7 Key Ingredients For a Healthy Financial Plan in Your Youth

When I was eight, I didn’t like the food on my plate touching each other, especially at Thanksgiving. The peas couldn’t touch the carrots, which couldn’t touch the mashed potatoes, which couldn’t touch the turkey. Maybe I was an OCD eight-year-old but hopefully you can at least sympathize with me.

I now realize that a good dish has all the ingredients working together rather than remaining separate from each other (although I’m not suggesting jumbling your Thanksgiving dinner plate). Developing a financial plan works the same way and the sooner we integrate all elements of our financial lives the better off we’ll be.

Taking advantage of these opportunities in our youth allows us to avoid a lot of mistakes we’d otherwise make when we’re older. We take care of our bodies with healthy foods, so why not take care of ourselves with healthy financial habits?

Don’t want to read all the ingredients? Skip ahead:

  1. Develop a simple budget you can stick to
  2. Establish an emergency savings account
  3. Don’t take on more debt than you can afford
  4. Ensure you have proper insurance coverages for “the basics”
  5. Establish tax-advantaged dollars that benefit you long-term
  6. Impulse buying…don’t do it!
  7. KISS…Keep It Simple, Stupid!

Ingredient #1: Develop a simple budget you can stick to

When we start cooking a meal, we’re usually wise to start with good prep (making sure we have the right quantities of the right ingredients) before we even turn on the stove or BBQ.

A good budget (meaning one that is achievable but also allows us to live and have fun) is the foundation to financial independence.

The sooner we implement a budget that we can stick to, the more balanced and less stressful our life becomes.

“Today Us” vs. “Future Us”

I acknowledge that the word “budget” has a negative connotation and it’s met with instant resistance whenever it’s brought up. It might be helpful to think of a budget as the pathway to “future us” where we get to do all the things we want to do, rather than a restriction on the things “today us” wants to do.

Budgeting allows us to decide where our dollars go. If we aren’t aware and we consistently max out the credit card, we instead run the risk of Visa deciding where our dollars go (hint: it’s to them). It’s empowering to be in control of our financial life as opposed to our finances controlling us.

ACTION: Develop a budget that works for you. You can use an app like Mint (it’s free!) or if you’re a spreadsheet nerd like me, you can develop your own template in Excel or Google Sheets and track your monthly expenses. Decide what works best for you and get started.

Ingredient #2: Establish an emergency savings account

Now that our meal prep is done, it’s time to start cooking.

I’ll talk about how and where we should save our money in the coming steps but it’s important first to establish the need for saving. We can run the same thought experiment we did with budgeting and can think of saving as paying “future us” rather than taking away from “today us”.

It’s helpful to have some of these lying around if we’re in a pinch.

[Bleep], Now What?

The most important saving we can do in our youth is to establish an emergency savings account for the “[bleep], now what?” moments that will inevitably happen to us. This is an account that ideally has 3-6 months of fixed (rent, insurance, car/phone payments) and variable (food, clothing) expenses sitting in cash that we have quick access to.

It takes a while when we’re young to build up these savings but it’s important to “just get started.” Also keep in mind that this account is for actual emergencies…running out of beer during Sunday Night Football is not an emergency!

ACTION: Open a second checking account and set up automatic monthly or bi-monthly transfers from your main checking account. My personal setup is two days after each payday a little goes into my emergency account and I pretend that money never existed. 

Ingredient #3: Don’t take on more debt than you can afford

It’s always important to cook for the right amount of people and to not bite off more than we can chew!

Owing people money is generally not a good idea, especially if the interest rate on top of the money we owe is high. But there are a few good reasons to take on some debt in our youth that help us progress forward, like going to college or buying a house.

Student loan debt can be crippling if we don’t land a career that can help pay it off.

Not All Debt is Bad, But Be Cautious

Taking on debt in these situations makes sense if we can afford to make the payments. Taking out $200,000 in student loans to get a “14th century French literature” degree is probably not the wisest decision. Nor is buying a $1 million house when we’re making $50,000 a year at age 23.

Credit cards are another source of potential pain. While they are helpful for us to establish a solid credit score, most of them carry interest rates in the low-mid 20%’s which can sneak up on us if we forget to make a payment or two.

ACTION: Only take on as much debt as you can afford, and only do it when it makes sense. Pay off your credit card 2-3 days after you swipe if you can. This allows you to use the credit card to show activity while also increasing your credit score with timely payments…and racking up those juicy rewards points!

Ingredient #4: Ensure you have proper insurance coverages for “the basics”

A key ingredient in a healthy financial start that is often overlooked is how well we’re protected against potential disasters, however unlikely they may be.

Car, Health, and Life Insurances

“The basics” pertains to our car insurance, health insurance, and potentially life insurance if kids are in the picture. Other things like commercial liability or inland marine insurance are important, but beyond the scope of what we’re addressing here.

I get it, this stuff is boring and sometimes scary to think about. When we’re young, we don’t want to pay more for better insurance when we think, “but it’ll never happen to me!” We think we’re invincible in our youth…until we’re not.

Don’t Skimp on Coverage Limits

Most often, young people are either under-insured or have the wrong type of coverage. Buying the minimum amount of car insurance our state allows might save us a few dollars every month but won’t do us a lot of good if someone needs 2 prosthetic legs from an accident we caused.

