The journey from your first paycheck to the time you reach thirty, is the most important time of your life for accumulating wealth. Wouldn’t it be great if there were defined financial milestones, to make sure you’re on the right path?
From my experience, there are. I have noticed 20 different milestones those who are on the right track accomplish financially by the time they’re 30, that you can learn from.
# 1 – Finance a dream vacation…in cash
There’s no better feeling of setting a goal, working hard towards that goal, and finally, enjoying that goal to the fullest.
# 2 – Pay off your student loans
After paying for a dream vacation in cash, paying off your student loans might not sound like a sexy milestone, but it’s just as important.
Debt restricts your freedom. The more freedom you have, the better life is.
# 3 – Automate paying your credit card bill in full
This financial milestone takes 2 minutes to accomplish but it’s one of the most important. Not only do you avoid interest and late fees, you hold yourself accountable to spending less than you have.
# 4 – Get rid of all bad debt
I’m a believer that all debt is bad debt. Yet, I realize this is unrealistic for some.
A good way to see what bad debt and good debt is is by asking yourself if the underlying asset appreciates or depreciates in value. If the asset appreciates, like a house, than categorize it as good debt. If the asset depreciates, like a car, etc… then it’s bad debt.
The goal is to have all bad debt paid off by the time you’re 30.
# 5 – Build an adequate emergency fund
An emergency fund works just like a parachute. Nobody looks forward to using it but they are sure glad it’s there.
By the time you’re 30, build an emergency fund that covers a minimum six months of expenses. A time will come when you’re sure glad it’s there.
# 6 – Make your first, and last, investment mistake
Investment mistakes are just like that guy or girl in high school that the entire school dated. You need to do it, just to get it out of your system.
It’s not a bad thing to make those mistakes when you’re young and have little money, than when you’re older have a family to support.
Hopefully, it will take only a few weeks to realize that beating the market year in and year out is impossible. The best strategy for getting rich is increasing your potential to earn more money. Don’t worry so much about beating the market by 1 or 2%.
# 7 – Develop a statement of cash flows
Imagine a business trying to operate without knowing how much money is coming in and out every month. As you know, successful businesses don’t operate this way.
Apply the same concept to your personal finances. Know how much money is coming in and out every month. (Hint: This is a lot easier than you think.)
# 8 & 9 Max out a Roth IRA & Contribute to your 401(k)
Let’s say you start contributing $5,000 combined to your Roth 401(k) and Roth IRA every year from the age of 22 until 30. All in all, you will have invested $40,000 over 8 years. At 60 years old, without any additional contributions and assuming a 10% return, you would have $1,097,505.
Now, say you get a late start and you invest $5,000 into your Roth 401(k) and Roth IRA from the ages of 30 to 60. All in all, you will have invested $150,000 over 30 years. Assuming you earn 10% a year, you would only have $904,717.
Start investing as early as you can!
# 10 – Get a degree or certification that increases your earning power
By going after educational opportunities that enhance you’re earning power at a young age, you give yourself more time to leverage your education. For example, it’s better to get an MBA (only if it actually increases your earning power) in your 20’s then it is your 30’s because it will increase your earning power for a longer period of time.
Plus, you’re not too removed from a school atmosphere in your 20’s. You’re used to sitting in a class room for a few hours, taking notes, dealing with group projects, and taking tests. This is a huge advantage.
# 11 – Take a career risk
Your 20’s is a perfect time to take a career risk. Generally, you’re only supporting yourself. If you had to move, you don’t have lots of stuff. If you don’t take the big risk to join that start up or start your own business now, you never will.
# 12 – Negotiate something
Negotiating is addicting. Once you have done it once, you can’t stop. Plus, you will start to notice opportunities to negotiate that you never thought were possible.
Inside of one week, I remember calling up my cable company and negotiating down my bill. A few days later, I was in Dick’s Sporting Goods store buying a fire pit, when all of a sudden I blurted out, “Will you accept $60 for it.” It worked. In just a few seconds, I saved $20.
