by Richard Band | September 9, 2013 9:01 am
I still remember that exuberant feeling when I handed in my last college exam (classical Greek, of all things), and made a beeline out the door.
Freedom! I practically danced down the sidewalk in the warm spring air.
Little did I imagine, toiling in Yale’s dank anti-capitalist dungeon, that I would spend most of my career advising people on how to build and preserve wealth. But it was a good choice. Looking out at today’s economy and markets, I see many challenges facing adults in their 20s and 30s. So I’ve tried to put myself in their shoes.
Here are five financial principles I would carry in my treasure box if I were launching out on the sea of life again today:
Spending money is fun. One of the true tests of adulthood, though, is to spend less than you earn today so you can enjoy more things later on with the savings you’ve accumulated. My wife Enid and I made it a goal, early in our marriage, to set aside for future enjoyment at least 10% of what we earned. In many years since, we’ve socked away 20%, 30% and more of our income.
By allowing that money to grow (through prudent investments), we’ve been able to handle major purchases — from extreme makeovers on our house to family vacations to college and weddings for our three daughters — without a hitch. Saving is the key to not worrying about how you’ll pay for the things you really want.
I recommend saving off the top of every paycheck, automatically if possible. Company 401k plans are excellent for this purpose. So are monthly mutual fund accumulation plans (See Tip No. 5).
It’s nearly impossible for a young adult of working age to avoid borrowing altogether. If you haven’t got student loans, you’ll probably need a car loan at some point — and you’ll almost certainly have to take out a mortgage for your first house. These kinds of debt are perfectly normal.
However, you should always be impatient to get rid of debt, because interest makes everything you purchase on credit more expensive. Credit cards especially are a killer in this respect, with their 14% (and often higher) interest rates. Hurry up and pay down your credit card balances first. Since our wedding day at age 23, Enid and I have always paid our credit cards in full, every month, to avoid finance charges.
Next, whittle down car loans and high-cost private college loans. I see no harm in carrying a home mortgage at today’s historically low rates, but you should limit your total housing cost — mortgage, insurance and taxes — to no more than 35% of your gross income, unless you live in an extremely high-priced real estate market. (See Tip No. 4.)
Marriages nowadays face a lot of obstacles. According to a University of Virginia study, spouses who feel their partner spends money foolishly have a 45% higher-than-average divorce rate. After extramarital affairs and alcohol/drug abuse, financial disputes are the third most common risk factor in marriages that break up.
Get to know your fiancé or fiancée’s thoughts on money before you say “I do.” If you don’t like what you discover, say “I don’t.” During our courtship, Enid struck me as the thriftiest person I had ever met — next to my old buddy Smokey Johnson, who always ordered a 10-cent Fishwich at McDonald‘s (MCD). From the start, I knew that marrying her was like collecting an extra dividend check every day of my life. We’ve never argued about how much to spend — only how little!
When I landed my first permanent full-time job in 1975, the national unemployment rate was 8.2% — and I thought the job market was tough. Today, the jobs situation is slowly improving, with 7.4% unemployment rate nationally, though it varies widely depending on where you live. Yuma, Ariz., for example, has a staggering 34.5% unemployment rate.
As a young person, though, you enjoy certain advantages over older workers. Chances are, you’ve got fewer commitments tying you down to a specific location. You can move in search of better opportunities.
Three or four decades ago, California was the mecca for fortune-seeking youth. Today, however, other states offer more jobs, lower taxes and significantly lower housing costs. Take Utah, for example. According to Kiplinger estimates, the Beehive State’s rate of job growth in 2013 will double California’s. Utah’s average income tax take per person stands at only $765 annually, vs. $1,229 for Caliifornia. Property taxes, per capita, are also 40% lower in Utah. Zillow reports that an average home costs about half as much in Salt Lake City as in Los Angeles. Great skiing nearby, too!
Other states with the “triple play” of low taxes, reasonable housing prices and rapid job growth include (in alphabetical order) Montana, North Dakota, Oklahoma and Texas. Like Utah, these states are enjoying a powerful lift from America’s domestic energy boom. Even if you’re not a petroleum engineer, though, the local prosperity will greatly increase your odds of success as you seek to establish yourself in any business.
Why do I say “one eye?” Because we’re back in an investing environment that bears some remarkable similarities to what I faced when I was starting out.
I bought my first stock in August 1973, just as the devastating 1973-74 collapse was getting underway in earnest. That baptism of fire taught me not to assume I would make money by simply hanging on to all my stocks and mutual funds through thick and thin. It was OK, perhaps, to keep a core position in the market at all times, but I had to learn how to trade around that core, raising or lowering my exposure at appropriate stages of the market cycle.
Many investors don’t want to embrace that insight today, even though it’s painfully obvious that the era of buy-and-hold is long gone (about 10 years gone). As a young person, however, you’re under no obligation to remain stuck in the outdated thinking of the 1990s. Ignore the self-serving propaganda of the mutual fund industry. Feel free to move your money around.
If I were launching an investment program as a 20-something today, I would begin by setting up an account with a mutual fund whose manager — rare among the breed — has a real grasp of today’s changed economic and financial landscape: Mairs & Power Growth (MPGFX). During the 2008 financial crisis, MPGFX did a far better job than most of its peers at preserving shareholder value, and the fund has continued to lead the gang since then on the way back up. After I had built up my balance to about $5,000, I would open an account with a discount broker like Fidelity or TD Ameritrade and try my hand at individual stocks. (My complete list of recommendations is available with a subscription to Profitable Investing.)
Global stocks should also perform respectably in the years ahead as the economic recovery now under way in the United States broadens out. (By most benchmarks, foreign stocks are quite a bit cheaper than domestic companies.)
My favorite vehicle for accessing the whole world of equities is Oakmark Global Fund (OAKGX). Clyde McGregor, senior manager at Oakmark Global, is a seasoned veteran with a great long-term track record. You can trust him to keep a watchful eye on your money. As with Mairs & Power Growth above, I would average into OAKGX over a period of at least three or four months in the hope of catching at least one meaningful market pullback along the way.
In short, today’s troubled economy is no reason for young adults to give up hope. You can build a secure and prosperous future for yourself if you practice the five keepsake principles I’ve outlined here.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
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