Financial Lessons from My 20s and 30s

25 Feb Financial Lessons from My 20s and 30s

My initial title for this post was “My Financial Mistakes” however I decided to change that because it is not quite fair to call them “mistakes”.  I am a believer that without mistakes we cannot truly grow.  I made many mistakes earlier in my life but they are important in shaping how I am now as a person especially when it comes to managing my finances.  As I re-evaluate and work toward my financial goals I feel thankful for these financial lessons I have learned in my 20s and 30s.  I am by no means perfect at implementing them but I always try to challenge myself to do better.  So here they are and hope it can help some of you out there.  

• Take advantage of compounding (with either Time and/or Contribution)

For years since I started working I have followed the normal compounding principle which states that your best “weapon” for increasing your wealth is time.  In order to fully take advantage of compounding interest you will need time on your side which means start contributing and investing early so your money has the longest time to grow.  Even though I did put money into some form of retirement account through my working years I did not put in the max. amount allowed.  My recommendation for others is to first put in the amount matched by employer in a 401(k) and then strive to put in the maximum allowed by IRS which is $18,000 per year.  If you do not have a 401(k) option then put it into ROTH IRA or Traditional IRA with the maximum allowed amount which is $5,500.  The earlier you do this the more time your money can grow to reach the highest possible number possible.  In summary start investing in your retirement early and as much as possible, even if you cannot invest maximum allowed in the beginning.  In my opinion a new pair of jeans or that fancy restaurant outing is not nearly as rewarding as investing that into your IRA account for 30 – 40 years.

• Set up automatic savings

I am an above average saver in my opinion.  It did not start out this way but I worked slowly to improve my saving rate year after year.  I am saving about 30%-35% currently and working toward 50% goal.  In the past I generally put aside money into saving/investment every few month or so.  However, the smarter thing would be to set up Automatic transfer to your saving or investment account.  It will not only put your savings on auto pilot but also enable you to be less attempted to spend extra each month.  

• Invest with a purpose and plan

Humans are social creatures and we like to do things with other humans.  Investing is no different and we like to do what others are doing in terms of investment.  If a stock is doing well and people are buying it, we don’t want to be left out and often jump in with thousands of other people.  Unfortunately it is often times not the ideal strategy to investing.  History has plenty of examples of how this is bad for your investment.  I still remember the real estate market of 2007 where I jumped in at the peak of the market and only to find out how quickly your equity can fall after the market collapsed.  I know the market is fickle and no one can truly predict what it is going to do, however, I made the mistake of trying to follow what others are doing and hoping to cash in on the good streak in real estate.  Invest because you have done your research and with your plan, do not follow what everyone else is doing because majority action is not always the correct choice.  We need to be smarter investors and be the master of our own actions.

• You don’t need everything you have

One thing I realized over the years is 50% of the things I purchased I actually do not need or usa very often.  That cool gadget or stylish shirt or ice cream cake (I do like ice cream) did not raise my happiness over time in any significant fashion.  Take a look at your life and how you spend money and really discern what you need vs what you want.  It does not mean to restrict yourself all the time but encourages you to be more mindful on what truly makes you happy.  Go for what makes you excited and grateful for being alive.  In the same time I think you will gain a greater appreciation of a simpler life.  In addition K.I.S.S. (Keep it simple, stupid) principle will most likely provide a boost to your effort to reach your financial goals.

• Manage the “Fear” factor

Changes are hard to make.  I know I have avoided making some tough financial decisions because I feared the “what-ifs”.  What if I lose all the investment on this?  What if I end up owing more taxes?  What if I don’t have money for mortgage payment at the end of the month? etc.  The point is we are faced with decisions that will impact our financial lives all the time and it is the fear of the unknown that often stops us dead in our tracks.  As a result we fall back to the familiar and the routine in order to feel “safe” or “normal” however, we are losing opportunity to make real progress by not acting.  If you have done your homework and due diligence I encourage you to take some calculated risks.  You will be rewarded for being “fearless” in the long run.