Today our son turns 18 years old. Usually, we’d go out to eat, get together with family, and watch him make a wish and blow out the candles on his cake. But this year is different. Today, he is 700 miles away and already earning a full-time paycheck.
J literally went from no job, hanging out with high school friends, with relatively few cares in the world to sudden, full-time, real-life adulting in just a few weeks. He joined the Air Force and shipped out 10 weeks ago. (Let me tell you, friends, as his parent, it’s been an amazing thing to watch. Not always easy, mind you, but incredible nonetheless.)
Anyway, he now makes more money then he ever has. But he also has to buy his own things and pay his own bills (though he has relatively few expenses right now).
I really want to give him all the financial advice and discuss his options with him. But, though he will talk about it in small doses, too much at once and his eyes glaze over. So I wanted to lay it all out there, you know, so he has it when he wants it. 😉
Money advice for our 18-year-old son with a full time income
You have the opportunity to set yourself up for financial freedom right now.
At just 18 years old, even the small things you do (or don’t do) with your money can and will have a significant impact on your future.
“Retirement”, especially in the traditional sense, might not sound like something you’ll ever be interested in. Plus, it’s soooo far away, it doesn’t make any sense to think about it right now. But, “retirement” is the wrong word here because who wants to “retire”, in the traditional sense, anyway?
“Freedom” is the better word to use here.
Building wealth now will give you the freedom to choose what to do with your life (and your work) long before traditional “retirement” age.
Just $50 a paycheck, or $100 a month, compounded (at 8%), would be $173,940 when you’re 50 years old. That’s equivalent to the cost of a video game or two each month.
What if you saved even more than that? More savings equals waaaay more wealth down the road. Those small amounts you save now grow larger and larger with time. (Check out this calculator!)
You are young and time is on your side. You have a life-changing opportunity right now. It won’t take large amounts of money or a significant change to the way you live to create a great financial future for yourself. The sooner you start, the sooner you’ll have more choices in life.
Don’t take on debt
This was one of the biggest financial mistakes we made early in our adult lives. Not only did we have a ton of student loan debt, but we piled on car loans and mortgages right away. If we hadn’t, we would be financially independent today.
Now, I’m not saying all debt is horrible all the time. Individual circumstances vary and I cannot say that it’s never smart to have debt (we still have a mortgage). But, you’re in a sweet position where there’s no need for you to have debt.
Credit Cards – If you sign up for a credit card and choose to use it, pay it off each and every month. Remember that compound interest I mentioned earlier? When you have a credit card balance, it works against you. If you carry a credit card balance from month to month, the high-interest rate will add up quickly with time. This is where many people get into trouble with debt.
Make a rule that you will never carry a balance on your credit card, not for even one month. Keep enough cushion in savings to cover any emergencies and don’t rely on a credit card to spend money you don’t have.
Student loans -. If you weren’t getting your education paid for, I might recommend starting at a community college or technical school to keep costs down for those first years. I would also suggest working and getting some real-life experience in the areas you’re interested in.
Car loans – don’t do it. You have a steady paycheck with relatively low expenses. And you have a working car (at least for a while :)). Save your money and you’ll have the option to pay cash for a decent, reasonably priced car later.
Mortgage – don’t do it. You’ll be moving around for a few years. Unless you plan to have investment properties, it’s better to wait until you’re settled down in one spot (don’t jump into real estate without doing your homework and talking to your parents ;)).
Put short-term savings in a high-interest savings account
Any money you want to save for the next year or two should be kept in a high-interest savings account. That way, it’s accessible (but not too accessible) and it’s still earning interest. If you leave it in your checking account, you’ll miss out on the interest you could make with a savings account. Plus, out of sight, out of mind. When it’s in the savings account, it’s harder to spend it. (We use Ally and Capital One 360.)
Savings first
The best way to save more money is to save on the day you get your paycheck. Figure out how much you need for your bills and expenses each month. Then set up automatic transfers to have the extra money deposited into savings on each payday.
Once again, if you do this each time you get paid, you’re less likely to spend it. Whatever’s left in the checking account is what’s available to spend and pay bills. You’d be amazed at how well this works.
