The First 6 Steps To Financial Wealth

Our Daughter Just Got Her First “Career” Job!!

Yes, Mom & Dad are proud.  She started her job last week, being hired on a 2 year contract with the University Police Department where she’s just finished her 3rd year of studies.  (Yes, that’s the reason I picked the somewhat atypical picture at the top of this post!)  Being that she is on the “5 Year” plan to graduate, the 2 year police commitment fits well, as she’ll graduate at the same time she completes her first contract.  As a Criminal Justice major, the experience will be invaluable.  For the next 10 weeks, she’ll be attending the Police Academy (she can’t wait for the high speed driving training).  As a parent, it’s a bit concerning with recent police sniper attacks in Dallas, but we’re proud of her for feeling the urge to provide community service and protect her fellow Americans.  I’ve always respected police and the work they do, and am proud to say my daughter is now in that field.  She’s a good kid young adult, and we’re excited for her.  The transition into adulthood continues, and she’s learning to fly.  She’s growing her wings.

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She’s now earning “real” money for the first time in her life.

Along with the move into adulthood comes the need to be responsible with money.  If she can learn the “right” habits early, she’ll set yourself up for a lifetime of improved financial security.  Fortunately, she’s very receptive to the “coaching” from her parents on some fundamental money skills (it probably doesn’t hurt that her Dad’s a financial blogger).  I’m pleased that we’ve maintained a close relationship, and treasure every minute that we spend with her.

Today’s post will focus on the coaching we’re giving our daughter, and steps we’re taking to set her up on the “right” path regarding her money habits.  Whether you’re 21 and starting on a new career, or 51 and behind on your financial situation, today’s article can help you get yourself on track for a more secure financial footing. 

Steps To Wealth

The First 6 Steps To Financial Wealth

While far from the most important thing in life, there are few who would argue against the statement that financial wealth can make life easier.  We’ve all heard the following quote (often attributed to Mae West, but according to this site it was originally spoken by Sophie Tucker, a vaudeville singer).  I’m guessing Mae West heard her say it, and adopted the saying herself?

I've been rich and I’ve been poor-and believe me, rich is better. Today, 6 Steps To Wealth. Click To Tweet

Here, then, are the 6 tips we’re giving to our daughter, along with practical steps we’re taking to implement each of the suggested steps.

1. Realize The Value Of Time

Your best chance to achieving financial wealth is to start saving early. Compound interest is an amazing thing.  Click on this article to see some examples of the power of compounding, a fascinating mathematical reality that Albert Einstein called “The Most Powerful Force In The Universe”. In summary, if you save $1k/month for 10 years, and the only thing you change is your starting age, the final result is astounding.  For someone starting at Age 25, they’ll have $1.4 Million at Age 65.  If you wait until Age 35 to start, but save for the same period of 10 years, you end up with only $734k.  You lose over $700k by waiting 10 years.

The Lesson:  Don’t Wait.  Start saving with your very first paycheck, and let compounding work for you.

What we’re doing:  One of the first things we did after she found out she’d gotten the job was to work with her on opening a Vanguard ROTH account, where we’ll follow The Simple Path To Wealth and invest her money 100% into a widely diversified, low cost stock index fund.  Contributions made early in a working career, and allowed to grow tax free, are the biggest single thing you can do to ultimately achieve financial wealth.  While she doesn’t fully understand “The Roth Thing” yet, I’m convinced she’ll look back at some point in her future and be thankful that we worked together to set up this account early in her working career.

2. Build An Emergency Fund

The first priority for your money should be to build a 1 month emergency fund by the time you’re 25.  By the time you’re 35 or older, your emergency fund should equal 6 months of your typical monthly spending.  This creates wealth by avoiding the need to default to your credit card (and associated interest costs) in the case of inevitable “emergencies” in life.  Our daughter loves dogs, and wants to ultimately work in a law enforcement canine unit. With responsibility for her 3 dogs, what are the odds that one of them may need an “emergency” vet treatment at some point? She also has a 12 year old car, and “unexpected” maintenance should be “expected”. Better to be prepared, and set the money aside early.

The Lesson:  Be Prepared.  Emergencies Happen.  Have cash available.

What we’re doing:  After touching base with Doughroller’s FaceBook group (a great group of folks interested in personal finance, and always willing to help), we’ve decided to open a CapitalOne360 savings account.  This will allow us to segregate her savings account into various categories, one of which will be her Emergency Reserve.

Doughroller

 

3. Don’t Buy Something Until You Have The Cash Saved

Debt is expensive.  It’s far, far better for you to have your money working FOR you (earning a return) instead of working AGAINST you (paying interest charges on debt).  By being patient, and avoiding “materialistic urgency”, you can build up the cash required BEFORE you buy that “must have” item. As you wait, your money earns a bit of interest.  Over time, this approach leads to greater financial wealth compared to the alternative of “buying it now”, and paying interest costs for years on a depreciating asset.

The Lesson:  Learn to be patient, and wait until you’ve saved enough to “pay cash” for an item you desire.  This is especially true if the item is a “want” instead of a “need”, but it applies to both.

What We’re Doing:

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My daughter really (really!) wants a motorcycle.  She sent me the picture above to include in this post, it’s the one she really wants (a “Harley Night Rod”, oh my).   We’ve explained the lesson above, and she’s going to set up a “motorcycle account” as part of her CapitalOne360 savings account.  How soon she gets her motorcycle will be dependent on how aggressively she can save for it.  As she builds cash, she’ll have to decide between buying a lower cost motorcycle sooner, or waiting to build more cash to buy the more expensive model above (I hope she choses “cheaper”, I really can’t picture her on the Harley!). She’s also doing the same with a “replace my car” account.

