I discovered your blog last year and I have been reading it off/on ever since. I was curious if you were able to give me some advice as a young person on how I can become actually wealthy instead of "pretend wealthy." I'm a college student and of course I am not eager to be incredibly stingy and miss out on experiences that can be afforded to me, but I thought you might be able to help. Some questions I have are,What should I look for in a credit card?What would be good to start investing in and what tips would you give to someone looking to jump into investment? What would be good investments early on?Finally, and this is a little bit more of a curiosity about the lifestyle you live, how often do you fall back into your old ways? In what areas of your life does that happen?I hope you can get the opportunity to answer my email.
Today, people make money by tweeting. I am not sure exactly how, but I would have said that was a stupid thing to do. Hell, some six-year-old made $11 million last year just playing with toys on YouTube. The world is a crazy place. But don't think that just because people like that strike it rich without any apparent effort, that it will happen to you or that you are entitled to it. Being hit by lightning is a rare event. It doesn't happen that often. The rest of us have to work for a living - so have a plan in place to do just that.
One of the biggest life mistakes I made over the years was to borrow too much money. Borrowing money for a worthwhile college education (I borrowed about $38,500) isn't a dumb move, but I easily borrowed twice as much as I needed - as evidenced by the fact I remodeled my kitchen with some of the money. Borrowing money for a house wasn't too bad a deal. Buying more house than I needed or borrowing more than I needed would have been dumb. Refinancing my mortgage again and again was really, really dumb. Of all the bear traps I stepped into, debt was probably the worst.
How to build up that savings? The two mistakes I made were undersaving and oversaving. Undersaving is to say not saving at all - just spending every penny and borrowing more. When I decided to "save" I did the typical young person bonehead move of putting money into an investment without figuring out where in my budget the money was coming from. By the end of the month, I was out of money and wondering what the hell happened.
I finally figured out that the smart move was to cut some small, unnecessary item from my budget - cable TV, designer coffees, and so forth - and put just a few dollars a day or per week into a basic savings account. No, it won't grow very fast, but over a year or so you might have a thousand or two, and it will grow from there. Being patient was the key - I wanted to see results right now! And many people give up on saving or investing when the $100 they put in the bank doesn't magically turn into a million overnight. You think I am being sarcastic - look at the savings rates of Americans.
Once you have some savings, you can invest. But what to invest in? At first, just building up a buffer of savings is important. But later on, you can put money into mutual funds, bonds, or even stocks. When you qualify to start an IRA, you'll have money to put into it. The key is to diversify and to invest in fairly rational things. Younger people can afford to takes more risks, to be sure - but gambling is not "risk-taking" - it is just throwing money away.
Diversification bears special mention. I was having dinner tonight with an old friend and he mentioned putting 1/3 of his retirement account into a "tech" stock back in the day. It went from $10 a share to $55 a share. "You then sold half of it, right?" I said. "No, I rode it all the way down to $5 a share!" The expression on his wife's face was, well, interesting. Diversify into a number of things, and if something does make a lot of money, consider selling off part of it to lock in your gains.
By the way, getting back to coveting, it may seem a lot of your peers have nicer stuff than you do. Fancier cars, the latest electronics, the designer fashions, and so forth. Some may come from money, true. Others are merely borrowing huge sums and are in desperate credit card trouble. One thing I have learned in life is that it is possible to put on a front of "pretend wealth" leveraged all with debt, for at least a few years, before it all comes crashing down. In the long run, however, such folks often end up desperately poor later in life. And it ain't pretty.
Of course, your friends will shout that down. Get the highest limit possible! It means you are successful! Get all the rewards! That's the "smart" way to do things! Talk to them in 10 or 20 years and ask them how that all worked out. 70% of Americans carry a balance on their credit cards, and I think 100% do at one time in their lives. A credit card is a debt instrument, first and foremost. Treat it like unspent nuclear fuel rods.
And I still make mistakes, but they are getting smaller and smaller. I wake up in the morning and realize that maybe we could have split an entree at the restaurant last night and saved money and ate less. Or maybe some electronic toy was a waste of money (I haven't done that in quite a while, thank God!). That sort of thing. The real boners? I am making less and less of them - at least I like to think I am. Maybe I am living in a fool's paradise.
But then again, maybe what I am saying here - which is not advice - will fall on deaf ears. Because I am not saying what to do, but only illustrating the bonehead things I did and my friends did. And they are all the bonehead things an 18-year-old desperately wants to do. The credit card company dangles out a 25% interest rate "rewards" card, and the car dealer dangles out a set of keys to a shiny new Camaro. It is tempting, and the best thing to do is leave your pen at home - particulalry in an era where an 18-year-old can sign his life away before age 21. But most Americans, they fall into these traps, and then spend the rest of their lives bitching about how awful they had it and how unfair it is that someone else has more money than them.
Just don't do what most Americans do. I guess it is as simple as that.