I am 56 years old and have $500,000 in savings. This is the advice I would give my 22 year old self.
Meet Cynthia. She is 56 years old, debt free, happily married with two grown children and has a stable consulting business that pays her bills. There’s more: She also has $500,000 tucked away in savings. At first glance, her situation seems quite ideal. But Cynthia’s journey has been an emotional one, filled with disappointment and shame. Let’s just say she wouldn’t mind having a word or two with her younger, more impulsive, spender self: Here’s what she’d say.
1. Save now so you can shop later
Cynthia’s first job was in sales and earned her a salary of $200,000. With annual bonuses, she was making over half a million a year. “The problem was that she had a bit of a gambling mentality,” she says. Instead of first accumulating a solid cushion of cash to support her life goals, like buying a house, she began investing her money in startups. That decision prevented you from saving enough money for a hefty down payment, which can take years. That also means that, at 56, she and her husband still rent her house.
There are advantages to renting, of course. As a renter, you have the flexibility to move more frequently, whether for work or a desire to see more of the world. You are not subject to a 30-year mortgage or pay property taxes or home repair and maintenance expenses. The downside is that it does not build equity in real estate, which is one of the best strategies for building wealth.
The lesson: Independence has been at the core of Cynthia’s decision-making all her life, but now she realizes that saving is the first step to achieving that freedom. (Home ownership is also very likely in the way Cynthia and her spouse will spend her savings.)
2. A budget does not limit your lifestyle, it frees you
At first, Cynthia signed up for several credit cards and practiced with no spending limit. At 25, she had already racked up more than $200,000 in credit card debt trying to live a lifestyle beyond her means while managing ever-growing student loans. The younger self of her had a bit of an addiction to financial risk taking and an unhealthy relationship with money. Growing up, she also talked little to nothing about money in her family, seeing her father pay for things with cash, but she never had any idea how they budgeted, saved, or invested.
When he got married, this thought was reinforced. She viewed her husband as some kind of failed switch. “Since he was more stable with his finances, I felt he could be riskier. We now had two pools of money to play with,” she shared. It wasn’t until she had children that this mentality began to change. With the added expenses of raising two children, Cynthia and her husband were forced to borrow money for daily living expenses, and her debt skyrocketed. The stress of this took a toll on her emotional well-being and began to keep them from reaching the financial goals they set for the whole family, like paying for college.
The lesson: You need a budget. Depending on your family’s income and needs, the first 10 percent of your paycheck should go toward eliminating debt. And make sure you get the reward for it. Debt reduction can be incredibly motivating, and for someone like Cynthia it can be the key to whether or not to continue with the practice. (Cynthia preferred the snowball approach.)
3. Betting is not investing
Angel investing is a long game and it can take seven to 10 years to see a profit. It is incredibly risky and not all investments make money. Many of the startups Cynthia invested in failed, which affected her financially because she often invested every dollar she had in these early-stage companies. “I convinced myself and everyone else that the next big deal would pay off the debt,” she says. Ironically, Cynthia had become an expert in high-risk investing for venture capital. But even with a sophisticated understanding of the world of private investing, she didn’t have a basic understanding of personal financial planning.
Investing gives us a lot of creative freedom to be ourselves, but only once we’ve protected our finances and credit and are well on our way to growing our savings sensibly. As Cynthia has learned, it’s never too late to go back to the basics of Investing 101.
The lesson: The traditional investment pyramid suggests that you first need a solid foundation of liquid savings or cash. Having enough cash provides a safety net if our income is cut off for any reason. He wants to have a track year for emergencies. The closer you get to retirement, the more you’ll want to have in cash accounts, which are earning more than 4 to 5 percent right now. Only after you have a portion of your savings safely in cash, can you consider investing in high-quality, diversified dividend-paying stocks through low-cost indexes or exchange-traded funds. And by contributing a constant dollar amount each month or year to these tax-deferred retirement accounts, you’ll avoid buying when the market is at its highest. (This approach is called average cost in dollars and is one of the most successful, tried and true long-term investment strategies).
4. Recognize that money is emotional
Cynthia’s addictive behavior around financial risk taking was a constant roller coaster of ups and downs and clouded her ability to embrace financial planning fundamentals. She didn’t set concrete milestones for herself at 30, 40, 50 and beyond. And she wasn’t honest or clear with herself about the steps needed to keep her credit score high, stay out of debt, or save enough to buy a home. The best way to address emotional insecurity around money is to look at the factors that drive spending on it. Why are you unhappy with your financial situation? What fear is influencing your decision making? If you feel out of control like Cynthia finally did, it may be time to consider contacting a financial planner.
The lesson: A good financial advisor makes you think about how you structure your money. They can advise you on how to develop your own philosophy and best practices on spending and investing and create a realistic plan for your daily finances and long-term goals. “Now I know that he could have done both. I could have protected myself financially and still be an independent risk taker. The key was to protect my finances first and then take the risks. In that order,” says Cynthia.
pam krueger is an investor advocate, personal finance journalist, and author. She is also the founder and CEO of the wealth and podcast host friends talk about money.
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