If you’re a young professional, the lifestyle of your 40s will be dictated by your choices in the coming years, and even in the coming months. They say 40 is the new 30, but for that to happen, you need to plan financially first.
Whether you want to build up passive income, get your dream job, or become immortal, you can’t miss the money hacks below.
1. Consider Moving While You’re Young
When you’re young, moving is much easier than once you’re older and have a family or elderly parents to take care of. If you limit yourself to jobs nearby, even if you’re in a big city, you’ll likely be missing out on your best career opportunities. Your first few jobs lay the groundwork for your long-term earning potential. When you are single, always remember that you have the power of flexibility. If you try out a high-paying job elsewhere, you can always move back if you can’t stand it.
2. If You Buy Stocks, Then Buy Ones That Pay A Dividend
According to The Motley Fool, stocks that pay dividends have historically outperformed other similar investments, with less instability. In addition, they pay out real cash. This makes them easier to keep during rough economic times. In addition, the dividend payouts of a good stock can increase as years go by.
If you put $3,000 into a stock with a 4% dividend yield, you’ll get $10 every month, in cash. That’s a free meal every month, by doing absolutely nothing! To encourage saving, try to go from earning 1 free meal a month to 2 meals per month, and keep going from there.
You can also look into preferred stock, which is more complex but can pay out much higher returns relatively safely.
Quick tips in regards to dividend paying stocks:
- Dividend payments can be cut, so look for big-name stocks that have a history of reliable dividend payments, and of increasing those payments as years go by. Ensure that they were paying dividends during the 2008 Financial Crisis.
- Do not look for high yields as a beginner. Between 2-4.5% is typical for major stocks. Because dividends pay “X cents per share,” if a company was mismanaged and it’s share price has dropped, the dividend “yield” or % return will look high. Avoid this rookie mistake.
- If love tech stocks, then 2 examples of companies that pay dividends include Intel (INTC) and Microsoft (MSFT). However, in my experience, investing in tech stocks is pretty risky.
- This recent article in MarketWatch showcases some interesting dividend stock ideas.
- Remember, I’m not a professional financial advisor. So, always do your research before you invest, and talk to a financial adviser first.
3. Wait For A Financial Downturn, Then Buy Stocks
We all know the mantra: “Buy low, sell high.” When Wall Street falls, it’s the perfect time to consider buying stocks. So, keep some cash ready for the next downturn. You can keep it in flexible investments like GICs, that can be taken out at any time.
4. Do Not Rely On Stocks To Save For Emergencies
The most likely time for you to get laid off is when the economy is down. This will also be when your stocks are worth the least.
When the economy is down, family and friends may be in need. You may need extra cash, but there will be few side jobs available. Banks will be hesitant to loan people money. On top of this, your stocks will be worth much, much less at this time. If your emergency savings are in stocks, you will be forced to sell them at this low point.
In my opinion, this is one reason why the average person tends to make less money in the stock market than we are led to believe: they buy when they have savings and stocks are high. When the economy falls, they are forced to sell at a low point.
5. Buy The Place You Live In
Real estate is usually the best investment you can make. In my opinion, it’s a much better option than buying stock. While purchasing real estate for investment purposes is hard, buying your own home or condo is much safer, and often has tax advantages.
When paying off a mortgage, a significant amount of the monthly payment goes toward paying down your own loan each month (the “principle”). This increases your net worth by hundreds of dollars every month. (Rather than burning your money by paying rent.)
Keep this in mind: While there are fluctuations in the real estate market, the cost of rent goes up steadily.
When you buy a place for yourself, typically it will be a bit more expensive than renting, at first. However, over the next 3-15 years, the rent will go up, and if you don’t own a property, you’ll be finding it harder to make your rent payment. This is especially true in a big city like Toronto.
Home ownership has other benefits as well. For example, you can get a line of credit backed by the equity in your house, which has a very low rate. Be extremely careful with these since major banks love to offer new homeowners low-interest lines of credit in hopes that they accumulate debt that’s easy to collect because you have a hard asset. With such a low interest rate, it’s better to keep your line of credit as small as possible, since it’s tempting to dip in.
Still have doubts about buying real estate versus stocks? A retired saleperson once told me, “All of my friends who invested in the stock market instead of buying real estate are in serious trouble.” I think that sums it up.
6. Stay In School Longer
After every graduation, there’s a temptation to finally enter the workforce. However, those who stay in school longer by taking a practical post-graduate degree end up with higher starting salaries. They are also more likely to be chosen for promotions in the long run. While they may be racking up student loans for a few more years, the long-term cumulative effect puts them ahead.
If you’ve dreamed of a career that requires a graduate degree and you’ve tried all other options for low-cost loans and tuition subsidies, find a bank that will lend you a student loan. Also, make sure the college program offers a co-op or internship. Graduating with lots of debt and no industry experience is a recipe for disaster.
Loans are awful, but leading a life in a career that you don’t want is even worse.
7. Negotiate Your Initial Salary
Most young professionals who get an initial offer don’t negotiate because they are excited or scared. It’s important to do your research by checking with friends, recruiters, and PayScale.com to see what you should realistically get as a starting salary.