If we’re young and in good health, we may also not need the more expensive health insurance plan our employer offers. A high-deductible health plan (HDHP) coupled with a Health Savings Accounts (HSA) is a cheaper and potentially more effective route for health coverage as it allows us to put away triple-tax advantaged money in an HSA while paying less for health insurance.

ACTION: Consider increasing your car insurance coverage to something like 300/500/100 if you can afford the monthly payments. You can also increase your comprehensive and collision deductibles to help offset the higher premium. Consider a HDHP if it’s available to you and couple it with an HSA to get more “qualified” dollars working for you.

Ingredient #5: Establish tax-advantaged dollars that benefit you long-term

Best not to wait. Source: BlackRock

Now we get to add some spice and flair to our meal without straying too far from the main recipe.

There are really two kinds of dollars we can save: those that are tax-advantaged (“qualified”) and those that aren’t (“taxable”). Qualified dollars are found in accounts like 401k’s, 403b’s, IRA’s and HSA’s and they enjoy tax-deferred growth. Taxable dollars are what’s in our checking and savings accounts, or brokerage account if we have one, and these dollars will be subject to capital gains taxes if we invest them.

Roth Dollars Reign Supreme

The dollars we contribute to qualified accounts are either taxed when we take them out (Traditional) or taxed when we contribute them (Roth). I’ll go out on a limb and say that with our country currently $31 trillion in debt, I doubt tax rates will be lower in the future.

So personally, I’d rather go the Roth route and pay a known tax rate up front on my 401k and IRA so every dollar in those accounts is mine when I retire. Regardless, it’s important to just get started as the penalty for waiting can be severe.

ACTION: Getting started with qualified accounts at this stage in our careers is more important than how much we put in them. Be sure you’re participating in your work retirement plan and if you’ve handled Ingredient #2, consider opening a Roth IRA and making small monthly contributions.

Ingredient #6: Impulse buying…don’t do it!

Imagine making the healthiest dinner ever and then ruining the health benefits by eating a massive piece of chocolate cake shortly after. Might not hurt us a few times, but a consistent habit of it will certainly degrade our health.

A good financial strategy that incorporates the ingredients above can be ruined with impulse buys of things that we think we need, but we really don’t. Whether they’re expensive things that we buy once or twice a month (but this jacket looks so good on me!), or a bunch of smaller expenses that we indulge in more often (sorry DoorDash), they both have the same effect of derailing our financial goals.

Discipline and developing a plan will reduce the likelihood of finances giving you this look.

Be Disciplined Now to Reduce Stress Later

It’s so easy to engage in these behaviors these days and we’ve all been there. I’ve been the victim of the one-click Amazon purchases and if you haven’t, you’re either lying or you’re more disciplined than the rest of us (reach out to me so I can study you).

Discipline is probably the most important trait when it comes to building wealth. It’s much easier to continue doing the same thing than it is to drop a habit and start a new one. If we develop good disciplinary habits early in our careers, then they will be easier to maintain and practice going forward when life inevitably gets more complex (more on that in the next ingredient).

ACTION: Always keep the budget you developed at the forefront of your mind when making large purchases. If you online shop, leave whatever you think you need in your cart for 72 hours. If you decide that you absolutely need it after the 72 hours are up, then buy it. If not, remove it from your cart and pat yourself on the back.

Ingredient #7: KISS…Keep It Simple, Stupid!

Any fans of “The Office” will know what this means. I doubt Michael Scott coined this acronym, but he’d probably tell you he did.

Keeping your financial life simple is the final ingredient that you sprinkle over the entire dish that really takes it to the next level.

Not All Information is Good Information

It’s easier than ever these days to have unprecedented access to information at our literal fingertips. A lot of the people producing this information have good intentions and want to arm society with knowledge to increase its odds of success (cue my “head-bow-with-hand-over-heart” action here). But there are always bad actors that we have to watch out for.

This usually comes in the form of someone selling you a low risk, high reward strategy, a flashy new product (hey Bitcoin!), or a “hot new stock”. Think about it…if you had a silver bullet to generate massive returns, why would you tell everyone? These kinds of things should make your spidey senses tingle. Don’t fall for it.

Turn Off The TV, Put the Phone Down, And Enjoy Life

Keep your life simple. The reality for us in our youth is that we can weather pretty much any storm that hits markets because time is on our side. We’re also broke enough that it’s hard to achieve proper diversification when we’re just starting out, so we’re better off throwing what few eggs we have into the S&P 500 basket and calling it a day.

S&P 500 performance 1960-2022
Who wouldn’t want to participate in this? Source: Yahoo! Finance, S&P 500 daily prices from 12/31/1960 to 12/7/2022. 7.03% annual return over the time period. Past performance not indicative of future results.

We’ve got more important fish to fry than worrying about what ticker symbol to gamble on. This is our time to explore the world, make memories with friends, and start our careers and families.

ACTION: Consider investing in the broader market rather than individual companies. Stay disciplined, stick to your gameplan, and don’t worry about short-term market movements. Play the long game and enjoy the things in life that make you happy.

The Final Recipe

Once we mix all seven ingredients and marvel at the healthy financial recipe we’ve just made, let’s not forget the last part: eat it! Cooking an awesome dish and then letting it sit and get cold doesn’t do anyone any good and developing a financial plan for ourselves is no different. Implementing the strategies we’ve developed for ourselves is rewarding and the sooner we get started, the more rewards we’ll have to reap!