The twenties are an amazing time in life. For most of us it is the first time that we are truly on our own and free to choose our own path. It is an age where we essentially get to start with a clean canvas and begin painting the type of life we have dreamed of since childhood. It is an opportune time to try new things, new jobs, develop new habits and enjoy the lifestyle that comes with having little responsibility and endless amounts of energy.

The twenties are also foundational years for us and should not be wasted or lived unintentionally. With the help of some friends and mentors, the following are some of the best things we could think of to do in order to make the most of your twenties:

1. Surround yourself with wise mentors - you don’t know how to get somewhere you’ve never been. that’s why you need mentors– insight and help from people who are where you want to be. None of us know the answer to every curve ball that life throws our way, but with the help of others that have been there, our chances of making the best decision grow exponentially. Choose a diverse group of mentors and utilize their experience.
2. Become a lifelong learner - as mentioned above, the awesome thing about your twenties is that you gain a tremendous amount of freedom to pursue whatever direction in life you choose. With this freedom comes an opportunity to study things for your own enjoyment rather than because you were told to. It’s easy to think that because, “school’s out for summer,” that learning is out as well, but keeping your mind active and continually challenging yourself are key parts of living well and developing these habits in your 20’s will help keep you from becoming dumb and irrelevant.
3. Travel - the practice of leaving home to experience new locations and cultures is fundamental, and one that nearly everyone I posed the idea of this list to told me to include. There is something magnificent about traveling that goes beyond just snapping a few photos or placing thumbtacks on a map. Traveling helps us understand that life is much bigger than ourselves and inevitably leads us to the wonderful question, “why?” as we notice the differences from place to place. It is this lifestyle of “why” that is so valuable as we learn to question the way we all live rather than just taking everything at face value.
4. Learn to listen and handle criticism well - if there’s one deadly mistake I’ve seen made by many of my peers over the past few years it is the inability to receive criticism. Guess what, all of us have things we could do better at, especially in our 20’s. Toughen up a little and have enough maturity to realize that criticism is a healthy part of life and doesn’t require a poor attitude, excuse or rebuttal on your part. Most importantly learn from criticism.
5. Develop an active, healthy lifestyle - by adopting healthy habits such as eating well and exercising regularly in your 20’s you are setting yourself up for a much better quality of life. No great experience or event matters if you are not healthy enough to enjoy it. Learn to cook healthy meals and join a gym…if you’re really adventurous, run a marathon. Developing these habits at age 24 is far easier than age 44.
6. Read a classic - even though we are required to read a few classics here and there throughout school, if you’re like me you have forgotten most of the characters and plot twists by now. Take the time to read something by Dostoevsky, or if length is a big issue for you, try something like “Catcher in the Rye.” The issue isn’t so much the specific book, just developing a habit of reading for personal enjoyment. If you’re not sure where to start, check out this list made by my friend Brett at Art of Manliness.
7. Go on an overseas missions trip - Traveling is wonderful, but it is possible to travel the globe without ever really stepping outside of yourself. Some of the moments that have changed my life the most came serving others in the poorest and most broken places in the world such as helping in the rebuilding effort in Thailand after the devastating tsunami in 2005. It is well-known truth that we often find ourselves the strongest when we spend our lives in the service of others.
8. Create a monthly budget - often the big advice from financial planners for young people comes in a cheeky remark about cutting back on the Starbucks lattes. Well, I love Starbucks and don’t plan on giving up my coffee. Instead I’ve built them into a monthly budget. Building a monthly budget is foundational to a healthy financial life, by starting one and living by it in your 20’s you can ensure a solid financial situation for years to come.
9. Start a Roth IRA - I know of no better retirement vehicle than the Roth IRA. A Roth is unique because your money grows tax-free meaning at retirement age (currently 59 1/2) when you finally decide to pull out the money you have accumulated, you don’t have to pay any taxes on any of it. For a layman’s guide to the Roth IRA including how to start one, read my post on the subject here.
10. Buy a used car - it may be tempting to show how independent you’ve become by pulling up to your friend’s house in a brand new car, but fight the urge. You are losing thousands of dollars the second you roll out of the dealership parking lot. Even buying a year-old car will save you tons of money while still providing you with a relatively new vehicle. I mention this for twenty-somethings because I’ve seen so many of my friends bury themselves in debt over a car, one of the few “investments” in the world almost guaranteed to do nothing, but depreciate during its lifetime.
11. Understand basic investment principles - there is no doubt that financial illiteracy is rampant among young people mainly due to it’s weak to non-existent standing in secondary school curriculum. Most people do not truly begin understanding the basics of investing until they are at an age where it won’t make much of a difference anyway. The three principles I have written about here at Schaefer’s Blog which I think every young person should know include: 1) Time Value of Money 2) Pay Yourself First 3) Dollar-Cost Averaging
12. Go to a concert - Ever noticed that many people’s fondest memories start with, “One time we got tickets to (fill in the blank).” There is something amazing about live music and thousands of screaming fans that turns up the volume of our lives in all the right ways. Whether it’s Coldplay, U2, Celine Dion (my wife drug me to her show in Vegas and….it was actually pretty good) or Willie Nelson (one of the best I’ve seen) pony up and buy some tickets to a good concert.
13. Learn a foreign language - there’s something wonderful about communicating with someone in their native tongue; it breaks down cultural barriers like nothing else. The 20’s are a wonderful time to learn a new language as you travel the world and immerse yourself.
14. Start a blog - the ability to communicate one’s ideas in writing is an incredibly valuable asset. Blogging is similar to journaling, but with the added bonus of exposing your ideas to the scrutiny of millions of eagle-eyed online viewers. It’s amazing how quickly your writing improves when you realize that people will actually be reading your work. For more great reasons why you should start a blog read here.
15. Get your college degree - according to a recent report from the Commerce Department’s Census Bureau a college graduate can expect to earn approximately $900,000 more over their lifetime than those with only a high school diploma. Whether you like it or not, a college degree is one of those things that society considers an entry ticket for most well-paying jobs. Instead of lecturing everyone on why a college degree is overrated, just take the time to get one and save your lectures for the classroom.
    