4. Know Where Your Money Is Going

None of these lessons can be effectively applied without understanding your personal cash flow. How much money are you earning each month, and where does it go?  Are you prioritizing your spending, or do your dollars simply disappear without you telling them where they should go?  Take control of your personal finances early, and you’ll have control of your money for life.  Budgets can be simple, as long as they work for you.

The Lesson: Start simple, but don’t ignore your personal cash flow.  Monitor your spending, and automate savings so they come directly out of your account before you have time to spend the money.

What We’re Doing:

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The picture above is the first draft our daughter’s budget.  She’s decided to work her budget “by pay cycle”, so she’s splitting her monthly expenses in half.  For example, her rent is $438/month (she splits the $880 total with a roommate), so she’s using $219/pay cycle.  Importantly, she’s doing it all herself, but sharing it with us for our input. It’s simple, but effective.  I’m proud of her.  As the first few months of paychecks flow into her account, she’ll update her ledger to track her actual spending patterns.  As her first paycheck lands, we’ve already arranged for money to automatically transfer (via ACH) to her Vanguard account.  Within the next week, we’ll do the same for the CapitalOne360 accounts, taking advantage of Lessons #1, 2 and 3 with her very first paycheck.

5. Max Out Your “Employer Match”

On the first 6% of our daughter’s paycheck that she contributes to the police pension fund, she receives a 14% match. That’s free money. Contribute just 6%, and you automatically get a 14% raise. Skip the 6%, and you’re sacrificing real money.

The Lesson:  Understand your employee benefits. If you’re not sure whether or not you’re optimizing “the match”, schedule a meeting with your HR department to go through your details. That’s why they’re there, so take advantage of their expertise.

What We’re Doing:  Within her first few days of work, our daughter spent several hours with her HR department.  Prior to the meeting, we talked about what she should ask about, and what information she should pay close attention to.  During her meeting, I made myself available via text or phone if necessary.  She texted me a few times during the meeting, and arranged to have the HR rep copy me on the email she sent to our daughter with all of the details of her benefit package.

6. Track Your Progress

As I wrote in Measure What Matters, the odds of achieving your goals is greatly improved if you track your progress on a regular basis.  Be it tracking your net worth, tracking the growth of your investment accounts, or watching your credit card balances decline, seeing the impact of your daily decisions over time goes a long way to instilling good wealth building habits.

The Lesson:  Find something to measure that aligns with a goal you’re currently pursuing.  Keep it simple to start, and expand as you grow.

What We’re Doing:  Given that my daughter hasn’t gotten her first paycheck, we’ve not yet implemented this lesson.   Going forward, I plan on encouraging my daughter to monitor the growth of her emergency savings, motorcyle and car accounts in her CapitalOne360 account.  In time, I’ll help her set up a few spreadsheets to better track her budget, as well as the growth of her investments as the months pass.  Later, we may automate things with some of the useful online tools (Mint, YNAB, Personal Capital, etc).  For now, we’ll start slow, gain some momentum, and begin building lifelong habits.

Conclusion

There’s so much more I could add to this post.  I have dozens of “lessons” in my mind from 30+ years of personal finance learnings.  Rather than doing that, I’m starting with the basics.  Pick one or two to get started in your own life, then add a few each month.

As for our daughter, my wife and I are very pleased that she’s “listening” and applying some key lessons early in her working career.  I have little doubt that starting small, with some strong habits, will greatly increase her odds of achieving a lifetime of financial security.

As she matures, I hope to continue to coach her in the many lessons I’ve learned.  As a reader of my blog, I suspect you’ll particpate in those future learnings.

If any of you have advice you’d like to share with our daughter, please comment on this post.  I’ll be reading your comments, and weaving them into my discussions with her.  If we’re lucky, perhaps she’ll even read your comments herself.  If you have a loved one who’s in a similar situation as my daughter, please pass this article along so they, too, can consider the lessons, and apply them in their own lives.

Together, let’s help the next generation “Achieve A Great Retirement”.  It’s never too early to start.

6 comments

  1. What a wonderful young lady! And what wonderful advice. Wasn’t aware that saving accounts could have sub-accounts. That’s nice to know. Your daughter’s taste in motorcycles is a little scary, though. I can’t imagine what that puppy costs. The only advice I would give your daughter right now is something she may not want to hear: LISTEN TO YOUR OLD MAN. You laid out a great framework, Fritz. I look forward to reading about your daughter’s progress in the future. Cheers.

    1. Mr. Groovy – thanks so much for your encouragement – glad to hear I’m not the only one freaked out by the motorcycle! It’s good for her to have dreams, but that one’s a little over the top! Ah well, it gives her a nice savings goal, which is really what it’s about at her age! I’ll keep you posted as things progress. Thanks again!

  2. If everyone would use these 6 tools, their life stress would be so much lower. Starting early, have savings not debt, delayed gratification, track spending, get free money and tracking net worth growth should all lead to enhancing one’s “enjoyment of life.” Never forget to enjoy each day while still building a less stressful future.

    1. Kevin, thanks so much for your comment “out here”! Nice to have you as a member of my “community”! It’s not rocket science, is it! Amazing, then, how few people take the first steps. Maybe we can help change that!

  3. Congrats with such an independent and undertaking daughter you have. Id o hope My 2 girls will grow up being as responsible with money as yours… Making a budget this young is something to be proud off…
    The motorcycle sure looks a little different… Good Thing: I have 14 years to get used to this thought.

    Thx for sharing. I hope one day my girls can read this and take consequent action.

  4. The steps seem so simple on paper, yet so few follow them. Thanks for sharing your wisdom with the next generation. Hopefully she’ll have a good influence on her friends, too. Pay it forward 🙂

    Congrats on raising an intelligent, hard-working, independent daughter and best of luck to her!

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