If You Could Go Back…

What advice would give your younger self? What do you know now that you wish you knew much earlier? A little while back, J.D. over at Get Rich Slowly wrote what I found to be a really thought-provoking post, by asking his readers to recount their younger and less financially-wise selves. He then did the same thing himself.

He was likely referring to the late teens/early 20s time period, which means I’m not looking back at the time in my life- I’m still in it. J.D. is an extremely smart and successful guy, and when someone like that talks about what they wish they knew at an earlier age, I’d be a moron not to soak it up. For the same reason, I felt I should pass it on.

So without any further ado, here are the 5 financial truths that JD wishes he knew at an earlier age…

1.) Why it’s important to pay yourself first:

The government certainly does this; by the time you get your paycheck, Uncle Sam has already taken his share. It’s foolish for us not to do the same (especially with the respective tax advantages of 401k’s and Roth IRAs).

It’s almost a given that if you wait until the end of the month to save what’s left over, there isn’t going to be much there. By paying yourself first, you make it top priority to invest in your future and consistently inch closer to financial freedom.

2.) How to harness the power of compounding:

Compound interest has often been called the 8th wonder of the world. It’s a double-edged sword though. Depending on which side of the equation you are on (saver or debtor), compound interest can create wealth or destroy you financially.

It’s extremely simple, but once you truly realize this concept, you never look at financial decisions the same way again.

3.) How to avoid the seductive trap of lifestyle inflation:

I haven’t mentioned it on this site, but the “lifestyle inflation” term has become fairly popular in the PF blogosphere. I first learned the concept under another name- “Parkinson’s Law of Finance”, which states that expenses generally expand to fill the available budget. In other words, as you make more money, you tend to spend more money in proportion, and you still don’t get ahead.

This is precisely why people claim that things would be better if only they made more money, even after numerous promotions and raises.

We could go into a lengthy discussion about anti-consumerism and learning to be happy with less, but not today. This problem has a simple, practical solution- always, always save a percentage of what you earn, not a specific dollar figure.

This way you get the best of both worlds. As our income increases, our savings rise as well, but we also get the opportunity to enjoy the fruits of our labor and spend more liberally if we please.

4.) How to avoid the chains of debt:

It seems incredibly obvious, yet many people (and governments) seem to completely ignore the implications of recklessly living on borrowed money.

Clearly, not all debt is equally bad. A low, fixed-rate mortgage with an easy manageable monthly payment is a good example of a more “healthy” debt. But if you’re like the many who use plastic to spend like a drunken sailor, know that you’re borrowing against your future well-being, and it will come back to haunt you.

We in the United States already stand to sacrifice much because of the financial recklessness of our elected leaders. Don’t make it even harder by abusing debt yourself.

5.) How to save on things both big and small:

And then of course actually doing it… Most people probably know how to save on the things we buy, but actually doing it is another matter (just as almost everyone knows that we should eat healthier and exercise).

But there is some technique involved in getting the best value for our money.  Just as we should be aware of small, consistent money drains (the Latte Effect), we also want to avoid making a big blunder on a big-ticket item. A car salesman feasting on an uninformed buyer can effectively erase many small gains made by conscious spending.

~

I’m glad I came across this post of JD’s. It’s solid advice that is all-but guaranteed to help anyone get rich slowly if they apply it faithfully.

Any other pieces of financial advice you wish you knew at an earlier age? Feel free to share them below.