Things Every 20 Something Should Know About Money

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It seems like my Grandparents working on the farm could fix a tractor with some twine and an adze. My Dad knows how to change brake pads, can tell when an alternator is bad and can fix lots of things around the house.

Now it seems like most people 30 and under don’t have a clue about most of these things unless it is part of their actual job. We have to outsource tons of things (unless we can find a good Youtube tutorial and gather the time and courage to do it ourselves).

While I’m not a very handy person, I have dedicated a lot of time to studying finance. My Dad knows a lot about money and he taught me those key principles. Of course not every parent is very good with money, so it makes sense that the next generation doesn’t have a good example to learn from.

What baffles me is the kids that come from really successful and financially sound homes still don’t have a clue. For some reason, it seems that parents are not passing on the knowledge they have to their kids.

As I talk with friends, cousins, coworkers and other people my age, I find myself concerned about a lot of things. Money is a taboo topic, and so is estate planning. So, if you haven’t heard from your parents or another reliable source, here are some things I think every 20 something should know about money.

Student Loan Refinancing And College Hacking

For some reason kids get their hearts set on certain schools that are expensive. There’s no telling how these ideas get planted in a kids head so if you went to an expensive school, might not be a good idea to plant that into the plans of your kids unless you want to help pay for it.

That’s fine if they get merit or sports scholarships that cover most of the costs, but sometimes it’s really not worth the extra money.

My degree only cost $40,000, so it was possible to work your way through debt free. Not easy, but possible.

In general, refinancing student loans that are more than 3-5% is smart, especially considering today’s historically low interest rates. It’s possible to get loans in the low 2% range now, and Sofi seems to be a leader in this space.

Of course, with the onslaught of Covid-19, having government backed loans with interest suspended is a nice perk.

I’ve never had an employer care about the school I went to so far. If you want to drastically reduce the cost of college, try getting your associate degree at a community college before transferring to the school of your choice.

Housing, Cars And Household Goods

A few bullet points here:

• Keep living like college students.
• Buy used furniture as much as possible. People are always getting rid of perfectly good stuff. Just be patient.
• Same for cars, usually anything 3-10 years old is ideal and under 100,000 miles is ideal. Every vehicle made in recent years is designed to go 250,000 miles without serious issues (of course serious issues do happen sometimes). Keep up with maintenance according to the owners manual.
• House hack if you can. No need to have large homes fully furnished like your parents home just yet. They didn’t start out that way and you don’t need to either.

Employee Benefits

Most employers have some sort of PDF guide or website to their benefits. I strongly encourage you to take some time to read it in it’s entirety. By being familiar with my benefits, I’ve been able to take advantage of Dependent Care FSA’s, HSA’s (very powerful retirement accounts), Roth 401k’s (great for tax diversity), etc.

Quick Example

In May 2015 I started my first job out of college. Since the year was halfway done and we were young and healthy, we decided there was little chance we would reach any deductible on any of the plans. Of course, accidents can happen, but they didn’t that year.

We went with the high deductible HSA plan, which saved us thousands in premiums, gave us a nice tax break, tax free investing and tax free withdrawal should we need to pay for medical expenses. We soon found out we were expecting a baby towards the end of the summer, but spent probably less than $100 out of pocket through the rest of the 2015.

Having a baby costs money though, so we switched to the “medium” plan during open enrollment in November 2015. This lowered the deductible and increased our premiums, the baby was due in March 2016. Once the baby was born, it’s considered a qualifying event to add them to your insurance. You also have the ability at this time to change any of your other benefits around again, just like open enrollment.

They give you 30 days from the qualifying event to make changes. So four weeks after the baby was born and we determined that my family was likely to enjoy good health and we switched back to the inexpensive HSA plan, paid lower premiums and enjoyed tax free investing. The lower deductible was great for having the baby and worth paying higher premiums for just 5 months.

Most people don’t realize they can optimize things like this, and will often stick with the most popular “medium” plan.

Prenuptial Agreements

My wife and I don’t have one, don’t think we need one and don’t really know much about them. Obviously I’m a bad example on this section, but you should be aware of these at a fundamental level and figure out if this is something you might want to set up.

As a rule of thumb, if you and your spouse don’t have significant assets you probably don’t need one. If one spouse is coming into the marriage with some serious money, an existing business, home or something like that, consider it. You can also get a post nuptial.

Life Insurance

Two costly mistakes to cover here:

1. I’ve noticed many breadwinners only get coverage through their employer.
2. Many couples don’t get private coverage for a stay at home parent.

If you are married and have kids, you probably need life insurance. Millennial’s are exposing themselves to huge risks without it. I make a nice upper 5 figure salary and have good life insurance through their benefits, but if I were to lose my job, I would lose that coverage. That’s why I have my own life insurance policy.

I got a 15 year term life policy for $20 bucks a month. If I were to die, my wife would essentially become Financially Independent (FI) and have a 7 figure net worth. She wouldn’t have to worry about money and could mourn, visit family and figure out what she wants to do.

