There’s no witty opening. This is nothing but advice aimed at preserving and increasing your net worth.
1. Leasing a new car
Cars depreciate the most in their first 3 years, which also happens to be the standard length of most leases. It might be cool to have a new car, but it’s also very expensive. If you can’t afford to buy, you definitely shouldn’t look at a lease. If you need wheels, just get a used compact sedan of Japanese origin with a clean VIN. Don’t be tempted to buy a used German luxury car either. I bought a 7-year-old BMW in college and that thing was a money pit. I basically bought the damn thing twice.
There will come a time in your 20s where you will finally be making a decent amount of money. Don’t blow it on a lease. It’s just a terrible financial decision all around. By the way, if you’re a guy, please bear in mind that girls who judge you based on the car you drive are simply not worth it.
2. Not contributing to your Roth IRA
Every article that has a 20-something talking money matters has some obligatory reference to the mythical 401(k). Contribute to it even though you don’t know what it is! That is child’s play. The Roth IRA is really where it’s at.
Since most young people do not make a lot of money, it is highly advantageous to contribute to a Roth account because contributions are made with post-tax income. Once you retire, you can withdraw from it tax free. So if your top marginal rate is 15% (and if you make $36,250 or less, that applies to you), you only take a small hit upfront for a large, tax-free return in the future.
For the vast majority of people, their career trajectory is low wages at the beginning, peak wages when you hit middle age, and then a long, drawn out plateau/slight decrease in your 50s and 60s. That means it makes a lot of sense to maximize your Roth when you’re young and poor and then contribute to your 401(k) or traditional IRA when you’re old and rich. The only exception is if you get a company match on your 401(k). Max the match in your 401(k) first, then max your Roth IRA.
Tax arbitrage, bitches. Corporations do it. You should too.
3. Not reading the financial section of your newspaper
There’s this show on HBO that aired a while back called In Treatment about a psychiatrist and the patients he sees. The second season had a CEO of a major corporation and in his first session, he describes the college that his daughter goes to:
Natalie, uh, she’s my youngest. She’s a junior in college. Whenever I visit, or visited, she’s overseas now. Whenever I visit her college town, there’s this coffee place. Bagels, muffins, kids behind the counter with pierced everything…and I noticed that all the students and professors, they all read the arts sections, sports, politics, but never the business section. Find pristine copies on every table. The only news that really matters, and they think they’re above it.
Collectively, we’ve decided that talking money in a social setting is crass. And it’s a real problem because the vast majority of adults are not financially literate. Things like bond yields, share buybacks, dividend increases or suspensions, merger announcements, regulatory policy, etc are not sexy. I get that.
But not knowing these things is basically asking for companies to take your money. Shareholders will ask gaming companies over a public conference call how they plan on maximizing revenue from compulsive gamblers because they know that the lay public just doesn’t care.
That kind of apathy is astounding because so many people constantly worry about money. But there’s no point in worrying about it if you don’t do anything about it. If you’re going into a fight, go in with a weapon of some sort. Both the WSJ and Bloomberg have top notch reporting and commentary. The latter even posts all its content for free. If you take the time to read just 5 articles a day, you will drastically increase your financial acumen.
4. Carrying credit card debt
The APR on most of these things is terrible. If you have perfect credit (which nobody in their 20s has), your lowest rate is 7%. If you have terrible credit, it can be as high as 30%. For perspective, institutional investors (old money) consider a 20% yearly ROI to be amazing. When companies lend each other money, they can do it at rates as low as .2% per year. So you’re getting seriously screwed if you carry credit card debt.
If you are carrying a bunch of credit card debt that you don’t think you can repay, declare bankruptcy (Chapter 7, liquidation) now and ask questions later. In a bankruptcy, non-secured debt (the vast majority of all credit card debt falls under this category) takes the biggest hit. You can even negotiate with the credit card company (or rather, the collections agency who bought your debt for pennies on the dollar from the credit card company) to reduce it to a fraction of what it currently is if you have the scratch to pay it off that day. Start at 15 cents on the dollar and work your way up from there.
5. Neglecting your student loans
Unlike credit card debt, student loan debt is considered secured. What’s even worse? Reductions in bankruptcy are impossible except for extreme circumstances, like if you get permanently disabled by a crippling disease or injury. You have Bush to thank for that. That means you are on the hook to pay the entire balance off. The lender doesn’t have to accept any reduction at all. And they’ll garnish up to 25% of your earnings for the rest of your life.
Maybe the law will change in the future, but look at it this way. If you think the government is in the pockets of corporations and rich people, do you really think that any reform in the future will break in your favor? That makes it important for you to get your student loan debt under control ASAP. Don’t just make the minimum payment. Throw every spare dollar you have towards it because it will never go away unless you pay it off (or do a decade of qualified public service).
It is such a toxic thing to have that people are putting off getting married and having kids in order to get their student debt under control. You know what the implicit message to that is? “Sorry, honey. I want to get married and have kids, but it is more important that I get this debt situation under control!” This debt is more important than your future marriage and children. So yeah, don’t let your student debt get out of control. It will be the biggest regret of your life.