Get into the habit of negotiating as many purchases as possible. Once you start, you will be surprised how much money you were throwing away.
# 13 – Earn your first side grand
It took me a lot longer than I thought to earn my first side grand, about 18 months to be exact. However, once I was able to $1,000 on the side, the next $1,000 was easy.
Diversifying your income is a habit you want to start a young age. The more streams of income you have, the less likely you are to lose everything all at once.
# 14 – Start a sub-savings account for an upcoming financial goal
What big expenses do you have coming up? Once you hit 30, do you plan to buy a house, a nice car, or an expensive vacation?
For whatever your goals are, start a sub savings account for that goal. If your bank doesn’t allow you to do this, join one that does, like ING Direct.
# 15 – Set a target retirement date
It’s not as if you need to pick out an exact date. It’s more important to have a general idea of when you want to retire. It’s understandable that this date will change over time, but without a target date, it’s hard to formulate a true investment plan.
For example, someone planning to retire young, at 50, needs a completely different investment plan than someone planning to work until they’re 65.
A good rule of thumb is that someone planning to retire at 65 needs to save 10% of their income. For every year earlier they set their target date, they should save 1% more of their income.
# 16 – Monitor your credit
If you’re waiting until you apply for a mortgage to start managing your credit, you’re costing yourself a lot of money. Take time in your 20’s to get a basic understanding of how credit scoring works. Personally, a good credit score has saved me thousands a year and can do the same for you.
A good start is to download my free eBook, The Gen Y Guide to Managing Your Credit.
# 17 – Say no to a financial salesman
A friend asked if he should get a whole life insurance policy. Someone he met through the local chamber was trying to sell him one.
After a few questions, I found out he had no Roth IRA, barely contributed to his 401(k), and even had some credit card debt. After finding this out, of course my answer to his question was no.
The first time you’re approached by someone trying to sell you something, is a mini financial milestone in itself. Salesmen usually don’t go after prospects with little money. However, the first time you say no, is a breakthrough. You’re saying to yourself that you can take matters into your hands or go through someone you trust, if you do need help.
# 18 – Give just enough to make it hurt
I wish with the first dollar I made, I donated 10% of it. Because now giving up that much of my income is unrealistic.
For now, which I think is a good rule of thumb to follow if you have never donated before, I’m giving just enough to make it hurt. I imagine life after 30 is going to get a lot more expensive. If I don’t get into the habit of giving now, I likely never will.
2 Financial Milestones for the Over Achiever
# 19 – Invest $1 for every $1 you spend
This is a personal goal of mine, but one that many others can benefit from also.
I’m not good at spending money on myself. There is nice stuff that I want, and that I have that money for, but I feel guilty buying it.
While reading financial advice from the legendary Sir John Templeton, I saw his rule was to invest $1 for every $1 he spent. He could buy whatever he wanted, as long as he invested just as much.
Once I started doing this, I felt like a weight was lifted from my shoulders. I no longer felt guilty for shopping at the nice grocery store. I didn’t feel guilty treating my wife to a nice dinner. The catch was, every time I spent, I had to also invest. (My rule is to invest $.50 for every dollar I spend. Eventually getting to a $1 to $1 ratio.)
# 20 – Start a 529 College Savings Plan
One of the most underutilized tax advantaged accounts is the 529 College Savings Plan. If only people knew how flexible they were, a lot more would use them to save.
Did you know that you can use a 529 plan to attend an international school? Or, did you know that you can use a 529 Plan to help save for the cooking or art class you have always wanted to take? Last, did you know that the transfer restrictions are very lenient for 529 Plans? For example, you can start a 529 Plan even before having kids, and then transfer it to your child once they are born, without any tax consequences?
If you get off to a good start and have your retirement savings under control, look into a 529 College Savings Plan for additional tax advantaged investing.
If you thought I missed anything important, please let me know in the comments.
Photo by: R I O M A N S O