Things every young person needs to know about money - Chapter 8 – Establish a system
“A Penny Saved is a Penny Earned” Benjamin Franklin
“While money can't buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx
This series has focused on the need for young people to think strategically about money. I discussed the importance of saving money, managing money and how compounding can work for or against you.
Now you need a system!
System’s beat “goals” every time. I might have a “goal” to retire rich, but unless I put in place a system to automatically invest that goal won’t be met. Here is a system for a young person to retire rich:
· If you have an employer sponsored 401(k), find out what the match is and start there. You are already making 100% on your money (the match), plus you are saving tax on the money you invested. For example, if you invest $100, your employer matches that $100 for a total of $200. If you were in the 20% tax bracket, you save $20 in taxes on what you invested! You invested $80 and now have $200. And that’s before you even “earned” anything on your investment.
· Every time you get a pay raise, increase your 401(k) investment by 1% less than your raise. You always feel like you have more money in your pocket, but you are rapidly increasing your retirement contributions. Don’t stop until you have reached the IRS maximum!
· If you don’t have an employer sponsored retirement plan, open a retirement account at any brokerage and use the exact same system as above.
· Now create a budget. Understand exactly how much you need to pay your bills, then leave yourself a little “play money”. All the rest gets saved! I call this “forced austerity”, and it forces good money choices to stay within your budget.
· Your savings should be a mix of regular savings (things break, you will want big items – plan for that!) and dividend paying stocks.
· Set up “DRIPs” for all your stocks – that stands for Dividend Reinvestment Plan – and every time the stock pays a dividend, you buy more of it. At the next dividend payment date, you get a bigger dividend and buy even more. That is the magic of compounding applied to stocks.
· Once all this is in motion and you feel financially comfortable, then expand your investments into conservative (think gold) and speculative (think crypto) vehicles. Don't forget insurance! Under the right situation that also offers interesting possibilities.
Set this system up, turn it on and forget it!
Next is everyone’s favorite topic – taxes!
I am painfully aware that my blog hasn’t been getting the attention it deserves. This was an incredibly busy time of year with the holidays, end of year activities at work and getting the boat winterized and stored. We also got to take advantage of some very interesting investment opportunities that I will share later. After I finish the investment series, I'll be switching back to project and management topics.