4 Key Financial Habits for Young People

Quick question: how many of your New Year resolutions have you continued to follow through on now that we’re more than halfway through the year?  None?  That’s my answer.  In full disclosure, I actually no longer make resolutions for the coming year.  I’ve come to realize that no amount of will power, determination, or good intentions will bring about lasting change in my life.  Successful change only comes when I’m able to establish a habit.  According to the dictionary, habits are “settled or regular tendencies or practices, especially ones that are hard to give up.”  As my thoughts turn to school and (hopefully) learning, I also started to consider which key financial habits for young people would have the biggest positive impact on their lives. 

That noise you hear is either the collective groans from kids or the collective audible sighs of relief from their parents.  Either way, summer is winding down and it may be great time to help the young people in your life to start forming habits that will help them take care of their money for the rest of their lives.

I believe that young people have access to many many more tools and sources of information than we did when I was growing up.  On the flipside, there are many more ways to spend money on many more “things” than when I was young.  As I referenced above, relying on will power or determination may not be the best way to make positive life changes.  Establishing money management practices and then turning them into habits is the best way to improve personal finances today and down the road.  The earlier a young person can form these habits, the better off they’ll be in the long run.

1. Keep Track of Your Money

My first real job was as a bank teller.  I was fortunate to land this gig the summer between my junior and senior years in high school.  Writing down deposits and withdrawals in my checkbook became a habit that has carried on throughout my life.  As a side note, the very real pressure that tellers are under to balance the “money drawer” at the end of each day certainly sharpens the mind and hones the bookkeeping skills.  If I couldn’t keep my own checkbook balanced, what hope would I have had as a bank teller.  But I digress.  Today, most of us utilize some type of spreadsheet or on-line means to track our money. 

I discussed the factors to consider when deciding on the best method to keep track of income and expenditures in a previous post.  Included in that post is a simple “starter” budgeting spreadsheet template that would work well for a young person who is starting to form personal financial habits and goals.  No matter the format or template, tracking incoming and outgoing money is a critical practice that needs to be turned into a habit. 

Creating and maintaining a budget sets a great foundation to achieve many of life’s goals that require money (buying a car, renting your first place, starting a family, buying a house).  These types of goals may seem far off when you’re young, but they require a long period of disciplined money management to achieve them.  Establishing your budgeting habit early will serve you well no matter what goals you put in place.

2. Avoid Credit Card Debt

Borrowing money is an important financial tool.  Most of us will need to leverage this option at various points during out lifetime in support of key life goals.  Borrowing gives us near-term access to capital that wouldn’t otherwise be available to us.  It provides flexibility and a means to an end. Acquiring and responsibly using a credit card is an important step in establishing good credit.  But just as misusing physical tools can be dangerous, so too can be misusing the tool of borrowed money. 

I do not spend more money on a credit card than I can pay when the monthly bill comes due.  This is a habit that has helped me from the very beginning of my personal financial life is that. It wasn’t an easy one to maintain when I was in school and not making very much money.  When I first started working after college and I was making a little more money, it was still a hard habit to keep, but easier because I had already been practicing it.  I realize that completely avoiding credit card debt is not a realistic option for everyone.  However, only spending money that is available is one of the most important financial habits young people should form early on in life.

If life events mean that you must build up credit card debt, then please prioritize paying it down as quickly as possible to avoid being on the wrong side of compounding interest.  Paying high interest rates on a balance that doesn’t shrink in a timely manner is a sure way to destroy personal wealth and forestall the goals that are important to you. Of all the financial habits for young people can establish, this maybe the most critical one.

Student Loan Debt

While not necessarily a habit, avoiding student debt is another tremendous way to start down the path of building wealth.  A recent study highlighted in Forbes found that the median bachelor’s degree has a net return-on-investment (ROI) of $306,000 to the graduates’ lifetime earnings.  Not too bad, right? However, this study includes data from nearly 30,000 different bachelor’s degree programs which means there are a lot of degrees (sorry art, music and psychology students) that have much lower ROI. 

