Saving

3 key points in life when smart money habits matter most, from the author of 'Effort-less Wealth'

Share
Tom Corley, financial planner, best-selling author and accountant.
Photo by Eric Vitale
Key Points
  • "Nearly every student wants to be successful and hopes or believes that they will be. But they are rarely, if ever, taught how to pursue this goal," writes Tom Corley.
  • "No matter where you start from, there are junctures where money decisions will come into play: entering the workforce, meeting a partner, starting a family, buying a home, balancing family and career, becoming an empty nester, and retirement."
  • "There are three key points where your money decisions have the potential to make the most impact."

When I speak to high school and college students across the country about how to develop smart money habits, I always begin my presentations with the same question: "How many of you want to be financially successful in life?" Then I ask them, "How many of you think you will be financially successful in life?"

Every time I ask the first two questions, I can count on nearly every hand going up. Then I ask the magic third question: "How many have taken a course in school on how to be financially successful in life?" No one raises their hand in response to this last question. 

Over the years, it's become clear to me that nearly every student wants to be successful and hopes or believes that they will be. But they are rarely, if ever, taught how to pursue this goal. Along with other systemic factors, this lack of education often leads people to live paycheck to paycheck. 

VIDEO11:1911:19
How schools are teaching Gen Z about money

Video by Helen Zhao

No matter where you start from, there are junctures where money decisions will come into play: entering the workforce, meeting a partner, starting a family, buying a home, balancing family and career, becoming an empty nester, and retirement.

The money choices you make in one stage can certainly have ripple effects on other stages. In my book, "Effort-Less Wealth – Smart Money Habits at Every Stage of Your Life," I share the habits that can help you grow wealth and even become financially independent. 

If part of your long-term plan is to become a parent, based on my Rich Habits Study research, I have found that there are three key points where your money decisions have the potential to make the most impact. 

When you enter the workforce

One of the best times for forging smart money habits is when you enter the workforce, because these are the choices that create a financial foundation. Some of the most effective habits at this stage can include:

  • Automating saving and investing. Most of the Saver-Investor millionaires in my Rich Habits Study began saving and investing as little as 5% of their net pay as soon as they entered the workforce. Every year they would increase their savings rate until it reached 20%.

    One of the best ways to consistently save and invest is to automate the savings and investment habit. Have a certain percentage automatically withdrawn from your bank account and immediately invested, either in an investment account or in a retirement account, if your employer offers you a retirement plan.

    If your employer offers one, I would recommend allocating 2% of your net pay into a health savings account. You can do this with each paycheck or on a monthly basis.
  • Finding housing within your means. If you are trying to figure out how much you can afford to spend on housing, particularly if you are earning an entry level salary and dealing with student debt, I'd recommend keeping housing costs at or below 25% of your net pay, because that will allow you to pay your monthly bills and save/invest for your future.

    While the cost of living varies depending on where you are, finding a place with a reliable friend, or even living with family, to help you save, if that is an option, is worth considering.
  • Limiting transportation expenses. If your job or life does not require a car, my best advice is don't buy or lease one. It is money that you could put towards other goals, or investment savings.

    If you do need a car, I would recommend spending 5% or less of your net pay on car expenses, which can include monthly loan payments or  lease payment, auto insurance, registration fees, car maintenance, car repairs and parking fees. I'd look for a high-quality used car, coming off a two or three year lease. A good used car could give you six to seven years of use.
VIDEO3:5203:52
3 personal finance rules you could consider breaking

Video by Tala Hadavi

When you are balancing career and family 

Money can become more of a limited resource when you are raising a family. There are some critical money habits that you can implement during this stage which will serve you well in the long-run, while also teaching your kids about how to build generational wealth. 

  • Remember the difference between frugal and cheap. Being frugal means spending the least amount of money on the highest quality goods or services. The key here is to seek quality first and then focus on finding the least costly, high-quality, goods or services.
  • Maintain a consistent budget. Figure out how much you are comfortable allocating for each category of your budget and do your best to stick with it. This doesn't mean that you have to avoid things, or deprive yourself of things that you enjoy.

    My best advice is, as a general rule, to keep things like vacation expenses and clothing expenses, for example, at or below 5% of your net pay. And if you are going to a restaurant, consider a more casual or BYOB spot where the bill won't be as high at the end of the evening.  
  • Spend time with other savers. If you want to forge positive, intentional savings habits, surround yourself with friends who have similar financial goals. Having those influences in your life can motivate you to stay on track.
  • Be transparent about college saving goals. For young families, consider opening a 529 plan to allow your college savings to grow tax-free. And be transparent with everyone in your life about what you are working toward. If they are able, friends and family may want to help contribute something to those funds at key life events.

    As kids get older, they may want to pursue a side hustle or a part time job, and a portion of what they earn could also go towards their 529 plan or college savings plan. If are able, for a benchmark, allocate 3% of your net pay towards college savings plans.
VIDEO1:5001:50
The best money advice I ever got: 'Pay yourself first' and more

Video by Mariam Abdallah

When you are getting closer to retirement 

As you age, your financial priorities will shift again. Particularly for parents, once children have started their adult lives, this may mean you have more disposable income available to you. 

Now is a good opportunity to step back and reassess, especially as the possibility of retirement becomes more of a reality. According to my research, some of the smart money habits you can implement at this stage include:

  • Continuing to stay frugal. This means being intentional about your spending, and keeping vacation, clothing and dining out expenses on the lower side. If you suddenly have an influx of cash, especially as an empty nester, think about how you might apply it to a new goal or boosting your retirement savings
  • Reviewing any outstanding debts. Particularly if you have a mortgage on a home, now might be a good time to refinance or pay it off entirely. If you are feeling overwhelmed with how to approach it, don't be afraid to ask for help. 
  • Connecting with a financial planner. If you have not yet engaged a financial planner, now is a great time to do so. They can help you figure out how to increase your investments, max out the contributions to your retirement accounts, and put your income to work where it will do the most good for your future. Think about where you want to be in the next ten years, and work backwards from there. 

Tom Corley is a CPA and a certified financial planner who holds a master's degree in taxation. He is the bestselling and award-winning author of "Rich Kids: How to Raise Our Children to Be Happy and Successful in Life" and "Rich Habits: The Daily Success Habits of Wealthy Individuals."

More from Grow: