Ever wished someone gave you financial advice when you were in your early twenties? Here’s a beautiful letter our founder & CEO Satyen Kothari had written to his daughter for her birthday. This is great actionable investment advice for young adults in their early twenties.
17 Money Rules For Young Adults
Happy 17th! Wow. How the years have flown by. And you have had one eventful year indeed between 16 and 17. You have shown the world that strength and positivity can explode out of small bundles.
And yes, here it is. The one letter every father thinks of writing. And the one that every child not interested in finance puts off reading. Except, I have written it. And hopefully you will benefit from it. You can read it as you see fit today, next month, and over the years, my lovely Z.
Because…after health, and somewhat at the same level as relationships (controversial point alert), a baseline amount of money is a big contributor to happiness. And as we have discussed, dearest Z, for many a year, our ultimate goal in life is to be happy.
The 17 money rule pointers for your 17th birthday
- F-You Money
Your goal is to get to this amount. For your freedom to make any choices in life. What this amount is depends on your lifestyle and your choices. The formula is simple:
(a) Calculate how much money you need per year
(b) Assume whatever money you have saved/invested produces 5% returns a year
(c) Then you have to have invested 20x of what you need per year to have enough F-You money
That’s the simple F-You math.
- The People Around You
Avoid being around people irresponsible with their money. Most people get into trouble because they neglect this one aspect in their adult life. This applies mainly to your choice of a life partner. The wrong one can destroy all the other good habits you may have made around money. Also applies to close friends as there is peer pressure. You or someone you love worked hard for your money. What others expect of you in terms of spending matters for exactly zilch. Remember that old phrase, “You are the average of the 5 closest people around you”? Important that you keep the right people with the same values as you about money. Even better if they are people that you can learn from about money management.
- Income Flow
First Earn > Then Invest > Finally Spend. Golden flow. If you pay yourself first from whatever you earn, you will always have more being added to your savings.
Do not indulge in debt. Period. Don’t do it to be greedy to make more money (it’s called leverage). Don’t do it because a loan is easy to get. The only exceptions are maybe a car because the interest rate is a lot lower than what your investments are making (car manufacturers be crazy sometimes!). And for a house that you live in (no loans for an investment property - not worth the stress). Again only if the rates plus tax breaks offered are a lot lower than what you are making from your investments.
- Credit Cards
Always pay off your credit card every month. Set up an auto-pay option that debits the money 5 days before the due date from your bank account. Do not optimise and use some 3rd party system to get more points etc if it risks you missing your payment date. Find the best card with the best rewards - many sites can help you. You can get a partial free vacation a year if you pick your card wisely (but all that is lost if you carry your balance to the next month. So always auto pay). How many cards should you have? One credit and one ATM card when you are in your home city. A backup for each when you travel.
Let's talk about investing…
- Buying A House
NO. Not in your 20s and 30s at the least. This is the time for your money to compound in high potential returns investments since you have time on your side to ride out market volatility. This also gives you freedom to move around the world easily without stressing and spending time and incurring big expenses in selling, packing, moving, buying. Many consider homes as great investments. Wrong. A house is an extremely concentrated asset, illiquid, and costs you money to buy, maintain and sell. All terrible attributes of an investment asset! As you approach your 40s, maybe, just maybe, a house then. To create memories. And because you should have enough saved up to avoid a loan for it. And because hopefully by then it is a small 10-20% portion of your overall assets.
- Always Have Zero-Excuses Protection
One secret of the wealthy - always buy protection for your most valuable assets. Your health (maximum insurance possible that lets you get the best treatment possible in the world), your house, global health insurance for when you travel, and for your expensive toys like premium cars. Don’t skimp on the optionals - buy everything included. Terrorism, flooding, critical illnesses. The insurance company should have no excuse to wiggle out of paying you if anything at all happens.
- Automatic Investing
Invest regularly with an auto=debit from your bank when your monthly salary comes in. Track performance easily to ensure every asset is producing returns for you. Money should not need regular work to grow and manage. You may have heard of this great app called Cube Wealth - use that ;).
- Investment Planning
Allocate your money into 4 buckets:
(1) emergency (6-12 months of life expenses)
(2) short term expenses coming up (under 3 years)
(3) medium term known expenses (3-5 years)
(4) until infinity.