16. Pay off credit cards - We’ve all heard the alarming stats yet few seem to be changing their behavior. The average college graduate it now entering the workforce with approximately $3,200 in credit card debt. Add to this student loans and it is easy to see why most in their 20’s take the attitude of, “I’ll deal with it later when I’m making more.” The problem is credit card debt can affect things like qualifying for a home loan, saving for retirement and building a solid credit rating. If you can’t pay off the full balance of your card every month then do yourself a huge favor and don’t use one in the first place. Secondly, whatever debt you do have, pay off as soon as possible - it will save you a lot of headaches in the future.
17. Stay in a hotel that costs over $200 a night - My wife and I had a debate about this one. I said you should do this in order to see that it’s not that much better than the $89-a-night Holiday Inn down the street. She disagreed, stating it was normally much better and one should stay in a nice hotel at least once in their 20’s just to treat themselves with a nice experience. So, I guess whatever way you look at it, staying in a nice hotel is something every twenty-something should do.
18. Read the Bible cover to cover - no other book has been cited by others, recounted in the arts, or debated in the public arena more than the Bible. And yet, very few have actually read it cover to cover. Being that this book covers so many fundamental issues central to life such as the role of God, man, sin, death, salvation, etc. it is something every person should read for themselves instead of relying on hazy quotes from the university philosophy professor or television evangelist. Man’s decision of what to do with God is one of the most integral he will ever make. Better to make this decision based on a personal encounter rather than off-hand information.
19. Explore your family of origin issues (positive and negative) and pursue growth - so many studies in sociology always end up pointing back to one’s family life growing up as the major factor in their growth and development. No doubt some of us experienced a wonderful family life while others went through something more akin to a nightmare. Either way the 20’s are a key time in understanding any family issues that may be holding you back and taking the necessary steps to find healing. It may require some counseling or may be as simple as calling your parents and telling them how much you love them.
20. Figure out the type of person you want to marry - I happened to get married at the age of 22 to my beautiful wife. This may seem young to many, but it has worked well for us. While I don’t think getting married in your 20’s is for everyone, it is definitely the time of life to start deciding what traits and values you desire in a future spouse. I’m not saying you need a 3 page checklist, but deciding on some of the non-negotiables will allow you to narrow in your focus and keep you from jumping into one poor relationship after another.