Making money is not the only reason to go to college.  There are many worthwhile vocations and life endeavors that don’t generate high salaries but instead provide purpose, meaning, and happiness.  However, taking on debt to get that degree only makes financial sense if your degree is in a field that provides a higher ROI like engineering, computer science or economics.  I graduated from New Mexico State University with zero student loan debt and have no regrets about the education I received.  My advocacy is to avoid student loans if at all possible – especially if your future anticipated vocation doesn’t support a high enough salary to justify taking on that debt. 

3. Pay Yourself First

Assuming you’ve established the habit of always paying off credit card bills each month, the next entity you should get used to paying is…you.  In reality, there are several “must pay” expenditures that hit us each month.  Housing, food, utilities to name a few.  The opportunity here is to consider that saving money is also one of these necessary expenditure for our money every month. 

Automatically saving money every month has never been easier.  No longer do you need to stuff cash under the mattress or dig up the ‘ole mason jar to make a deposit.  The proliferation of on-line banking enables paychecks to be auto deposited with very little effort.

Time and persistence are the best tools for building wealth and saving money for life’s goals.  I previously wrote about what it takes to save $1 million.  Assuming we want to accumulate this figure by age 65, we’ll need to start at age 25 and save $505/month while earning a flat 6% return each year.  I believe the best path to making this happen is by establishing a habit to save money every month.

Regularly Invest for the Long-Term

One additional note about this habit.  You may notice that the return rate used in the above example is 6%.  Not many savings accounts or CDs are paying 6% interest these days.  Which implies that some amount of investing in the stock market, real estate or other instrument will be necessary to really build wealth over time at that level of return. 

I started investing in my twenties once I had graduated from college and had established the habit of saving money from each paycheck.  My children are investing at an even earlier age using the E*Trade accounts I established for them with money they have received and earned.  I’d say investing consistently isn’t quite a habit for them yet but they’re off to a good start.

Dollar-Cost Averaging (DCA) is an approach to spread out investments so that the total price paid is less affected by market timing.  DCA involves investing a consistent amount of money in a target stock or fund over a certain period of time.  In this way, the investor mitigates some of the volatility inherent in the security markets and is also supportive of forming a good investment habit.

There are multiple choices to be made when considering where and how to invest money.  A good place to start might be by looking at Exchange Traded Funds (ETFs) or Mutual Funds.  Either ETF’s or mutual funds allow people to invest in a mix of assets.  Index funds allow investors to buy assets that mimic the composition and performance of a financial market index.  It can be a great introduction to investing without assuming the full risk of choosing individual assets.

4. Establish and Maintain a Financial Plan

I know, I know.  Financial planning sounds like something old people do.  Sounds like an activity to do while wearing a cardigan sweater and reader glasses.  But getting accustomed to setting some financial goals and using the first three habits to achieve them can help a young person establish a life-long healthy relationship with money.

I’m not talking about a complex plan.  This really is about putting a picture in place that anticipates income vs. spending over time that results in a target amount of money that will be earmarked for a specific purpose or goal.  It doesn’t need to be fancy or complex.  Money is a resource that allows us to accomplish things in life.  An initial plan may only make sense for a short period of time before it needs to be revised.  It’s the forming of this habit that is important, not the specifics of the plan itself.

Good Habits are Better than Bad Ones

Good habits are deceptively hard to establish.  Conversely, bad habits can creep up on us and become a part of life.  There is a rich set of books that deal with the ability of humans to make positive changes and intentionally form good habits.  To highlight just a few that I’ve read:

               The Other 90% by Robert K. Cooper

               The 7 Habits of Highly Effective People by Stephen R. Covey

               Tiny Habits by BJ Fogg PhD

Finally, I’ve framed this as good financial habits for young people to establish.  The truth is that we can seek to form these good habits at any age and perhaps replace old bad habits that don’t truly serve us, or our financial goals.  It’s never too late to form good habits! As always, best of luck to you and yours!

Written by: A. Reed Reviewed by: B. Holman