The Four Rules of Financial Planning
How can we keep young people out of financial trouble? Are there some simple rules they can follow?
I raised my two children with these Four Rules, and over the last eight years I have taught them to dozens of high school and college classes. They work. Following these four simple rules will facilitate their financial success. Not only have my own kids (now self-supporting adults) thanked me for my financial guidance, but I have also received numerous expressions of thanks from students and parents alike. Following these Four Rules will help anyone, regardless of age, in their financial planning.
1) Do What You Love. This is probably the most controversial of my rules, because on the surface it has nothing to do with finances or financial planning. It also seems to be the hardest for most young people to grasp, probably because they have not yet had the life experience to know that while money is nice to have, purchasing power does not mean you’re happy. After spending close to 25 years counseling people on their financial planning, it is clear to me, that my happiest clients are those who are able to support themselves comfortably doing work they like.
2) No Consumer Debt. Consumer debt means borrowing to buy “stuff.” It is different from business or investment debt. Consumer debt is where most people get into trouble, credit cards especially. If you can’t afford to pay cash, don’t buy it. The only reasons to take on consumer debt are:
a. To buy a house.
b. To go to college.
c. To buy a car, but only if you absolutely need one to get to work.
3) Save 15% of your income for the future. I have worked calculations on this many times, and I find that even though in the early working years the 15% does not look like much, the time value of the savings compounds and it becomes a significant amount of money. It also starts two good habits, saving and living within your means. As your income increases over time, the amount you save will also increase. The end result is a good shot at being financially independent.
4) Insure against catastrophe. A catastrophe is something from which it would be very hard if not impossible to recover. The biggest examples are a medical crisis, and liability for an auto accident. So young people must have medical insurance and auto liability insurance. If their apartment gets broken into, or their car gets damaged in a collision, those are things they can recover from. Look out for the potential big-ticket risks and insure those.
On August 18 and again on August 19 I am teaching a class on this in my office for young adults (and those soon to become young adults). Look for the email invitation.
Sincerely,
Glen Janken, CFP, CLU |
