June is the time for graduations, and for graduation speakers pontificating on the meaning of life. For something more down to earth, here's some purely practical advice to this year's grads on how to be financially successful.
The rules for financial success are simple. But before we start, note that following these rules doesn't promise to make you happy in life or lucky in love. They're merely about having lots of money, which isn't life's most important goal. But my rules do guarantee financial security.
Fortunately, the rules are easy to understand. And, except for Rule 1, they're easy to implement. Unfortunately, Rule 1 is the absolute, make-or-break rule.
Rule 1: Spend less than you earn.
If you spend less than you earn, you accumulate wealth over time. If you spend more than you earn, your debt accumulates instead. To get rich, you need to set aside some money to get rich with. In contrast, to get poor, all you need do is fail to set money aside, and then run into a little bad luck. Don't misunderstand, one reason you'll work hard is so that you can splurge on occasion. Go right ahead and indulge yourself -- just don't do it all the time.
It's easy to check if you're being obedient to Rule 1. If you're paying interest on a credit card balance, you're in violation. And if you ever -- ever -- take one of those payday loans, you're in violation big time.
The remaining rules are much easier to live with.
Rule 2: When a good opportunity comes along, invest in yourself.
There's no capital investment quite so good as human capital investment. More education, taking an apprenticeship -- all these can pay big dividends for years to come by giving your income a healthy boost. Of course, be sure you know the difference between consumption and investment. A course in poetry writing may make you a better person; it's not likely to make you wealthy.
Rule 3: Buy a house as soon you know you'll be staying put for a few years.
Owning the roof over your head has been a rewarding long-term investment for decades and decades. There are tax advantages. There are psychological advantages. Nationally, over the last three decades housing prices have risen about 7 percent a year. Last year, prices rose more than 11 percent. And much of Washington state has been a particularly hot market.
You may hear the term "housing bubble," meaning that house prices are too high and are going to fall. You needn't be concerned about bubbles so long as you're going to stay in the house you buy. Whatever happens to rents or housing prices, you've locked down your biggest single housing expense. Think of Rule 3 as a get rich slowly scheme.
Rule 4: Max out on not paying taxes.
Put away as much as you can in 401(k)s, IRAs, College Savings Plans -- anything that legally defers or eliminates paying taxes. There's no point in sending money to your Uncle Sam that your Uncle is willing to let you keep!
Rule 5: Don't work up a sweat trying to outsmart the market.
You can't predict the market. I can't predict the market. The real expert, the guy with the inside information or the hot tip -- he can pick your pocket but he can't predict the market either.
Invest in no-load index funds from a respected mutual fund family and let your money grow. Don't get in the habit of checking how your investment's doing, at least not more often than once a year. It isn't going to grow any faster if you worry over it.
So, graduating seniors, as you go forth today I hope and expect that you shall forget every word said here. Hey, graduation is about having fun.
But, maybe you could clip out these rules and look at them on the day you get your second pay check. The first check ought to go for fun too.
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Dick Startz is Castor Professor of Economics and Davis Distinguished Scholar at the University of Washington. He can be reached at econcol@u.washington.edu.
This column appeared in the following publications:
Bellingham Herald, June 12, 2005
Everett Herald, June 8, 2005