Financial Lessons from a 23 Year Old

August 22, 2011

I just got off a call to our financial helpline with an amazing young woman.  It is funny how sometimes you get a caller who should be teaching financial planning instead of calling the helpline; this was one of those calls.  I was struck by her insight and maturity for such a young woman.  She had a good idea of what she needed to do but was trying to do everything at once.  I helped her take a step back and look at things a bit differently.  She had all the right pieces but wasn’t sure how to put them together.  The pieces themselves aren’t the important part of this story, but the wisdom behind how she was making her decisions.

We’ll call her Katie (not her real name), and she wants to:

  1. Save for retirement to pick up the company match.
  2. Get out of debt.  Her husband is in school (has two more years) and they are taking out student loans for his tuition.  They also have some credit card debt from moving expenses, and unexpected higher expenses when they moved.
  3. Build three months emergency reserve.  Right now they have six weeks in reserve.

Katie hates debt (even student loan debt), so she is only taking out subsidized loans (which she won’t accrue interest until her husband graduates) and then she’s trying (not very successfully) to live on her salary while paying the rest of school.  We talked about student loans being a good kind of debt and that it’s actually ok to take out what you need.  Credit cards are worse even if they have an introductory rate of 0% because the base rate could go up to 25%.  Student loans can also possibly be deferred for a bit, if you hit hard times in the future.

Then we looked for money in her budget – since they got a pretty high tax refund and their situation hasn’t changed, we talked about changing her exemptions to get more money in her pay check now to pay off debt, and a lower refund next year when she files her tax return.  We also talked about temporarily stopping her 401(k) to build her savings, and she didn’t like that idea at all.

Here is where the insight came in.

She took a long term, but very realistic view of her financial planning.

She is the saver in the family and her husband wants to eventually start his own business.  Even though she HATES debt, she wants to jump start her savings and fund her 401(k) up to the match NOW because he probably won’t fund a plan later.  She wants to be a mother and mentioned she may work part time or be out of the workforce for a few years, which will impact her retirement savings.  I bring this up because I talk to a lot of young mothers who just assume they’ll return to work when their children are born so they build their lives around two incomes including a bigger mortgage, thus trapping themselves into working full time when they have babies.  Not Katie, she wasn’t just thinking of that, she was actually considering how that would affect her future social security, pension and 401(k).

She isn’t mortgaging her future.

I have fallen into this trap before myself where you think, “I’ll go ahead and borrow because when I (insert future action), I’ll have the money to pay for it.”  In her case, she plans of course, for her husband to get a job when he graduates but she isn’t racking up student loans in the meantime.  She and her husband are living like “starving students” and only borrowing the bare minimum.   They will thanks themselves later because there is nothing worse than getting the increase in income whether it is a job, a raise, a bonus, or a tax refund and have it already spent.  It takes the wind right out of your sails.  Have you ever done that?  I have and it is no fun.

She is self reliant.

When she asked about the emergency fund, I figured she didn’t have one.  Considering she has a hubby in college, recently moved, and they are living off one income, the odds of her having even having even one month’s expenses in savings seemed remote.  Wrong.  She was upset that she didn’t have the full three months.  She actually should in this economy because if she lost her job, it might take six months to find a job and then where would they be?  He might have to drop out of school or they’d possibly have to rely on family to help.  I don’t know because I didn’t have to ask about her back up plan.  It was refreshing to listen to her.  We worked out a plan to build their emergency fund to the full three months within a year, while at the same time paying off the credit card.  I was impressed.

I gotta say Katie, I like your style.

I think you’ll make a great Mom, too.