This article was originally published in Time & Money (Aug. 9, 2019).The author, Daniel May, drew on the expertise of Rachel Richards ’13. Richards, who graduated with a degree in financial economics, is an author, real estate investor, finance guru, professional speaker and business owner living in Louisville.
This newsletter is a little special; I had the opportunity to collaborate with Rachel Richards, former financial advisor and best-selling author of Money Honey. She was kind enough to contribute her thoughts and unique perspectives on several different topics, the first of which is the worst financial mistakes young adults are making, and how to avoid them.
Her second book about real estate investing and passive income will be released later this year, and I was able to get a peek behind the curtain and will be publishing a newsletter about that at some point in the next several weeks. She didn’t give away all her secrets though, so you’ll still have to pick up a copy of her second book.
I’m currently enjoying Money Honey and you can be too, just click here to buy it on Amazon. Even though I’m probably not her target audience (this book is geared more towards women), I love her style of writing and how she explains concepts using easy- to-understand language, all while keeping it fresh and entertaining (which isn’t easy to do when you’re writing about personal finance).
If you want to learn more about Rachel, you can visit her website.
Rachel and I agreed that the biggest financial mistake we see our friends and people our age make is not being invested, or:
1. Not having a sense of urgency about saving for retirement
Rachel: “One of the biggest mistakes that people are making is not investing, young people specifically. The biggest advantage we have is time; the sooner you start, the more time you have for compounding interest. Investing is an intimidating topic for a lot of people.
I used to feel scared of investing too, but what I eventually realized is that even a young, inexperienced investor, even if you don’t have a great idea of what you’re doing, and even if you don’t pick the absolute best investment, you’re still going to be way better off than the expert investor who waited 10 years to start investing. People don’t see investing as urgently as they should. Getting invested right now is super important and super urgent. People feel intimidated and don’t know how, but you don’t need a lot of money to get started.”
Investing doesn’t have to be this big scary complex thing, it can be as simple as opening a Roth IRA, finding an index fund, and setting up automatic recurring contributions.
How do I get over feeling like I don’t know what I’m doing?
Remember in high school when you had to take home a bag of flour or a baby doll and care for it like it was a real child? Well do that, but for investing instead. And instead of teaching you how hard it is to raise a child, it will teach you how easy it is to invest. Got it? No? I’ll let Rachel explain…
Rachel: “What I recommend doing is to act like you have $1,000 and pick out some investments (such as index funds) and pretend like you’ve invested it. Look at the stock or fund price today, pretend like you’re invested in it, and track your gain or loss over the next few months and just see what happens.”
Investing with pretend money will help you feel more comfortable because you’re getting the experience of being “invested” without putting any real money on the line. By the end of the experiment, you should feel comfortable enough to start using real money.
2. Taking on too much student loan debt
This is a tricky one. Student loan debt may be necessary if you don’t have the scholarships, income, or help from parents to pay for college out-of-pocket. Before figuring out how to pay for college, figure out if you need to go to college. There are affordable community colleges across the country, and in some states (including the state I live in, Tennessee) community college is tuition-free.
Trade schools are another lower cost option, and they don’t necessarily limit your earning potential either. Electricians, plumbers, construction managers, and web developers all have the potential to earn a great income without going to an expensive university.
How can you pay for school without loans?
If you’ve decided that a 4-year college is the right choice for you, how do you pay for it? Here’s what Rachel had to say.
Rachel: “I was actually in a similar position (trying to figure out how to pay for college); I went to Centre College in Kentucky and the cost of a degree was going to be $40,000 per year and after scholarships I still needed to come up with $10,000 a year so I could graduate debt-free. As a student, that’s obviously no easy feat, because you have to balance class and work, and I didn’t even have a car.
What I actually stumbled into, and this isn’t for everyone, but I went into an interview with Cutco Cutlery for a sales position (and scheduling appointments). I was very excited because this was the first time I was exposed to a job where the harder you work, the more money you make. Cutco, just to clarify, is not an MLM because you aren’t recruiting others to join; it’s just direct sales. Which isn’t for everyone; it takes a lot of hard work, but it worked for me. During the summer I would wake up at 6 AM and go to sleep at 10 PM and worked all day long. And that’s how I spent my summers.
My first summer I made almost exactly $10,000, so I paid for my first year of tuition, and I did the same thing the following two summers. So that’s how I was able to pay my way through school. There’s a lot to be said for working as a college student in some type of sales job because your pay is commission-based, and you have the opportunity to earn more money the harder you work. I also learned some very valuable business skills, like how to train new employees, how to interview potential hires, and how to cold call prospects.”
I am one of those people that would not do well in sales. My personality type is just not cut out for it. So how else can you pay for college?
I received tuition reimbursement through my employer in college; there are many different companies out there now that offer tuition reimbursement. Some of the big ones are Publix, UPS, Verizon, Starbucks, and some big banks like Wells Fargo and Bank of America. My tuition reimbursement didn’t cover all of my college costs, and I still had to take out student loans, but working 30 hours a week and getting partial tuition reimbursement helped lighten the burden and is a great option for many students.
3. Getting into credit card debt
Credit card companies don’t prey on students as much as they used to, for example they aren’t allowed on college campuses anymore, but younger adults are still very much the target demographic for credit card companies. Younger consumers who sign up for credit cards could be customers for 40, 50, or 60 years. Students also have low incomes and are more likely to not be able to pay off a credit card balance every month, and over a third of college students already have more than $1,000 in credit card debt.
How can you avoid credit card debt?
Using credit cards for everyday purchases is fine, in fact credit cards are the more secure way to pay and they earn rewards. You only get into trouble if you can’t pay your entire balance every month. Interest rates on credit cards are very high (the average APR is currently 17.76%), so you can get yourself in a hole fairly quickly.
To avoid credit card debt, don’t finance anything you can’t afford. If you don’t have the money to pay for something upfront, save up for it. Delayed gratification will feel better in the long run anyway – there are many psychological benefits of deferred gratification.
Obviously this is all easier said than done; it’s not easy to wait to purchase something you really want, but your future self will thank your present self for not getting them into credit card debt.
In some situations, credit card debt may be unavoidable. It’s better to go into credit card debt to buy groceries than starve yourself. If credit card debt is something you are struggling with, and you aren’t sure how to balance your budget to get rid of it (or avoid it), check out last week’s article on budgeting.
Thank you for reading today’s newsletter! As always, feel free to e-mail me (firstname.lastname@example.org) if you have any comments, questions, or suggestions for future newsletters. If you like what you’ve read so far, feel free to bless your friends with a link to sign up for my newsletter.
by Daniel May
October 18, 2019