Financial freedom is not just a dream; it’s a journey that begins with understanding and taking the right steps. For high school and college students, this journey is especially crucial as it sets the foundation for a secure financial future. This short guide will walk you through the essential steps to achieve financial independence.
(Prefer audio? Find the audio summary at the end of this post.)
1. Pick the Right Field of Work
Ikigai is a Japanese concept that means “a reason for being.” It’s about finding joy, fulfillment, and balance in the activities that make up our daily lives. Finding your Ikigai is about aligning your passion, profession, vocation, and mission. It’s a delicate balance that, when achieved, can lead to immense personal and financial rewards. Consider these questions:
What do I love? What subjects or activities make you lose track of time?
What am I good at? What are the skills for which others often seek your help?
What can I be paid for? What jobs are available that align with your interests and skills?
What does the world need? How can your work contribute to society?
Combining these elements will lead you to a career that not only pays well but also brings satisfaction and a sense of purpose. Research industries and job markets to understand where your Ikigai may lie. Seek internships and part-time jobs in areas of interest to gain experience and insight.
2. Save 10%-20% of Your Net Income
The golden rule of personal finance is to pay yourself first. Before spending on anything else, set aside 10% to 20% of your net income. This habit ensures that you’re consistently saving for your future. To make it easier, automate your savings so that a portion of your income goes directly into your savings and investment accounts. I like to think of it as paying a monthly subscription fee to my future self, that will pay me back 2, 3, 4 or even 8 times the fee and provide financial freedom!
Saving is a habit that builds discipline and provides a safety net for future financial endeavors. By saving a portion of your income, you’re ensuring that you always have funds set aside for emergencies, opportunities, and investments. When you are just starting your first full-time job, you may start by saving 10% and gradually increase it to 20% (or more!) as your income grows. You can use this spreadsheet to track your expenses and savings. It has categories for must-haves (needs) and fun things (wants). It has a column for monthly goals and also provides a monthly summary to track your progress. You can tailor it to suit your needs.
3. Contribute to 401(k) or IRA and Make it Automatic
Retirement may seem far away, but the earlier you start saving, the better. If your employer offers a 401(k) plan, contribute enough to get the full match; it’s free money. If they don’t, open an Individual Retirement Account (IRA) and contribute regularly. These accounts offer tax advantages that help your savings grow more efficiently.
Retirement accounts like 401(k)s and IRAs are powerful tools for building wealth over time. They offer tax benefits that can significantly enhance your savings. Here’s why starting early matters:
The power of compound interest means the earlier you start, the more you’ll have.
Automatic contributions ensure you’re consistently saving without having to think about it.
Over time, the tax-deferred growth can lead to substantial tax saving.
4. Invest in Low-Cost Index Funds or ETFs
Investing is how you turn your savings into wealth. Index funds and Index Exchange-Traded Funds (ETFs) are excellent options for just about everyone thanks to their low costs and diversified portfolios. The key is to invest for the long term. Resist the urge to sell when the market dips; those who stay invested are more likely to see their investments recover and grow over time.
Start with at least 10% of net income and increase it as your income grows.
Avoid timing the market and stay invested through market ups and downs; consistent long-term investing is key.
As you approach your 50s, adjust your asset allocation and rebalance once a year if necessary.
Conclusion
Achieving financial freedom is a disciplined process that requires patience and persistence. By following these steps, you’re not just preparing for a comfortable retirement; you’re setting yourself up for a life where financial stress is not a constant burden. Start today, and watch your efforts compound into lasting financial well-being.
The key is to begin, savor the early successes, and then stay the course, allowing the power of compounding to work its wonders.
Q & A
Here are the answers to some of the common questions.
