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I have started noticing articles that advise on financial habits to embrace or avoid at various stages of life. For example, here's an article on money milestones for your 30's, things a personal finance writer did in his 20s that made him rich, and money mistakes every generation makes.
I agree that life phases tend to support certain actions or hinder them. For example, when I was a recent graduate, I was more focused on basic budgeting than investing. When I had young children, I was often too overwhelmed to sort through the nuances of various retirement and college-savings plans.
Still, not every piece of age-related money management advice resonates with me. Still, it can be helpful to know the pitfalls and opportunities common to those in my age group and stage of life. So, with my 20s, 30s, and 40s in the rearview mirror, I am ready to share more specifics of my successes and mistakes in hopes of helping others make better decisions. While I know I could have done better, my husband and I have retirement investments that are well above average, along with a fully paid for house.
There's no way I could anticipate the outcome of every decision. But I did make a few moves that benefited me later in life:
- Started investing early
I am a saver by nature and so began investing as soon as I had a bit of extra money, which happened to be in my 20s. In addition to personal investment accounts, my husband and I invested through retirement accounts at our employers.
Sure, it helped that I was a business major in college with a finance concentration. But I wasn't an expert in investing. Instead, I had a basic understanding that buying stock in publicly traded companies could reap rewards in the future.
Getting started early benefited us in the usual way: we were able to multiply our money through the compounding growth of our investments. That is, we began to make money not only on our contributions but also on investment gains.
This process of investing also helped me to expand my knowledge. I learned about ways to buy individual stocks and mutual funds (when I began investing, online discount brokerages didn't exist). Plus, I experienced the tax consequences of investing, noticed that some 401(k) plans have better investment choices than others, and more.
Further, the growth of my investments proved to me that thinking about my future could be helpful and didn't have to wreck my quality of life at the moment.
- Made career moves that benefited family's wealth
Very early in my career I had to make hard decisions when my employer was acquired by a much larger competitor. In fact, one of the first decisions I had to make as a newlywed was whether to commute to a large city where my employer was being relocated or stay in the small town where my husband worked and we lived.
I did the math and realized that my commuting costs (gas and parking fees) would outweigh the benefits associated with my career prospects with this particular company. At the same time, I knew that my husband's position had great promise in terms of career growth and wealth accumulation. Over the long-term, this decision — along with generally prudent spending habits — allowed us to build a strong investment portfolio.My decision shouldn't necessarily be replicated by wives (or husbands) everywhere. But it's useful to weigh the possibilities of career moves with the the potential of building wealth.
- Learned to cook in order to save money and eat healthy
Very quickly after I graduated from college, I realized that the only way to control my budget was to control my dining-out habit. Cooking was then and still is a challenge. In fact, planning meals, buying ingredients, stocking staples, cleaning dishes, etc. is a lot of trouble.
Sometimes, it doesn't seem worth the effort. Often, I wonder if a carefully planned and regimented schedule of eating in certain low-cost restaurants might be better (and less expensive) than cooking and eating in. After all, we can eat a meal of meat, vegetables, and rice from the local Chinese restaurant for about $5 per person; and, when the kids were younger (and I had less time to cook), the nearby Chinese restaurant seemed to anticipate our calls and deliver in 10 minutes or less.
Still, over time, cooking can save a tremendous amount of money. Even if a meal costs $5 per person to prepare (and it usually doesn't), this expense is much less than a typical $10-20 per person restaurant charge that doesn't include tax, tip, or a possible alcoholic beverage.Further, and maybe just as significantly, cooking and eating at home is generally healthier than dining out — particularly if I avoid processed food. I can control the calories, salt, fat, sugar, etc. and make just what I want and need.
- Bought an inexpensive house and paid off our mortgage early
Oddly, even as a young adult, I equated buying a large house with a waste of resources. It didn't make sense to be trapped with a huge mortgage and not have money left over for essentials like groceries and nice-to-haves such as vacations.
However, I won't lie and say there weren't times when I wished we had spent more money to buy a nicer, larger home in a more popular neighborhood with more kids around.
But now that my children are in college, I can say that we have plenty of room and I am happy with the size of my house. And to be honest, it's not small, just less big than many of those in my area.
The other thing about the size of the house is that it was not super expensive. So, we were able to pay off the mortgage earlier than the usual 30 years. Again, I won't say that everyone should rush the pay off their mortgage. In fact, it may be wise to pay for the mortgage over a relatively long period of time, particularly with a low interest rate of say 4% or less (we didn't though, even after refinancing from a 30-year to 15-year loan).