Don’t be afraid to invest
Many people don’t invest because they’re scared to make a mistake. But, unless you invest your money, the compound interest I mentioned earlier won’t happen. The important thing about investing is to just start! Don’t worry too much about choosing the wrong fund or losing money. Just starting – even if you don’t pick the best funds – is always better than doing nothing at all.
Use your employer’s retirement plan to get free money. Did you catch that? FREE money! Yes, free. All you have to do is sign up to have a percentage of your paycheck invested in your employer’s retirement plan.
Many employers (including yours) will match up to a certain percentage of the money you invest in the retirement programs they offer. But you don’t get the money unless you contribute to the retirement plan. Once you get it set up, you won’t have to think about it. Investments will be automatically withdrawn from each paycheck.
Choose index funds. You know Warren Buffet? That hugely successful billionaire investor from Omaha? Yeah, he recommends most people invest in low-cost stock market index funds. He’s a smart man and has done well for himself, so I’ve taken his advice and I’d recommend it to you as well.
Index funds are types of mutual funds that basically track a stock market index, like the S&P 500. When you’re invested in an index fund, you invest in a portion of all of the companies in that index. This way, you’re investments are spread out among the companies selected to be a part of that index. Fees for these funds are low because they simply track the index and aren’t actively managed.
Don’t watch your balance. Let time be on your side. If you invest in stock market index funds, your balance will go up and down as the market goes up and down. But, if you look at the history of the stock market, it trends up over time. Sure, there are some pretty significant dips, but if you take your money out then, you won’t benefit from the recovery and nothing will be gained. As long as you don’t sell your funds when the market is down, you can wait out the downturns and you will recover (and then some). Set it and forget it until later.
If this concerns you, balance things out with a small percentage of bond index funds. As you get older, consider adding a larger percentage of the bond index funds to hedge against the volatility of the stock market.
Automate everything
Automate your savings and your bills. That way, you save money each month and your bills are paid without you having to make the decision to do it (or not). Though you still need to set this up and track it, it’s the best way to ensure you save consistently and get the bills paid on time.
Keep the Big 3 in check
Three big expenses have the most significant impact on your overall financial situation. If you can keep the big three in check, you’ll always be a step ahead with your money. The big three include housing, transportation, and food (with insurance and taxes up there too).
Since these are the expenses that make the biggest impact, if you focus on keeping these low and well within your means, you’ll be able to save more and keep debt in check and, ultimately, set you up for future financial success.
The small purchases add up
The little purchases, you know, the ones that are just a couple bucks – they don’t seem to be a big deal. Until you make them every day, multiple times a day. Then they can add up to hundreds each month or thousands each year. ‘Nuff said.
Focus on experiences, not things
Too much stuff will drag you down, financially and otherwise. When you focus on living your life, according to your values and your priorities, and when you don’t compare and judge your life (and stuff) with other people’s – you’ll be much happier.
When you buy new (shiny) things, you’re happy for a short time. You anticipate and enjoy the new thing for a few days, maybe even a couple weeks. Then you get used to that new thing. It’s not so exciting anymore and it doesn’t give you nearly the level of “happy” you had when you first bought it. This is what’s called hedonic adaptation. And it happens with nearly everything you buy. It’s guaranteed to get us all from time to time, but just realizing it’s a “thing” and knowing this will happen helps you guard against it.
Even research has shown that people value experiences over things. Experiences are different than things. They become a part of the story of our lives. They help us grow, learn, and build our relationships.
And with that, I’ll leave you with the wise words of The Minimalists, “Love people and use things because the opposite never works.”
J, if you really read this – thank you for your patience and for humoring me! 🙂
Friends, what money (and life) advice would you give to an 18-year-old with a full-time paycheck?
Brian says
You’ve laid out some solid advice for your son, Amanda. I believe it’s important to ask your child what their dreams are for their future and money. Yes, at 18 they might not have a clear picture, but whatever and wherever they are currently at it might help us parents guide them in a better direction. Giving them some general guidelines like avoiding debt, spending less then you make, etc are keys when just figuring think out. Happy Birthday to J, and best of luck to him!
Amanda says
Thanks, Brian! That’s excellent advice – to ask about their dreams for their future and money. J’s the go-with-the-flow type, but I have noticed he’s been talking more and more about possible future plans in recent weeks. I think the fact that he’s now on his own has spurred a lot of future thinking. Thanks for stopping by and for the great comment, Brian! 🙂