So, what have I missed? What should not be on the list and why? Please leave a comment and make your voice heard!

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Due to my love for finance and my ability to throw out the random buzzwords like “asset allocation” and “diversification” to sound really smart, many of my friends have begun to come to me for investment advice. “Cameron,” they ask, “this investing stuff is just too complicated, I am (insert an age) and still haven’t invested in anything, I don’t even know where to start.” The first question I always ask is whether or not they have a Roth IRA? Judging by some of the responses I have received I think it’s time to explain what a Roth IRA really is and why if you are young (college, twenty-something) and you don’t have one, you are throwing piles of cash down the toilet.

IRA stands for Individual Retirement Account, basically a simple way of saving money for retirement — remember though, it is just an account, not an investment itself. With an IRA you can choose where you want to invest your money. Think of an IRA as a basket in which you can throw various kinds of investments. Most people choose to throw a mutual fund in their IRA which is why you will hear the terms getting thrown around and mixed-up most of the time. As long as you remember that an IRA is simply an account to place investments in, you’ll avoid a lot of confusion.

Traditional Vs. Roth - These are the two main types of IRAs. I will save you the trouble right now and tell you that if you are under the age of 50 and you don’t make six figures then Roth is the way for you to go. The main difference between traditional and Roth IRAs are how you are taxed. With a traditional IRA you get a tax break when you deposit the money in your account each year. This means if you make $50,000 of taxable income in a year and place $3,000 in your IRA you will only pay taxes on $47,000 that year. Your money will then grow and when you take the money out after age 59-1/2 you will then pay taxes on the money in your IRA. A Roth IRA is different because while you get no tax break up front, your money grows tax-free in your account and when you take it out come retirement time, YOU PAY NO TAXES, not even on the earnings. Another way of saying it, traditional IRAs are “tax-deferred” and Roth IRAs are “tax-exempt” savings. American Funds has a great comparison chart comparing the two types.

Some Rules to Know - First, being that it is a retirement account you will be heavily penalized if you take the money out early, meaning before age 59-1/2 (there are a few exceptions like a first-time home purchase). This means put money in your IRA that you won’t need in the near term.

Second, for you overachievers, the maximum contribution has just changed from $4,000 per year in 2007 to $5,000 per year in 2008.

Finally, to be eligible for a Roth IRA you must make less than $101,000 as a single filer or $159,000 as a joint filer in 2008. So, if you’re raking in some good money already and you exceed these limits you will only be able to invest in a traditional IRA, still not a bad thing.

How to Set Up a Roth IRA - First, remember that banks and investment companies want your money, so they’re going to make it as easy as possible for you to give it to them and if they don’t, shop somewhere else. All you need to set up your account is your W-2 form showing you have earned income. There are a few different places you can go to set up your Roth IRA: bank/credit union, mutual fund companies, or discount broker. The bank route would be for the ultra-conservative investor that wants to use CD’s or money market accounts as their investments (if you’re under the age of 50 this is probably too conservative).

Next would be opening it through a mutual fund company. My favorites include: Vanguard, American Funds, USAA (All of these links will take you to the page dealing with opening an account with the company). By going through a mutual fund company you can then purchase shares in one or multiple funds from the company and put them in your Roth IRA. This method also helps ensure greater diversity being that with a mutual fund you are automatically investing in hundreds of companies rather than just one or two, spreading out your risk substantially. Plus, many times the minimum investment is lower when opening a retirement account than it would be with a normal brokerage account. The final avenue would be using a discount brokerage service, similar concept as above.

Once you have opened your account the next step is setting up an automatic investment plan (takes out money from your paycheck and automatically puts in your investments) so you can harness the power of dollar cost averaging (DCA), an investment principle I wrote on earlier The World’s Easiest Guide to Understanding Retirement Accounts - Ramit Sethi (the man)
- Why You Need a Roth IRA - Kiplinger.com
- Roth IRAs: A better IRA for almost everyone - AmericanFunds.com

For the past several months my wife and I have been using the free, easy-to-use, web-based software called Wesabe. Many of you have been asking me about it lately so I decided to give a brief overview of what it is and why I like it.