What I will affirm, though, is that being a mortgage-free homeowner delivers freedom and reinforces the idea that financial discipline pays off.
- Got basic insurance
Scrutinizing insurance policies and buying insurance are not exciting things to do. But they are a part of grown-up life that it's best to embrace.
In an effort to make sure my family and I have been adequately covered but not insurance poor, I have evaluated insurance policies and made difficult decisions about what we truly needed and what was likely a money drain. I've researched health insurance, life insurance, car insurance, homeowner's insurance, disability insurance, pet insurance, dental insurance, long term care insurance, and probably a few more types of insurance.
I've considered worst-case scenarios and the cost effectiveness of insurance (that is, would it make sense to buy a policy or set aside money to draw upon if a certain, potentially insurable bad thing happened). Then I bought the insurance needed and let go of what was unnecessary.
- Distrusted untrustworthy financial advisors
One of the most difficult parts of making progress financially has been dealing with financial advisors. Sifting through sound counsel and dangerous advice has not been easy.
On the dark side, I have learned that many advisors, credentialed and otherwise, have a limited capacity to understand novel personal finance scenarios, a surprising inability to offer creative but perfectly legal solutions to dilemmas, and a zeal for positioning services that benefit their wallet and not their clients.
From a more positive and proactive perspective, I have discovered that financial professionals can be excellent resources — especially if I know the right questions to ask. After I've researched a topic and am ready to discuss, pros can explain nuances, apply a rule to my situation, and guide me in implementing a plan.
Though I am still learning to tap the potential of financial experts, I have avoided disaster by withholding trust from unsavory and unskilled ones in the past.
- Learned to adjust my finances in order to give
I won't say that I am a perfect giver; I'd like to become more generous. But my husband and I give to thousands of dollars each year to our church, and small amounts to other causes.
One of the first things I learned about giving is that we have to live below our means in order to afford to be generous. Our lifestyle must be a notch less than what I could have afforded otherwise given my age and income. A natural consequence is that I begin to care more about being a good steward and less about demonstrating status through my home and car purchases, vacations, fashion clothing, etc.
When I began to be more intentional about spending wisely, I started to see more possibilities for sacrificing immediate wants for long-term needs. That mindset has helped me to control expenses and free money for investments.
There were periods of my life when I didn't pay as much attention to finances as I should have. Here are some of the things that I let slip (but am working to improve):
- Didn't stay on top of college planning and saving
I started setting aside money for my children's college education expenses when they were babies. In the beginning, I saved within UTMA/UGMA accounts (Uniform Transfers to Minors Act / Uniform Gifts to Minors Act), which allowed me set aside money for my children's benefit. Then, I thought it best to move money to Coverdell Education Savings Accounts (aka Coverdell ESA, formerly an Education IRA) so that funds were designated for education.
Next, I got excited about 529 plans, which allowed me to save a certain amount for college (529 Savings Plan) or prepay college tuition (529 Prepaid Plans). Naturally, I was interested in the prepaid version as college tuition kept rising at an astronomical rate.
But a prepaid tuition plan never materialized in my home state of North Carolina. To make matters worse and more confusing, the 529 Plans that were offered by the state seemed to be poorly designed in terms of investment choices and fees. So, I stuck with funding the Coverdell accounts.Meanwhile, I signed up for Upromise in hopes that my grocery store purchases could yield some extra cash for college. But, in over a decade, I never purchased items that would qualify me for awards. (Note that Upromise was later acquired by SallieMae and now offers more ways to earn cash back for college savings plans.)
So, the contribution limits associated with Coverdell accounts (just $2,000 per year), my idleness while waiting for the 529 concept to mature, and my own frustration with savings choices meant that I underfunded my kids' college accounts. We still have money to pay for college but we could have handled this process better.
- Didn't master home or yard upkeep
I'm not great at cleaning or keeping up the yard. Making home repairs is pretty much out of my league. So, I've paid a lot for folks to do minor installations, take down trees, handle renovations that could have possibly been do-it-yourself projects, etc.
I don't fault myself for not being born knowing how to install hardwood floors or make plumbing repairs. And I probably shouldn't beat myself up for growing frustrated at my unsuccessful attempts to nurture plant life.But I could have saved money and built a stronger foundation of personal knowledge had I taken classes and done more research to learn the basics of home maintenance and yard maintenance.
