When I was in college back in the Stone Age (late 60’s and early 70’s, actually!) there was a very popular poster hanging in many dorm rooms which said, “Today is the first day of the rest of your life.” If you are a young person just starting your career, whether it be after high school, college, or grad school, there should be a number of parameters looked at as you manage your money, build your career, and bring some balance to your life.
Before you sign a new lease
for an apartment, purchase or (heaven forbid) lease a car, or make another large purchase, doing a pro-forma definitionon what your finances will look like after the purchase is always good business. As we have said to our clients over the years, you do not want to have any surprises. You certainly don’t want to be like the three year old child who goes into the ice cream store and orders the large banana split with four scoops of ice cream when a “kiddie” cup will suffice.
The “sleep test”
As consumers, we many times act on impulses. On occasion, is it a bad thing? Nope. However, if acting on impulses is a norm, eventually it’s going to put you in a very bad position. We always talk about having something pass the “sleep test.” Meaning, when you put your head on the pillow at night, is making the purchase or obligation going to allow you a restful or a restless nights rest. If it doesn’t pass the sleep test, then don’t do it. If you are looking at a car, most people today will do their research online and then go to a dealership. Having all of the information in hand makes you a better consumer, will allow you to try and drive a better “deal,” and is less likely to make an impulse buy which will ultimately cost you more money. More notes about cars…some people will tell you that the “best value” in car purchasing today is a CPO (certified pre-owned) model with less than 20,000 miles on it and maybe a year or two old. These cars typically sell for at least 35-40% less than the original sticker, and will allow you to drive something reasonable while paying much less than being romanced into purchasing something, which is brand new. In addition, a thought on leasing…auto companies have learned that the only thing consumers care about is how much their monthly payment might be. Leases have been structured with enticing payment levels that make a car “affordable” to most consumers. First, there is a limit on the number of miles driven each year, and second, why in the world would anyone want to give back say a 3 year old Toyota Camry with 30,000 miles on it? Those cars normally last forever, and maybe you don’t wish to keep it for upwards of ten years, but giving it back after a three year lease makes ZERO financial sense. One possibility is to buy one that’s a year or two old, run it to 100,000 miles and go get another one. You’ve paid less for it, probably cost very little to maintain, and in all likelihood, received a good value in car purchasing. Last time I looked, no car appreciated in value the day it was driven off the lot.
Accumulate a “cushion”
When my children graduated from college, one suggestion I made to them was to live at home for a certain period of time. This way, they could accumulate some money to allow them a bit of a “cushion” before they went out on their own. I understand why neither child took me up on my suggestion, but it was interesting a few years later when my eldest remarked that living at home for awhile would not have been a bad idea at all. One suggestion, if you do live at home don’t think this should give you the unalienable right to be an indiscriminate spender. We have maintained that you should spend no more than 28% of your income on housing (rent/mortgage). (Many Personal Finance experts recommend not spending more than 28% of your gross income on your monthly housing costs). Make sure that you save an amount of money each month, which would be equivalent to a month’s rent, (28% of gross income) and have it automatically deducted out of your checking account and deposited into a savings or money market account. Eventually, you will move out on your own or your parents will strongly advise that you go out on your own. As an aside, we have friends who told each of their kids that they could live at home until age 25…then they were out!! By having practiced saving 28% of your income, the transition of using that amount to pay rent will appear to be a seamless transition. These are two very simple ideas, but ones that will allow you to take greater control of your finances at a much earlier age.