Financial advice for an 18-year-old?
Last week, Isaac asked Get Rich Slowly readers for advice on how to handle life after grad school. He's about to enter the workforce and needed tips on what to do until he gets his first paycheck. Isaac was very pleased with your helpful responses.
This week, we've got a chance to help somebody even younger than Isaac. Nico is 18, a sophomore in college, and financially clueless. He needs help! Here's his story:
I'm pretty young — about to start my sophomore year of college — and I literally have absolutely no knowledge of anything financial. I do have a simple student account with a paltry amount of money in it, and that's really about it. So yeah, the majority of your site goes over my head and some things are quite intimidating.
I'm going to continue browsing the basics section in order to see if I can glean some information, but are there any other resources you would recommend to a financially clueless 18 year-old? I think it would be a good idea to start this kind of stuff earlier rather than later.
Nico's right: The time to start learning about finances is now, before he needs to know the information. Fortunately, he's not as far behind as he thinks he is, even if he does feel clueless. It's my guess that most young adults feel lost when it comes to money.
So, what resources would I recommend for an 18-year-old kid? As much as I'd love to pitch Get Rich Slowly and Your Money: The Missing Manual, I actually think there are better options, including:
- Michael Mihalik's Debt is Slavery, which carries the subtitle, “and 9 Other Things I Wish My Dad Had Taught Me About Money”. This slim volume is one of the quiet classics of personal finance, and it's perfect for college students. My review from three years ago gives a run-down of the book's contents.
- On the web, CNN Money has a great little site called Money 101, which features a crash course in various financial topics. Nico should bookmark this page and refer to it whenever he has questions about a particular topic.
- Ramit Sethi's I Will Teach You to Be Rich — both the book and the website — is specifically targeted at young adults, especially the clueless. (One caveat: Ramit downplays the importance of frugality, and that could lead some folks to problems. Frugality is an important part of personal finance.)
Although Nico didn't ask for specific advice, I'm going to give him some anyhow. I'll repeat the same advice I give when I speak to other college students. Namely:
Develop a basic budget
It doesn't have to be fancy. Whatever Nico chooses to do, he should get in the habit of setting aside 20% for saving and investing. This may sound like a lot, but if he can start the habit young, it'll be easier — and will yield greater returns — in the long run.
Learn how to work
I made a lot of mistakes when I was younger, but this is one thing I got right. I knew my parents couldn't support me when I was in college, so I worked as many jobs as I could. I learned how to work hard, how to deal professionally with all sorts of people, and how to maintain a positive attitude. These skills are tremendously valuable later in life.
Avoid lifestyle inflation
Even in college, it's important to watch your spending. As Nico's income increases, he'll be tempted to increase his spending in proportion. The more he can resist the urge of lifestyle inflation, the more successful he will be with his money. It's okay to spend, but be reasonable.
Do what you love
A low-paying job that leads to future prospects in a career you like is better than a high-paying job in a career that doesn't move you in the right direction. Never stick with a shitty job. And don't be afraid to change your major. It's easier for Nico to change direction now than it will be in five or ten years.
Maybe it's because of my own experience racking up debt during college, but I think it's important for young adults to learn the fundamental law of personal finance: To build wealth, you must spend less than you earn. There's more to it than that, of course. The less you spend, the more flexibility you have.
When I graduated from college, I bought a new car and developed credit card debt. I had to take any job I could find because I was tied to monthly payments. When my friend Sparky graduated, he had a lot of freedom. His debts were minimal. He traveled the U.S., taking whatever job struck his fancy. He spent time in Mexico. He spent five months traveling southeast Asia. He was able to do these things because he didn't have expensive obligations.
I don't think Nico should worry about stuff like investing and insurance right now. These are important, but they're beyond the basics. For now, Nico should focus on learning how to earn and spend money wisely.
What do you think? What do you wish you had known about money when you were 18? What advice do you have for Nico? What books or websites (or other resources) would you recommend for him? What steps can Nico take at 18 to make sure that Nico at 41 is happy, wealthy, and wise?