First, I’m a firm believer in the importance of spending your money intentionally, rather than being surprised by your purchases at the end of each month. In order to do this a detailed budget must not only be created, it must be constantly maintained. There are many different programs out there to help you in this endeavor like Quicken and MS Money, but Wesabe is free and it adds the community element which I’ll explain later. Before I forget, here’s the link to a quick 3-minute video tour of Wesabe if you’re more of a visual learner: VIDEO TOUR

Some of the highlights of Wesabe:

All Your Accounts in One Place - Wesabe is nice because it allows you to view all of your bank and credit card accounts in one place making it easy to budget, categorize and view all of your spending rather than having to skip from site to site.

Creating Spending Categories - When you first upload an account (checking, savings,
credit card, etc.) with Wesabe it displays the transaction exactly like it reads on your financial statement, often meaning pointless numbers and codes with no relevance to you. Wesabe then allows you to edit the transactions individually changing the bank code into something you can use like, “McDonald’s” or “Apple Store”. What makes Wesabe great is that from that point on it will recognize if a similar transaction comes though and will assign it the name you chose automatically; meaning, if you receive a paycheck on the 1st and 15th of each month from the same place Wesabe will recognize this and call the transaction “Paycheck” (or whatever you assign).

Also, as part of the editing process Wesabe enables you to “tag” each transaction, putting it in a specific category like “Restaurant” or “Entertainment.” This ability to create spending categories is obviously key in creating and maintaining a detailed budget. The tag process also “learns” as you use Wesabe more, automatically assigning repeat transactions the right tag. For example, if you go to Chili’s every week you will only have to assign the first transaction a name and tag, after that it will do this for you as it recognizes the same purchase item or place.

Creating Spending Limits - Another handy tool Wesabe offers its users is the ability to create spending limits. Users can assign each “tag” or spending category a certain spending limit for the month and Wesabe automatically keeps track of where you are as you make your purchases. If you set a “Restaurant” limit of $150 for the month, Wesabe will let you know that you only have $50 left for the month if you go out one night and spend $100 on a meal. This is probably my favorite feature as it eliminates the guessing of where you are at any given point in time in regards to your budget…helping you spend intentionally

The Community Element: Tips and Goals - Wesabe is unique from traditional budgeting software in that it relies on its community of users to provide guidance and tips on how to successfully manage your money. The “Tips” section of Wesabe looks at common themes in your spending and automatically provides user-generated tips specific to you. So, if you’re a single-person with no kids you won’t be receiving advice on saving money on diapers or budgeting for your kids’ college tuition.

The community also comes into play in the “Goals” section of Wesabe, a place where you can create and monitor your personal financial goals. The wife and I currently have goals including buying our first house and maximizing our yearly Roth IRA contributions. Wesabe allows you to connect with other users with the same goals giving you an opportunity to discuss, share and learn.

Overall, we’ve been very pleased with Wesabe. Every once and a while it mis-tags a purchase, but that is rare and easy to fix. The only other problem we ran into was having one transaction come up twice in “Bills” and “Payments”…we fixed this using the filter feature, filtering out the “Payments” from our spending and earning summaries. Finally, many have questioned the security aspect of uploading financial accounts onto the web…understandable, but Wesabe takes security just as seriously as any of your financial institutions that you bank with daily. Check out there security policies here: https://www.wesabe.com/page/security.html

Continuing on in the 3 Investment Principles series (If you haven’t caught the first two here they are: Time Value of Money and Pay Yourself First) we come to the final principle: Dollar-Cost Averaging (DCA). The aim of DCA is to reduce the risk associated with a single, large investment by spreading out the investing (and risk) over time. Everyone has heard the token financial advice, “buy low, sell high.” Seems simple enough, but in reality no one can predict exactly when a stock will bottom out. By investing a fixed dollar amount at regular intervals (weekly, monthly, etc.) regardless of share price, you will end up buying more shares when the price is low and less when the price is high, thereby maximizing your total return.

