Here are a few tips on how to ensure that you will have a fiscally sound future throughout your life. This is not a get-rich-quick scheme (such things don't exist in reality), but rather a slow and arduous journey towards financial security.

First things first, start saving young, preferably while you are in your pre-teens or teens. The goal is to have at enough money for at least 10% down for your first dwelling, typically $20-25k, by the time you hit your mid-twenties. This involves a lot of short term sacrifice - no holidays, no new PC, living on spaghetti and ketchup for extended periods, no TV, etc - but it will pay off handsomely in the end.

Second, work hard in college and take as many advanced classes as permissible. Usually the limit to this is institutional, meaning a lack of opportunities or program restrictions, but working within and the the maximum the confines of the established system grants you ability.

Thirdly, go to a college you can afford and do not study what you want to study, but rather the personally viable option which will tend to pay off. I would strongly discourage studying art, history, literature, politics.. the et cetera-studies in which only superstar academics actually get a job and get paid. There is no shame in being an accountant or public administrator, there is shame in being unemployed and unemployable. Study on credit, study hard and correct, forgo personal ambitions of grandeur, and whatever you do, don't stop at the Bachelor level. A BS degree is called that for a reason...

Fourthly, you should at this time be out of college, have a workable degree, get a decent paying job, and you are ready to start building your wealth. Having lived frugally, forgoing many of your less-responsible/better start peers life styles, you should then start funneling your money into what is most likely to be the largest (and only) source of wealth: Housing. It's always difficult to find the right place at the right price, but if you fight your urge to apply sentimental value to a roof over your head, you should look for something which is close to a city center or coast line. These are two things which are being created exceedingly slowly, and properties in the vicinity tend to rise quite quickly and retain value. Having at least 10% down on your first property also insulates you quite well from short term property price movements. The preferred ratio is 20% equity as this gives you both the optimal cost/interest and security.

Assuming you are now hitting you late twenties/early thirties, have a home in which you have a 20% equity stake, and a stable job, a long period of stability follows. You go to work, do your daily allotment, come home, eat, sleep... rinse and repeat for around 15-25 years. (Children is an optional extra, if your finances allow.)

Now, you are beginning to hit your late forties. Income is pretty decent, amounts available for conspicuous consumption is quickly rising above the threshold of what you consider responsible consumption, and things are starting to settle. You are now in the process of planning for retirement, that weird word which you should not expect to experience before you are 70 (at least).

This leads me to my last point: How do you invest?

-Never invest in the company you work for (or any company in the same industry). Eggs and baskets.

-Never invest in stocks. You will fail as a stock picker.

-Never try to "time" the market. You will fail as a "timer".

So what to do? You must first consider you investment horizon and divestment window. The narrower these times are, the more you should consider bonds, specifically TIPS. IFF your investment horizon is less than 15 years and your divestment window less than 5 years, then TIPS. If you have an investment horizon of 15-25 years and a divestment horizon of 5-10 years, you should buy an Index Fund. Whatever else your "investment adviser" (sleazy scumbag salesman of finance products) tells you, stay the course. They earn precious little commission on that particular product and will use all types of arguments to sway you. Don't be an idiot; don't sway; Historically and on average, this investment will serve you the best. Don't give a banker his salary for free.


Here's a few DON'Ts:

-DON'T be tempted to take more loans than you strictly need. Sharing an apartment till 35 is a good idea.

-DON'T have more than 80% mortage to assets by 30, 60% by 50,

-DON'T have more than 1 after tax income in credit card debt, or more than 2 credit cards.

-DON'T listen to your cab-driver.

-DON'T bother to reach for a $20 on the street, it's an illusion. There are no "free lunches".

-DON'T invest in anything that sounds too good to be true. There is no such thing.

-DON'T live beyond means. Ever. The consequences are horrendous.

-DON'T be fooled by history or short term thinking. Consider a 30-50 year time horizon for all your choices, NEVER 3-5 years.


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Comment by Doug Reardon on December 29, 2011 at 11:42am

Ah, yes; Capitalism the ONLY viable economic system.


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