Fill bucket 1 first and then the next one and so on. This ensures no stress and money is available when you really need it.
- Stress and Risk Management
Investing should not stress you out as the markets WILL rise or fall, and very unpredictably so. Anything that you have invested for infinity should be dealt with in a stoic manner and should be relatively at aggressive risk, as long as you identified quality options to invest in. Everything else should be in very safe conservative investments that don’t react to markets. And always diversify in 2-3 different options in each bucket as well.
- How to Invest
You have 3 options:
(a) Invest by yourself (hardest): Buy into super high quality companies as if you plan to be the owner for a long time (when you buy a stock in a company you are exactly that - an owner). If this is something of interest, I have a book or two that you need to read. Remind me about the 4M strategy. Maybe start with this from your 5% Fun Investing pile?
(b) Invest behind quality fund managers with a proven track record of at least 10 years. For these fund managers, ask for their non-aggregate record per year (means how they did every year compared to the regular market) and their cumulative record over 3/5/7/10 years (meaning how their returns added up with time). They should have outperformed the markets 7 years out of 10. As an aggregate over the cumulative periods they should have beaten the market by a factor of 50% at least
(c) Passive index fund investing (easiest): If you want to be a totally passive investor, for the first 20 odd years of your adult life just keep adding money to a passive index fund. For the US markets use VTI.IV and for India use the Junior Nifty Bees. For any money that you need in under 3 years, buy a bond fund in the US like BND.IV in the US and in India, keep it in bank fixed deposits or liquid funds (don’t go for bonds etc for this - not worth the occasional stress for the small extra amount in returns)
- Fun Investing
If you ever decide to become hand's on with investing, start with a fun money pile. Divide your money up into a 95% serious money that goes into the buckets and funds in this article, and another 5% fun bucket that you can experiment with investing by yourself to keep learning. Nothing like trying investing for yourself to learn. This 5% is how you start picking stocks on your own or want to dabble in cryptocurrency. Read up first before you play with it.
- Investing in Karma
Start analysing good causes that you want to help out. I personally prefer causes that have compassionate capitalism as a business model - where they give the money to the less fortunate but in a manner that’s scalable. Such as no-interest or low-interest loans to the needy. So that the money can keep compounding to help others. Milaap is a favourite here. You can allocate whatever amount you see fit in your working years, and plan to scale up as your net worth grows. But remember - giving should be taken as seriously as investing. Only give to high quality causes.
Now for some deeper philosophical points around money…
- Buy Quality
Buying a quality product is always a great idea. Research before buying that it is indeed great, and give it a lot of loving care after buying. It is such a joy to use a well crafted, beautifully designed product. It’s like having a piece of art around you at all times. Classic coffee machines. Simple, powerful music speakers. A powerful Porsche design blender. A light, low maintenance bicycle. And yes, a gorgeous car. These things around our home have given us such happiness due to their aesthetic and usability and quality. Surround yourself by these. Contradiction: For things you may not plan to use for too long, go the other end. Cheap and disposable is ok, as long as they don’t affect your health. But reduce the proportion of these over time.
- Know Your Time Value Per Hour
Your time and energy are limited. Spend it on saving money on the big stuff and thinking of how to best invest for the long term. Don’t sweat the small discounts and savings as they take up too much time and energy to process. Understand and maximise your time value per hour. This personal per hour rate may change at different stages of your life - keep track of it.
- Need Less
The wealthiest person is not the one that has the most; but one that needs the least. Your money is to enable your passions and a great life. Stay analytical on whether money going out is adding to your true happiness. Do an annual 360-scan of your life to see whether you truly need all you have. Or maybe someone less fortunate may benefit from you sharing your possessions? There is more joy than you can imagine in sharing your good fortune.
- Enjoy It All, Every Second Of It
The joy of having enough money is you can enjoy your passions and life. Don’t be penny wise. Enjoy your life. Buy that product you love. That club membership you would enjoy. That great meal cooked by a famous chef during your travels. That trip that would create long term memories with friends. That’s the real joy of earning money and planning well around it.
25 years of money life lessons in 17 points in 1 blog post.
Enjoy, my dearest Z.
There it is. Advice that every young reader who ever wanted to invest money could benefit from.