An example of this from youngmoney.com:

“Dollar cost averaging works like this: systematic investments are made to an investment account. For this example we will say on a monthly basis. To keep things simple we will also say that the investment account is allocated 100% into one growth fund. We will use $100 as the monthly investment amount. Now, depending on how the market is doing that fund’s price is going to fluctuate from day to day. So let’s look at a six-month example in the table below.

In the example above, you have invested $600 and your account is now worth $791.73. Over the six-month period, you paid an average of $14.33 per share. If you would have taken all $600 and purchased the shares at the beginning of the six months, you would have purchased 30 shares and your account would now be worth only $750. For this example, using dollar cost averaging has increased your account by over 5%! Of course the above scenario is just one example of using dollar cost averaging. There are many.”

This isn’t to say that this method of investing doesn’t have its critics. DCA operates on two assumptions: 1) the investment (stock, mutual fund, etc.) follows an overall positive trend over the investment time frame, meaning, dollar-cost averaging isn’t going to help if the investment you’re putting money into ends up losing value in the long run. 2) If you happen to get extremely lucky and start investing at the bottom of a long-term price trend you would be better off buying a lump sum…good luck timing the market!! John Wagonner explains in USA Today, “Dollar-cost averaging typically does best when an investment goes sideways or down for years and then, at the end of the period, suddenly breaks to the upside.”

As is the case with nearly everything in finance, time frame matters. “Regardless of the amount of money that you have to invest, dollar-cost averaging is a long-term strategy,” explains Jim McWhinney for Investopedia.com, “While financial markets are in a constant state of flux, they tend to movie in the same general direction over fairly long periods of time. Bear markets and bull markets can last for months, if not year. Because of these trends, dollar-cost averaging is generally not a particularly valuable short-term strategy.”

In the end I like DCA for one simple reason, it builds a habit pattern of investing in season and out of season. Its very easy to form the wrong habits in an affluent culture like our own. It seems everyone, but you, always has the latest gadget, toy, car, etc. Spending, saving, investing are all habits. The purpose of this 3-part series on investment principles is to help make good habit patterns, ones that create wealth and enable you to live the High Life.

If you want to create wealth you must either save more or spend less…that’s it. Why is it so hard then? Most people have the best intentions when it comes to doing these things, but at the end of the month, when the bills and statements arrive, the letdown begins. You realize that your money has yet again pulled a Houdini and is no where to be found…where did it go…you stand there puzzled, your empty Starbucks cups and Hollywood Video receipts mock your weakness. And so the cycle goes…unless you make a change. Thus, the second of the three investment principles every young person should know:

#2: Pay Yourself First

Most people pay everyone else before they pay themselves. They hope at the end of the month they will have some money left over to put towards savings or investments, but it rarely happens, its too easy to spend money. Paying yourself first means exactly that: when you get your paycheck, before you start paying bills, going grocery shopping, filling your gas tank, etc….take a percentage and put it in savings or investments. If you do this you will never go a month without saving money. At the end of the month you will still probably spend all your money…its what we are all great at, but the savings will already be in the bank, safe and sound.

The easiest way to pay yourself first is to set up automatic fund transfers on the days you receive your paychecks. This way you won’t even realize the money is gone, you’ll budget and spend according to the new amount. Spending is largely psychological, if you start out with a smaller amount your mind will tell you that you have to spend less, be more frugal.

Finally, an example of the power of paying yourself first from financial educator David Bach, author of “The Automatic Millionaire”:

“Let’s assume you make $50,000 a year. That’s about $2,000 every two weeks, which is how most people are paid. So to save 10 percent of your income, which is less than an hour a day of savings, you’d have to save $200 every two weeks — or $14 a day.

If you invested $200 every two weeks for 35 years in a retirement account that earned an annual return of 10 percent what would you have? Quite a pot of gold: $1,678,293.78.”

**Author’s Note: I actually pay myself second, I give the first 10% of my income to my local church, also known as tithing…but the principle remains the same.

Since my last post I have had time to read more of Ramit Sethi’s, I Will Teach You To Be Rich blog. As I have read the articles and seen the demand for simple financial education…and after many discussions with friends it has become obvious to me that many college and twenty somethings have not been introduced to basic money and investment principles that most close to finance would consider fundamental. For the next few days I’ll be laying out the three investment principles every young person should know.

