So, You Wanna Be Me: My Advice to Millennials

Over my short time as a blogger and longer time as a dividend growth investor, I’ve already gotten some questions and comments regarding my financial success. Heck, this article is written in response to a request from one such reader. As a younger Millennial (early-20s), people in my age group tend to be kind of surprised that I have enough money for savings. “Wow, man, how did you do it? I can’t imagine being where you are, what with all the _______ I have to deal with.” And only God knows what will happen if I tell them I’m worth six figures and am debt-free. Apparently, “Because I’m God’s gift to mankind” doesn’t really cut it as an explanation of my success, so I’m going to break it down for you, right here, right now.

I know it seems kind of bogue to someone possibly younger than you to try to give you advice, but hey. And of course, there are many, many people who’ve done this before, many of whom are much more experienced than I am in finances and in life. If you don’t want to deal with me, ask them for advice! God knows people love giving advice to others. If you don’t have anyone in your personal life to talk to, check out my blogroll for other peoples’ thoughts and blogs. Most of us are really friendly and love talking about this stuff.

Sparknotes Summary

Net worth = Assets – Liabilities. Assets are things that appreciate in value. Stocks, bonds, precious artwork, cash in bank accounts. Liabilities are things that cost you money. Debt, loans, cars, clothes. Anything that doesn’t actively generate more money for you is a liability, generally speaking. In order to get the highest net worth possible, you buy assets and get rid of liabilities. It’s that easy.

Step 1: Get the fuck out of debt

Simple, yeah? Not so much. Many of you have multiple kinds of debt. Student loans, credit cards, maybe a car payment. Looks nasty, doesn’t it? Guess what, it is. Here’s a life pro tip for you: debt is bad. Not all the time, true, but at this point in our lives, we probably don’t have the knowledge or mental strength to handle it responsibly. I don’t think I do. Not sure I can handle a six-figure mortgage or something. You should be running around like your head is on fire, trying to pay off your debts as soon as possible.

But how do I do that, you ask? Basically you have to prioritize your debts by interest rates. The ones with the highest interest rates need to go first. I know others like to do things differently. Some like to throw all their money at the biggest dollar amount debt; others try to pay off the smallest dollar amount debt possible. But why do I say to look at the interest rates first?

Let’s look at an example: assume you have 3 debts, $10,000 each. For the sake of convenience, let’s say that no payments need to be until 5 years have gone by.

Debt 1: A student loan, interest rate 4.6% (the average for student loans in the 2014-2015 academic year), that compounds quarterly. After 5 years, this debt is $12,569.49.

Debt 2: A 60-month car loan, interest rate 4.38% (the average again), compounding quarterly. After 5 years, this debt is $12,433.50.

Debt 3: A credit card debt, interest rate 15.85% (yet another average), compounding quarterly. After 5 years, this debt is $21,753.76.

Wow. See how much Debt #3 turns into after 5 years? That number scares the shit out of me, and I want to get rid of it before it gets that big, or worse.

Okay, so now you have a list of all your debts, the exact amount – to the penny – you owe, and the interest rates. Now what? Pay them off! If you have one loan, throw all the money you don’t absolutely need for survival at it. If you have multiple debts, pay the minimum balances on all except the one with the highest interest rates – you pay that sucker off ASAP. Then move on to the next highest one and pay that off, and so on and so forth.

This, of course, assumes you make enough money to live and make all minimum payments, and still have some left to make extra payments. If you don’t, well, I got some bad news for you: you need to make more money. How you do it is up to you. Sell extra stuff on eBay, get another part-time job, do something to get ahead in life. You need to jump into the front seat of the Hustle Bus and ride that fucker into the sunset.

Story time: I was fortunate enough to have parents who paid for my undergrad education in full. However, I still had a credit card I wanted to pay off every month, because hey, there were things I wanted to buy. And as a gamer, those things tended to get expensive. So while focusing on completing a computer science major and math minor, I had a job with my school’s IT department. For the longest time, I had a shift from 6:00 PM to midnight every Friday, watching one of our computer labs. Of course that’s frustrating because I had to fix PC LOAD LETTER error #473 instead of hanging out with friends or whatever, but it gave me an overtime bonus of a couple of bucks an hour. Doing that for a couple of years allowed me to graduate completely debt-free. No credit card debt, no pay-in-installments BS, nothing. I did the same thing in grad school in a slightly different job, but even better, I actually had access to a 401(k) to contribute to.

