When it comes to saving and investing, you will need to look at how you can limit your spending in order to increase the available funds that could go toward your emergency fund or investing for the future. Although this is still mainly a defense approach, this benchmark focuses on looking at what you are saving for and having a systematic plan to save for that!
How I would approach this is by looking at what would likely be your two largest expenses: your housing and your transportation.
In the last episode\’s example, I was referencing Lucas\’ situation. In his case, he is saving to pay cash for a home by the age of 23. He will be able to then house-hack his first home until he gets married, then use that property as a rental and move into a larger home.
Now, how many 23-year-olds own their homes outright, heck how many 46-year-olds do?
According to the United States Census Bureau, about ⅓ of Americans who own a home, own it free and clear, as in it\’s paid-in-full. That\’s 37.3% to be exact, while 62.7% do carry a mortgage.
Look at how you can limit your housing outlay, and your housing expenses, especially in a time of life when you typically have more flexibility in where you live and the conditions you live in. Look at how you may be able to either rent a place you can sublet spaces in or work on setting your savings goal for a down payment on a house where you can find roommates and house hack. This expense alone can save you hundreds if not thousands per month, attributing to a great opportunity to save and invest.
Now, typically the second largest expense aside from schooling is your transportation.
I use transportation as a zero-sum game. As in, I would set this up to where you purchase a vehicle with margin, one that you can purchase at or below trade-in value, make improvements to, use for the needs that you have, and always structure in order for your vehicle to either be something you break-even on or is an income producer. Over the time you own the vehicle, you can utilize it for Uber or Lyft to provide a transportation service to others, or you can simply list on Turo to rent the vehicle and make an income that way.
Always look at both of these large expenses from a standpoint of how you could limit or eliminate the cost. This will set you up to be able to save and invest so much more over the course of a single year.
Ok, so now that you have intentionally looked at both your housing and transportation and now you have some margin between what\’s coming in and what\’s going back out–what do you do with that margin?
Assuming that you have built your emergency fund, which will put a buffer between you and life in the event that you experience a layoff, health issue, or some other unexpected event, you will then want to look at investing.
For most situations, I typically recommend investing in a Roth IRA.
This is an investment umbrella of sorts that has you pay the tax on the investment up-front. Therefore, allowing for tax-free growth. This is especially helpful because you are being taxed at what most would assume is the lowest tax bracket of your life; then, you can draw from this account after the age of 59 ½ with no penalties or tax! The contribution limit is currently sitting at $6,000.00 a year. Now, the contribution you make post-tax then grows with compound interest. This means that if you take a portion of what you\’re earning during college and place that intentionally in a fund where you can experience a net growth of, let\’s say, 8%, you will have just shy of six digits sitting in that account with only depositing $6,000.00 per year.
I believe that so much can be accomplished in your personal finances by starting early, even if it\’s seemingly small steps or avoiding setbacks. Intentionally limiting or eliminating your housing and transportation costs is a great start, but taking this a step further to take those resources and open a Roth IRA will ensure that you allow compound interest to work in your favor.
I believe that this benchmark and three areas will continue a process of improving your financial picture and, perhaps even more importantly, creating and building upon other habits.
You have maybe heard the saying that youth is wasted on the young, so be countercultural and give yourself a head start.
CTA: My call to action is to use this time wisely in order to build systems into your life that will prevent you from wasting this time. Look at the benchmark of saving and investing and apply it to ensure that your future self is proud of you today.
https://www.census.gov/acs/www/about/why-we-ask-each-question/housing/
