By Brad Beckstrom
When I started saving in my mid-20s I was not aware of the term “financial independence.” I was, however, very aware of the word “freedom.” I was never good at following orders. I likely would have struggled in the military or working for anyone who wanted things done a specific way. On the other hand, left to my own devices, I was very interested in making my own plans and setting personal goals. Secretly I was a bit of a self-improvement junkie. When I got my first real job out of college, I signed up for every class offered by my employer’s training department. Time management, presentation skills, Brewing 101. Well, I worked for a brewery. It seemed I was a much better student after college, devouring course materials and finding great books on my own.
Simple Money Habit #1
So, in a nutshell, that’s the first simple money habit: Lifelong learning. I’ve always put that first because regardless of how much money you’re able to save, the most important investment you can make is in your own development is you. Kevin Kelly, founder of Wired Magazine, once said “just read one book a month and it will change your life.” He’s right.
Simple Money Habit #2
Lifelong learning goes beyond reading and classes, it’s really also about asking questions. When I was calling on clients at my first real job, I was asking questions about their business, franchising ideas, what worked for them. Simple Money Habit #2: Ask Questions. This started early for me, even asking my grandmother if I could see her stock certificates or figure out how her calculator worked. Now I can get a lot of answers on Google, but the ones that are the most helpful come directly from people with experience.
In my first job I asked a lot of questions about the company’s profit-sharing plan, employee stock purchase plan, pretax contributions, company contributions, pension plans, cost-of-living allowances, relocation benefits, health and insurance benefits. I’m sure there was a “PITA” sticker somewhere on my personnel file, but when I added it all up back then, these benefits were equal to nearly 50% of my salary, and that did not include my company car! We got a new car every 50,000 miles, even when I worked in the office. Having a car, gas, insurance, and auto expenses paid for allowed me to save thousands, and quickly pay down student loan debt. In today’s entry-level job market, a lot of these benefits like 100% health coverage, company cars, and pension plans don’t exist. That makes it even more important to ask questions about which benefits the company does offer and make that part of your plan.
Simple Money Habit #3
So, regardless of whether your job offers an auto allowance or not, drive a used car and take good care of it. Most college graduates largest expenses are automobiles and student loans. If you can find a way to minimize or avoid auto loans and student loan debt you’ll have an early foot in the door to achieving financial independence at a young age. Avoiding debt is Simple Money Habit #3.
I didn’t have a credit card in college. My primary source of income was tips from waiting tables at a couple of very busy local restaurants. That cash generally went directly into my wallet or into a checking account. Not having a credit card back then helped me avoid running up any debt. All purchases were made in cash. Paying in cash helped me literally feel what things cost and avoid impulse purchases. By the time I started using credit cards I had that down.
Simple Money Habit #4
In College I drove a 20-year-old car that I was able to keep on my parents policy. Despite less than stellar grades, I was able to have several jobs lined up before graduation. I picked one that offered a company car and solid benefits. Driving a used car that’s paid for, or even better, driving a new car that’s paid for by someone else is Simple Money Habit #4. As a quick exercise, add up everything you spend on auto payments, auto insurance, gas, maintenance, general auto upkeep per month, and calculate what you could save per month in a car that’s paid for. To calculate the true value of any ongoing monthly savings, invested at 7% return compounded over 10 years, you multiply the expense by 173. Formula explained here. Let’s say you can save about $500 a month driving a 10-year-old car and save the difference. Invest that savings in any low fee index fund and in 10 years you’ll have $86,500. Even if you stop saving at that point, the good news is that this money will continue to grow and compound. If you were to stop at $86,500, compounded over 30 years at 7%, the return is $702,238.
The key point here is to save and invest that money you’d otherwise be spending on a new car. I’m not exaggerating when I say if you were to do this over 20 years of work, it would fund a major part of your early retirement.
Simple Money Habit #5
The message here (and Simple Money Habit #5) is to bank any cost savings, raises, bonuses, or windfalls before you have a chance to spend them. My early paychecks included automated employee stock purchases (ESOPs), 401(k) contributions, US savings bonds, all pretax. Luckily my year-end bonuses were in company stock and automatically contributed to a retirement plan. Later, as an entrepreneur, I followed the same philosophy taking a low paycheck then the bonusing out into tax advantaged accounts at year-end like my SEP-IRA. (self-employed individual retirement account)
Simple Simple Money Habit #6
Track everything. What good is working hard, saving money if you don’t know where you’re going or where you’ve been. In 1994 I read Vicki Robin’s book Your Money or Your Life. One of the things that stuck with me the longest is tracking your financial progress. The book talked about spreadsheets and wall charts. I was way too lazy for that, but fortunately I discovered Quicken about the same time. I consolidated all of my investments into low-cost mutual funds at Fidelity and rolled over several employer 401(k)s into my IRA. Now I’ve got over 25 years of spending, banking, and investment data at my fingertips. I could even tell you where I had lunch on March 1, 1994. The data been extremely valuable during market downturns when I can look back and see how investment accounts recovered in the past.
Since I’ve been using Quicken, some great new tracking tools have arrived on the market including Mint.com and Personal Capital. I use Personal Capital to track my investments along with banking and credit card spending in an app, but I still use Quicken for all of my banking and investing primarily because it has built in bill pay and, I get a better feel for how I’m doing with family finances when I reconcile my downloaded transactions once a month. I can also compare any year’s spending to the current year’s by category. Using Quicken to review my finances once a month is one of the best money habits I have. It allows me to compare the previous month to the same month last year, quickly comparing recurring expenses and spotting ways to beat last year.
Simple Money Habit #7
For those looking to achieve financial independence at an early age, it’s recommended the savings that you should bank and invest are 25% to 30% of your total income. A couple of books talk about this including “All Your Worth” and “Your Money or Your Life”. From experience I know how hard it is to do that, and in fact, I only hit those percentage savings rates during maybe one third of my pre FI working life.
What I did discover, by simply having a savings plan and investing in, stocks and real estate, my own business, and most importantly, learning, is that over time compounding and return on investment help me make up for those many less-than-perfect years.
Simple Money Habit #7 is to have a savings plan. You’re not going to hit your numbers every year. In fact, you may even have a few years where you go backwards. But keep that plan somewhere where you’ll see it once a week and you’ll get there.