("planes de pensiones"), there are fewer options, as there doesn't seem to be such thing as international pension funds. All the pension funds I've seen in Spain are actively managed and charge too high fees, typically around 1.5% (I still have some due to the tax treatment), if anyone knows alternatives it would be interesting.
Second, there is one thing that the investor can control, and that is fees. Fees eat away at investments over time, so as an investor one should be fighting fees at all times. It just so happens that there are many index funds with extremely low fees.
That said, tax implications matter a ton.
I have some of my savings in index funds. The low fees, the risk profile (if that's a proper term for it in English) and historical performance (which is not a guarantee for future performance) of certain indices is what I like about them.
If I create an index consisting of Company A, B, C, with 40% A, 30% B, 30% C and call that index "the sebcat index" others may sell sebcat index funds consisting of company A, B, and C stocks at those proportions. Of course, that's a bit too arbitrary. Normally you would have an index based on e.g., the N largest companies on a specific market/region. The index may be adjusted over time depending on market cap or something else, funds may not follow the index exactly, but that's the gist of it, to the best of my knowledge (see caveat). It's not in itself bound to geographical regions, though if you buy funds tracking foreign companies you should be aware of currency effects, politics &c (though local companies could be affected by that as well of course).
Look up a couple of indices (e.g., MSCI indices), then find what index funds on your exchange tracks these indices. Look up what the funds consist of exactly. If you compare two different funds tracking the same index, they should have similar performance over time. Buy one or two per index. The fees should be relatively small, 0-0.4%.
If you expect a crash to happen, or you see a crash happening that is not likely to end soon, sell any index funds affected and maybe put the money in interest funds, or gold, or something that you believe will not be as affected by, or benefit from the current situation on the market. Then buy back when (or if) the market goes up again (depending on your time frame).
Both million times easier said then done.
Learn about survivors bias. Basically all the things these successful people told you are only guide lines, not rules.
This is sounding rather a lot like Zen's thinking.
- invest 10% of your income
- invest only in things you understand or when you happen to know someone who understands them
There is zero more insightful content in this book. And even these two insights are totally lacking, because they won’t tell you what investment makes sense these days.
I think we misunderstimate the impact a few fundamental lessons on finance can do to a person’s life. Especially when the person is oblivious to it.
I’ve seen it first hand multiple times now. I give away this book all the time and and have seen nothing but good come from it.
And to be less irrelevant, I do agree with you that a simple rubric that can be internalized by compelling stories can be very powerful in a person’s life.
If someone wants more concrete advice I usually point them to David Swensen.
If it's obvious that a given investment has good fallback value, then the market has probably factored that in already by the time you are investing. If it's not obvious, then the tip could be superseded by the more general one: "if you have information that most people don't and it makes you think that an investment will work, then go for it". But that is rather obvious, and the problem is to acquire that kind of information.
You can view saving as zero-risk investment, and then find the optimal distribution of income over a number of investments with different risks/returns.
I wish I had bought index funds instead of keeping most of my savings in GBP before the Brexit referendum...
And it's quite silly, because the examples take things to the extreme, but there's also a lot of truth to it. It goes a little bit like this:
If you do a bit of toothpaste research, you'll find the active ingredients (i.e., the stuff that matters to your teeth) in a tube of $1 toothpaste and $6 toothpaste are pretty much similar. In fact, you can find toothpaste at $0.2 per oz and $2 per oz. Given you brush twice a day using 0.2 oz, that's an annual expenditure of $30 to $300, depending on the type you use. Let's be conservative and say you can save $200 if you buy cheap toothpaste in a little bit of bulk, instead of expensive toothpaste.
Average life expectancy is about 80 right now. If you're 20, that means you'll potentially save $200 for 60 years. That's 12 thousand dollars in toothpaste saved, simply by making a conscious decision at age 20 to spend 15 minutes looking up whether cheap toothpaste is effective, and which one to buy.
Related to this is the time value of money. i.e., if you look at the past 60 years of S&P500's return, include dividends (reinvested), and adjust for inflation, you'll find 6.5% returns. Let's be conservative and low-ball that at 4%, assuming taxes, other crap and potentially lower future returns. $1 invested today at 4% for 60 years would compound to 1.04^60 = $10.50. As that's inflation adjusted, it ought to mean your purchasing power has tenfolded.
If you combine the savings of toothpaste with long-term investments, you'll find your toothpaste purchasing behavior can easily be worth tens of thousands of dollars.
Now note, I chose toothpaste because there's no effort or quality-of-life choice to be made there. Buffett enjoys using coffee as an example as saving a $3 morning and evening cup is much more profound than saving 10 cents on toothpaste each day. But it does require you to skip coffee, or make it yourself. However trivial that may be to some, that requires respectively discipline and mental effort to others. But things like toothpaste should be a no-brainer.
It's up to anyone in their twenties to consider what actually matters to them, there's tons of such decisions to be made. The brand of toothpaste? Likely not. Brewing your own coffee? Probably not a big deal either. Skipping lunch with friends because it saves money? Probably not a great idea. But even there, being cognisant of the cost of such eating-out behaviour may spark you to invite a friend over for a self-made lunch. The point isn't to save as much money, the point is to allocate your money to where it's actually valuable. That's not toothpaste. It may be working less and spending more time on a hobby, with friends or family.