Q: These steps sound simple. So, why do half of families in the United States have no retirement savings? A: The steps may be simple but they are not easy. When you are young, retirement seems like a remote event. Instant gratification often trumps long-term thinking. Retirement planning, saving and investing don’t seem important until it's too late. In most states in the U.S., personal finance courses in school are not required. Some people lack the knowledge and motivation and are too overwhelmed to take the first step even though most of them are on their own with no pensions and inadequate social security. Also, during your 20s and 30s (when you should ideally start saving for retirement), other obligations such as student loan payments, a down payment for a home, children and family related expenses make it difficult to start saving and investing.
Q: How do I find a field of work that aligns with my Ikigai? A: Start by exploring your interests and strengths. Volunteer, intern, or work part-time in various fields to gain experience. For example, if you love technology, enjoy tackling tough problems or solving logic or math puzzles and have a knack for coding, consider a career in software development or a related field. If you are passionate about physical or mental health and love to help people, explore health related fields. Or one or more of these 20 occupations with high projected growth may spark your interest. It is also very important that you are always learning, no matter what field you choose. And, if you choose the field that you are passionate about, you will always be learning. Learning not only enhances your career but also promotes your overall wellbeing.
Q: What if my passion doesn’t pay well? A: Balance is key. You might have a passion that doesn’t pay well initially. In such cases, you can pursue it as a side project while working in a related field that does pay. Over time, you may find ways to monetize your passion or transition into it full-time. BLS is a good source of information about the outlook for various occupations. Here are the 20 occupations with the highest projected percent change of employment between 2022-32.
Q: Can you recommend some books that can help me learn about personal finance and investing? A: To get started on your investing journey, here are a few books that I would recommend:
The Millionaire Next Door by Thomas Stanley and William Danko
The Little Book of Common Sense Investing by Jack Bogle
I Will Teach You To Be Rich by Ramit Sethi
A Random Walk Down Wall Street by Burton G. Malkiel
Q: How can I save money when I have student loans and other expenses? A: It’s about prioritizing your future self. Even if it’s just a small amount, saving consistently can make a big difference. For instance, if you save $100 a month starting at age 20, by age 65, you could have over $300,000, assuming a 7% annual return.
Q: Isn’t it better to pay off debt before saving? A: While paying off high-interest debt should be a priority, it’s also important to build the habit of saving. Even a small emergency fund can prevent you from going further into debt when unexpected expenses arise.
Q: Can I access my retirement funds before retirement? A: While it’s possible, it’s not advisable due to penalties and lost growth potential. For example, withdrawing $10,000 from your retirement account today could mean missing out on over $100,000 by the time you retire, assuming a 7% annual growth.
Q: Why choose index funds or index ETFs? A: Index funds and index ETFs provide diversification, which reduces risk. Also, due to their lower expense ratio, index funds perform better than 90% of actively managed funds over the long term. Instead of betting on specific companies, you’re investing in a broad market. For example, an S&P 500 index fund gives you a piece of the top 500 companies in the U.S. including the magnificent 7.
Q: I just started my first job earning a $40,000 annual salary which I expect to grow at 3% per year. I plan to save 12.5% of my income. What would be the value of my retirement account when I turn 65? A: Good plan! By the way, 12.5% is equivalent to 1 hour of your salary each day. This is a great start. You can increase it to 15%, 20% or even 25% as your income grows. For example, you may save half of your raises to increase savings, without compromising your lifestyle needs. At 12.5% saving rate, your account balance will be $1.6 million (see the breakdown in the table below).
As you can see, 75% of the balance comes from investment returns. However, it requires you to save consistently and stay invested through the end, through market ups and downs. Note that the majority of the growth comes after you have built a large enough balance as you get closer to retirement age. For example, at 56, your account balance will be about $770,000 which more than doubles by the time you turn 65 (in the last 9 years)! So, again, saving consistently and staying the course all the way to retirement is key.
Note: You can use this spreadsheet to calculate your projected account balance based on your own data (make a copy to make it editable).
Feel free to post below any additional questions you may have.
Audio Summary created using Google NotebookLM
