Young Couple

What Everyone Needs to Know About Money – Before Age 40

By: Karen Schaeffer, CFP®

Published: July 2020

After 40 years of teaching people how to make smart money decisions, one of the most common reactions from students is: I wish I learned this when I was younger. Of course, it’s never too late to learn, but what if we really could roll back time and reach everyone before the big 4-0 milestone? In a perfect world, these are the money tips that every young person knows and uses:

  1. Consumer debt is a thing of the past. If you use a credit card, pay it in full. Single. Time. If you have outstanding balances, do whatever it takes to pay them off ASAP. Overwhelmed? Get help from a nonprofit like Consumer Credit Counseling Services.
  2. Avoid lifestyle inflation. As you make more money it’s ok to spend more money, but big isn’t always better and more can be too much. Have an extra dollar? Putting half toward spending and half toward investing is a winning strategy.
  3. Boost retirement contribution. Until you hit the IRS contribution limit ($19,500 for 2020), there is no better way to build wealth than in a retirement plan. Even if you need to reduce contributions in the future when life hits an expensive speed bump, the money already invested keeps working for you.
  4. Measure your progress against yourself. It’s impossible to know who among your friends and colleagues is really good with money and who is living on the edge of debt. Focus on how you’re doing compared to how you want to be doing. Did you reduce some debt in the last year? Add more to your TSP? Save enough money for a real vacation when travel is a thing again? Yea you!
  5. Overthinking investment decisions is pointless. Keep the money you need to spend in the next few years in cash (checking, savings, money market fund). Get the rest of your money invested in the market (stocks, bonds, real estate) – everything else is fine-tuning. And remember, thou shalt not panic sell. Market values go up and down and when they drop you get to join successful investors who continue to add to their market investments when prices are low.
  6. Understand homeownership. It’s great to build wealth by owning rather than renting, but only buy when you are unlikely to move for several years. The cost of buying and selling can be prohibitively expensive. Just because you get approved for a mortgage doesn’t mean you can afford the payment and keep your current lifestyle. And let’s not forget the cost of home maintenance – it never ends.
  7. Life insurance is not an investment. If you need life insurance, stick with term life insurance. Other policy types, like whole and universal life, are significantly more expensive and offer features you don’t need.
  8. Estate planning documents are required. What do you need? A will, power of attorney, and health care documents. What might you need? A trust. Call a lawyer, schedule an appointment, and get this off the to-do list. And, yes, you do need a lawyer – online services, no matter how well advertised, are just not good enough.
  9. Double-check your beneficiary designations. Regardless of what your estate documents say, the beneficiary named on your form is the owner when you die, no discussion. 
  10. Be generous. Money doesn’t buy happiness, but sharing money does. The sooner you learn to be generous with your time, your talent, and your treasure, the happier you become. Oh, and the world becomes a better place. Win-Win!

Karen Schaeffer, CFP® is the Managing Member and Co-founder of Schaeffer Financial LLC, a financial consulting firm in suburban Washington, D.C. She has been advising clients for over thirty-five years and has developed a diverse client base including professional women, Foreign Service Officers, foreign nationals, and Federal government employees. She has been presenting seminars for NITP for over 25 years.