Consider the alternative. If I were to die without life insurance through my employer or my private policy at this point, my wife would be in a world of hurt. She would have a few months to figure things out and have to start liquidating retirement accounts.

While she might last a few years with careful management, it would be stressful and a lot to deal with. Not only that, she would be sentenced to a difficult life. The responsibility for the household expenses would fall to her and she would have to work to provide for our two kids. She likely wouldn’t have the luxury of staying home and would have to put them in daycare.

Don’t Forget To Cover A Stay At Home Spouse

My wife works part time doing marketing for a pest control company she co-founded and so far it pays nothing, but will be a good income stream in the future. She just finished up her Bachelors degree online and does a great job taking care of the house and the kids while I sit in my cubicle all day.

If my wife were to die without a life insurance policy, I would also be in a serious trouble. I’m not FI yet and I couldn’t just quit my job. I’d be forced to work out some other arrangement or put the kids in daycare and let someone else raise them. Again, we have enough coverage on my wife that if she met an untimely end, I would be FI.

Protecting your kids from these risks is one of the most loving and intelligent things you could ever do. My wife and I have policies through Mass Mutual and Haven Life (and Mass Mutual owns Haven Life). Policy Genius can help you figure out good insurers. Bestow is also good and quick, you can get a policy in the next 10 minutes. If you don’t already have a policy, you probably should stop reading this and get one, right now.

Wills

You already have a will, and it’s been given to you by the state you live in.

If you trust the state government to distribute your things when you die, then you are set. If not, it might be good to get your own set up.

For most, a will isn’t totally necessary until you have kids, but if you own a home or other valuables, they are very important.

I mentioned using Haven Life for my life insurance earlier in this article, and they gave me access to a free will through TrustAndWill.com, which we took advantage of. Normally it would have been about $130.

It was extremely easy to set up. The part that takes the most time is carefully choosing the executor of the estate. I talked to a few friends to make sure they were willing and aware of the implications it could have for them. We decided on a friend of mine who embraces FI principles and would carry out our wishes while being impartial to family pressure.

Peace of Mind

It’s great knowing our assets will be distributed exactly how we want if our children were to find themselves without us. We also got to choose who would raise our kids if we kick the bucket. Without a will, they often go to the loudest relative (the one who puts up the most effort). Kids would belong to the state in the interim, which doesn’t sound like something any sane parent would put their kid through.

Tomorrow.me has a free app where you can get a will set up in 10 minutes. TrustAndWill was great and is around $100 for a will (or free with a Haven Life policy). They also included a Healthcare proxy and Power of Attorney which are important in their own right should you become incapacitated. Otherwise you’re looking at a meeting with a lawyer.

UPDATE May 27 2020: Sofi now offers a free will for their members through Ladder.

Sofi is proving to be a great one stop shop for lowering student loans, having a high interest rate for online savings, brokerage and retirement accounts that offer fractional shares, wills, life insurance, mortgages, and more.

Also note that having a trust set up can be better than wills but it depends on your situation. Usually you would need significant assets or a special circumstance, like I had. That is a whole other blog post.

Stock Market

Lot’s of people think that the stock market is risky. This isn’t entirely true.

Taking the market as a whole, volatility is a better descriptor.

There is far more risk with individual companies, which is why I and Warren Buffett recommend broad passive index funds. It is difficult to get good returns on your money without increased risk or volatility. Index funds greatly reduce risk, but not volatility.

Let’s look at the S&P 500 for example, which is simply the 500 largest companies in America across each sector of the economy. When you buy an index fund like SPY that tacks those companies, your money is very spread out.

It doesn’t make much difference to you if one company out of 500 goes bankrupt, and it does happen sometimes. But if that company decreases in size to a certain point, it is replaced by a different company in the sector. It is self cleansing.

So the point is, invest anything you can afford to!

Some other general advice:

• Watch your fees or “expense ratios,” the lower the better. Most Vanguard funds are extremely cheap, around .03 and .2%
• Avoid funds with loads on the front or back. This is a charge just to get in or out of a fund.
• Use a free tool like Personal Capital to analyze your portfolio and allocate your investments better
• Avoid jumping in and out of the market. The best investors are dead people and people who forgot their account existed, because they never sell (and never pay extra in taxes). The average investor gets returns around 3.5% compared to the S&P 500’s average 7-10%. This is largely due to market timing.
• Don’t invest more than you can afford. Have an emergency fund of some amount in place first.
• Use the 3 Fund Portfolio to outperform 80% of all professional fund managers (net of fees)
• If you’re young, try to fund a Roth IRA and Roth 401k rather than traditional IRA’s and 401k’s.

Conclusion

I hope this doesn’t seem overwhelming, but if it is, shoot me an email at FrugalStu72@gmail.com and I’ll see if I can answer your questions better.

Additionally, you work for or interact with money in some way probably every day, so I would strongly recommend you try to read 1 article a week on finance. You ought to know something about the stuff that allows you to live your life. If an article is too much, consider a podcast episode, like Stacking Benjamins.