- Stopped improving my financial knowledge
I have an excellent foundational knowledge of finance. I totally get the crucial concept relating to the time value of money, which drives all aspects of finance and financial decisions.But for many years, I didn't focus on becoming more knowledgeable. Getting better at personal finance wasn't a priority as there were many worthy things demanding my attention. Mastering certain topics seemed overwhelming if not impossible; for example, tax laws constantly changed and service offerings like mobile banking kept evolving.
What I finally discovered is that continuing to build on knowledge is essential, not simply for making good decisions but being confident that I've taken the right steps for my circumstances. And though there will always be something new to learn, it has become easier and easier to keep up as my knowledge has expanded. For example, after researching how robo-advisory firms like Betterment work, it was much easier to understand how WealthFront and FutureAdvisor operate.
- Acted miserly too often
If you don't know me well, you may not realize that I am often reluctant to make expensive purchases.You may have read about my hike through the European Alps this summer and figured I spend freely without fear or regret. The trip was a 30th anniversary celebration for my husband and me, and happened to include our youngest son. We worked with a low-cost, no-frills outfitter to make our travel in the realm of affordable. For example, one of the most picturesque scenes from our trip was taken from a private room in a hotel where I shared a shower or rather shower facilities with about 30 other people. The trip was extravagantly fun, but not necessarily a luxurious one.
Still, it was costly. Not cringing at certain expenses (like the cost of bottled water when we meant to order tap water in French restaurants) took resolve on my part. But spending in this way was a breakthrough for me. Being able to enjoy myself, have a grand adventure, and develop deeper bonds with my husband and son was well worth the money.
Now that's not to say that my frugal efforts have not been useful to our family's net worth. But I can say that I often suffered angst over spending when I should have been more relaxed.
- Diversified at a slow rate
For the past several years, I have been working to diversify a concentrated holding. But, for various reasons, it's been slow going.
Right now, I am more excited about diversification and my progress has accelerated. One reason is that my husband's 401(k) plan now has a Roth option. So we are able to divert investments to low-cost mutual funds within the 401(k) account and position ourselves to pay fewer income taxes in retirement through the Roth designation.Looking back, though, I can see now that I should have developed a plan and followed that plan more consistently. I've learned that an okay plan, if executed well, is much better than a great plan, executed poorly (or not at all).
- Taught my kids money lessons sporadically
I won't say that I didn't try to teach financial literacy to my kids when they were young. But I can say that I could have made more concerted efforts over longer periods of time to provide financial training.
To a certain extent, my kids — like most people — have tendencies that are hard to change from the outside. One of my children is a natural saver like me. He aggressively pursues opportunities to save money and has already begun to invest. He often calls me to get my take on an investing concept or the latest in the stock market.
On the other hand, my spender has shown me that it's okay to, uh, buy warm clothes for the winter and dress fashionably. He has taught me that certain indulgences can bring joy. Still, with the extra expenses associated with his out-of-state college tuition, he is learning to stay on top of his financial situation.
Fortunately, as they reach financial milestones, they seem to be asking the right questions and gaining the knowledge they need to navigate college life and beyond. Still, I could have pushed them to learn more about banking, credit, and investing at earlier ages.
- Didn't keep a large cash reserve
When my husband and I had amassed a decent-sized investment portfolio, I began to think that we really didn't need much of a cash reserve or emergency fund. Our fixed expenses were relatively low. And we could easily cash out of investments if needed.Then the recession of 2008 happened and I began to have a better understanding of the value of cash. Sure, cash doesn't (or hasn't recently) made much money in terms of interest rates in a savings account. But having a ready stash is handy if you want to avoid selling stocks in a market downturn or putting emergency expenses on your credit card. Plus, having cash can allow you to buy favorite stocks at bargain prices during periods of market volatility.
I've begun to stay more on top of cash needs and added a cash cushion. But I should have been more aware of this need earlier.
Now that I have greater perspective of the past, I can see that the smart things I've done have outweighed the not-so-smart ones. Investing early and managing large lifestyle expenses seem to be the big things that I've done right. I was able to use leverage my natural inclinations to make good decisions. Now, I am working on expanding my capabilities to become a better steward of my time and resources.
What about you? What smart moves have paid off for you more than you anticipated? What not-so-smart actions have you corrected?