Here’s a more detailed guide from The Muse which has some good tips. In my experience, the best bet is to find the salary that you think is reasonable and stick to your guns. If you get a much lower offer, I’d recommend using a printout of PayScale.com to demonstrate the expected market rate. However, be prepared for the possibility that they may reject you.
If you get an acceptable offer, typically there’s still room to negotiate. Asking for a huge increase for your first job may be unwise, but asking for an additional $1,000-$3,000 is pretty reasonable. The accumulating effects of that small increase over 20 years adds up a lot. It could be a big part of your down payment on a family home.
More importantly, future raises, pension benefits, and bonuses are often based on a percentage of your current pay. Even a small difference at the start of your career can snowball over time into a big change in lifestyle.
8. Get Insurance
Insurance is extremely cheap when you’re young, but extremely expensive once you get older. Young people feel invincible. However, the instant they get a bad diagnosis it becomes too late to lock in a good price for things like life insurance and health insurance. Life insurance for a young and healthy person is extremely cheap.
Want immortality? You can even use life insurance to cryogenically “freeze” yourself until they find a cure for your disease (and freezing).
9. Eliminate Or Reduce Expensive Habits
Your daily cup of java or a smoking habit can have a huge consequence on your long-term finances, as well as your health. Make a list of all the expensive habits you have and try to eliminate those that are unnecessary, one at time.
Think of the free money you’d get by putting it into a stock with a monthly dividend instead.
10. Be Careful With How Much You Spend On A Car
60 seconds after you buy a new car, it loses 9% of it’s value, according to Edmunds.com. After just one year, it loses 19% of it’s value. However, the value drops only 12% by the next year. Furthermore, the drop is 9% between years 4 and 5. In other words, used cars maintain their market value better.
Dealers try to tempt buyers with low monthly lease rates on new vehicles. Avoid this at all costs. Even after years of payments, you’ll need to return the leased car unless you pay the remaining balance, which will seem insane 4 years later. If you do not have the cash, it’s better to get a loan or lease for a lower-cost used car. Aim to pay it off in a year or two. Later in life, you’ll have no monthly payments at all and you can sell that car for a significant portion of its value.
Financial Samurai recommends that the purchase price of your car should be 10% of your salary. That could mean you’re buying a car that will require a lot of maintenance. I personally think that 10%-20% is more realistic. From what I’ve seen, used Toyotas and Hondas can last over ten years with little maintenance.
In terms of buying a luxury vehicle, the costs are often a lot higher than anticipated. Here are some unseen costs of luxury cars:
- The maintenance and repairs costs on a luxury vehicle are much higher.
- They often require premium fuel rather than standard fuel.
- The engines themselves are typically more powerful and may get less mileage.
- Once the car is old and loses it’s appeal, you’ll still be paying these overhead costs.
It could be wiser to use that money for something else, like real estate, which may appreciate in value rather than lose value.
If you hold off from spending $10,000 on your car, and put it into an investment that generates 6% compounded per year, you’ll have $32,071.35 in 20 years, or a $22,071.35 profit. Still worse will be the extra costs for maintenance, gas and repairs, which will average out to hundreds of dollars per month.
11. Maximize “Matching” Programs
Read the details of your employer’s benefits package. Often, there are offers where an employer will match contributions to things such as a pension. Do your best to max these out, since you’re immediately doubling your money.
In many cases, you can get low-interest loans to maximize the contributions. Because you’re doubling your money, this is one case where taking a small loan can be beneficial.
12. Contribute To IRAs And RRSPs
IRAs and RRSPs (the Canadian version) are tax-deductible accounts. Here’s an example of how it works:
- Suppose you make $40,000 per year.
- Suppose taxes are 25%.
- Therefore, your after-tax income would normally be $30,0000.
- However, suppose you contribute $10,000 into your IRA or RRSP.
- That $10,000 contribution is deducted from your taxable salary amount of $40,000.
- Your new “taxable” salary is $30,000. At a 25% tax rate, $30,000 x 25% = $7,500 in taxes.
- So, by contributing to your tax-deductible account, you get back $2,500 in taxes ($10,000-$7,500).
Once money is in that retirement account, there’s no taxes on any investments you make. Any dividends inside that account, or capital gains from stocks going up, are completely tax free for decades, until you retire. Once you retire, you can withdraw the money from the retirement account. You’ll pay income tax on any money you use from those accounts.Because the money isn’t accessible until 65, it’s okay to start small (assuming there’s no employer matching program). Small monthly automated deposits are a great way to save.
However, assuming your employer’s contribution plan allows it, you can withdraw $10,000 of your IRA (or $25,000 of your RRSP) to buy your first home. For this reason, it actually makes a lot of sense to use these accounts to save for your first home. Canadians should also look into opening up a TFSA, which allows significant tax-free savings each year.
Final Thoughts
When you’re young, it’s hard to make decisions that you know will affect your life later on. It;s important to remember that this decision making process is a privilege of the society we live in. There’s no perfect answer or approach. The important thing is that you make a formal plan soon, based on the best facts you’ve got and with a little bit of gut instinct.
Featured photo credit: Frankie Leon via flickr.com