#1 - The Time Value of Money

The basic premise of the time value of money is that all else being equal an investor is better off receiving a certain amount of money today than he is receiving that same amount of money in the future. Basically, money now is better than money tomorrow. To most people this is instinctive, of course you would want money NOW! But why? One would assume that the value of $1 today is equal to the value of $1 a year from now, but this assumption is wrong. The dollar received today is more valuable because of all the ways you can make it grow. Just by putting it in a savings account you’ll at least earn interest on it, thereby increasing its future value Here is an example:

You are given the choice between
Option A: $100,000 today
Option B: $100,000 in 3 years.

Lets say you decide to take Option A and invest your $100,000 in a savings account with a simple annual rate of 5%.

Future value of investment at end of first year:
= ($100,000 x 0.05) + $100,000
= $105,000

Next you leave this money untouched and let interest continue to accumulate

Future value of investment at end of second year:
= $100,500 x (1+0.05)
= $110,250

These equations rolled together would be equivalent to:

Future Value = $100,000 x (1+0.05) x (1+0.05) OR
$100,000 x (1+0.05)^2

Using this logic after three years the value of the $100,000 would be:
= $100,000 x (1+0.05)^3
= $115,762.50

This equation allows us to calculate multiple years or periods of interest without having to add each period up individually and is the basis for one of the most basic finance equations out there:

Future Value = Present Value x (1+interest rate)^number of periods

NOW, before you zone out from too many numbers. Here is the bottom line. Option A, in this case, is $15,762.50 more valuable than Option B, who’s future value is equal to its present value. And remember, this is just assuming you put the money into a savings account making 5% interest. Option A could in fact be much more valuable if you instead invested the money in the stock market which has averaged approximately %10 percent return per year over the past several decades.

Compounding interest (another discussion in itself) allows our youth to work for us in mighty ways so that the money we have today is in fact much more valuable than money we will have in the future. Albert Einstein was quoted as saying, “The most powerful force in the universe is compound interest.” Understanding the time value of money principle allows us to harness this force and create wealth.

It amazes me the amount of financial advice available today. Books, seminars, blogs, dvds, etc. with the sole purpose of showing you how to make money. I’m all for it to be honest, the more information available the better….although there are a lot of crooks and idiots out there as well. So, you have to be careful who’s advice you take.

I found a blog yesterday entitled I Will Teach You To Be Rich by Ramit Sethi, a young Silicon Valley entrepreneur. While I admit I haven’t had the time yet to read through all of his articles, I was in agreement with his general views on creating wealth. The principles below are from his blog with some extra info added in by yours truly. I post these because they are, in large part, the same principles that I have come up with as I’ve attempted to hack my way through the jungle of financial plans, solutions and gimmicks in my own life. Nothing cosmic…THERE ARE NO SECRETS…but sound advice to any college/twentysomething wanting to create a stable financial base:

– Create and Maintain a detailed budget. Wesabe is an excellent site I use that helps you do this…best part, completely free! Upload your accounts, label transactions, set spending limits and you’re on your way.

– Get your credit report. A recent amendment to the federal Fair Credit Reporting Act requires each of the nationwide consumer reporting companies – Equifax, Experian, and TransUnion – to provide you with a free copy of your credit report, at your request, once every 12 months. To get these reports go to www.annualcreditreport.com

– Make sure you’re not paying fees on your bank accounts or credit cards.

– Open a high-interest bank account. www.bankrate.com will give you a comparison of all the different banks and their interest rates.

– Establish a savings goal of 20 to 30 percent of your income, if possible.

– Open an investment account at a discount brokerage. Most of my friends that I talk to about this look at me with horror saying they just don’t know what to do…believe me, brokerage houses don’t get rich by making it hard for you to open an account with them. Call, ask questions, don’t make any quick decisions. If you already use USAA they do a good job, I’m also a fan of American Funds…if you go the mutual fund route.

– Fully fund 401(k)s and Roth IRAs. If you are over the age of 22 and do not have a Roth IRA set up, even if you don’t contribute much yet, you are flushing money down the toilet. It takes literally a few minutes to set up an account that will allow you to grow money throughout your life TAX-FREE.