That actually brings me to my next point: Always contribute something to a 401(k), if the option’s available to you. My recommendation is to contribute up to the level your employer matches. For example, some employers will match up to 50% of your salary, up to 6%. This means that if you contribute 6% of your salary, they’ll give 3%. That’s basically a 50% free return on your money! Why would you turn that down? Of course, you get a pass if you need to pay off a lot of debt. But do what you can. In grad school, my salary was never high enough to get employer matching, but I still gave 5% or so. Gave me a grand total of like $500 when I graduated, but hey, $500 is $500 that I won’t have to work for in retirement.

Step 2: Accumulate assets

So now you’re debt-free and want to start making money, huh? Good job. Crack open a beer or a Perrier, you’ve earned it.

Now’s the fun part. Remember how I said assets are things that appreciate in value and make you money? Now’s the time to get them. The statistics say you should be saving 15% of your income to have a financially secure retirement, so make sure you start putting that away somehow. If you can’t do it all at once, try ramping up slowly. Just pay yourself before all else; don’t get all spendy-like with massive bar tabs and trips to Europe and shit without investing first.

First things first, max out your 401(k) – the current limit is $18,000 a year. This money is put in there, pre-tax. It has the side effect of lowering your take-home pay. And you will have to pay taxes on that money eventually. But by the time you need to access that money, you should be in a lower tax bracket and pay less taxes on it. But that’s neither here nor there.

Okay, let’s say you’re doing that, but you want to do more. Awesome! Now open up a brokerage account and invest there.

There are two ways to do this:

Buy Index Funds

A lot of the early retirement guys, such as Mr. Money Mustache, love doing this. You basically buy a mutual fund (a collection of stocks) that tracks a given index. Popular ones track the S&P 500 or the Russell 1000. Common allocations are like 60% VTSMX, 30% VGTSX, and 10% VBMFX. This allows you to get exposure to all of the US stock market (VTSMX), all of the rest of the world’s stock markets (VGTSX), and US bonds (VBMFX). That’s it. Every time you put money into your account, add it to those three, and you’re golden. Very easy, and ideal for those who don’t want to think about investing all that often (let’s be real, that’s most of us).

Dividend Growth Stocks

This is the path I favor more, which you know if you’ve read my blog before. I’m a dividend growth investor (DGI), which means I buy individual stocks that (a) pay a dividend, (b) grow that dividend over time, and (c) meet criteria that help to lower the risk of me losing money or income. The idea behind dividend growth investing is that although we may miss certain high-flying stocks like Tesla (TSLA) or Google (GOOGL), we ensure that we get paid dividends that increase over the rate of inflation, basically meaning we never lose purchasing power and can always pay our bills. Certain companies, like Pepsi (PEP), Johnson & Johnson (JNJ), and Sherwin-Williams (SHW) are household names and have been paying increasing dividends for literally decades. We do sacrifice some total return compared to indexers (sometimes), but we never need to sell stock and get paid a lot more for doing nothing. The particulars aren’t important, and several bloggers on my blogroll have spent a long time making the case for DGI, so I’ll defer to them for the detailed reasons why DGI rocks.

It really doesn’t matter which style you choose, as long as you’re putting money away and not spending it. The only reason I mentioned these two is because these two are very popular and commonly followed among personal finance blogs. There are actually many more ways to invest – value, growth-at-reasonable-price, strict-income. Once you get experience in investing, you can try something else if it suits you. But doing one of these two to start with should ensure that, if you stick with it, you won’t be eating dollar-store cat food in retirement.

Resources

Paying Down Debt

• Mint or You Need A Budget are good for setting up budgets. I’ve used Mint before, wasn’t really my thing. I’ve never used YNAB, but I’ve heard it’s effective too.

Indexing

• Mr Money Mustache is the best proponent of indexing I know, so check him out. He’s a very talented writer, even if his math is seriously sketchy at times. Don’t tell anyone I said that.

Dividend Growth Investing

• SeekingAlpha – a good site for basically all things financial.
• My blogroll – The blogs on that list are run by people just like me. Lots of good content out there, find a few you like and follow their progress.
• Me! – I’m awesome. If you like what you see on my blog, stay in touch.

Net Worth Tracking

• Personal Capital – I’ve never used them before, but I’ve heard good things.
• Excel works too!

Conclusion

Yes, when you really dig down into it, it’s really just a two-step process. Building a high net worth is simple in theory, a bit more difficult in practice. Just take it one step at a time. Making progress is all that matters.

Send me an email if you want some help or guidance; I’m happy to help out.

And always remember these easy steps:

1. Contribute to your 401(k) just enough to get an employer contribution
2. Become debt-free
3. Accumulate assets
4. #profit

Good luck!

Disclosure: Long JNJ, PEP, SHW. Image source is available here.

Tags: advice, investment-philosophy, investor, millennial, personal, you-wanna-be-me