As summer comes to an end, I was asked to provide advice to departing interns. Alongside the professional development discussions, I always recommend mastering personal finances. While it may take time to gain experiences and chart an individual financial path, here are my basic ‘SWIM’ recommendations to get started.
Save at least half of your income. You probably can’t do this with a high debt load, so get out of debt. Why save fifty percent plus? Traditional lower savings guidelines assume you’ll have consistent salaried income over your career, and you may not. You’ll also want to avoid dependence on individual work income or social support in the long run. If financial independence is a priority, push your savings rate to 80-90%. Once your annual expenses are 3-4% of your savings, you no longer need to work for money.
Wait for Purchases
Be disciplined with your purchases. Let needs and occasional wants drive purchases rather than income (or a windfall) driving consumption. Implement a routine to prioritize, evaluate and reprioritize your potential purchases in order to manage your changing desires before cash outflow. Nirvana is passing on a purchase even when you can afford it.
“This is the natural state of man: a head full of desires, but with the desires in question changing from year to year and even from minute to minute, like the water in a river.” –William Irvine, On Desire
Build your balance sheet with net income producing assets and understand the associated risks of your holdings. Avoid unnecessary fees, transaction costs and anything that consistently causes you to lose sleep. An investment isn’t ultimately profitable until you receive cash, so understand the time it will take for that to happen. Gambling isn’t investing.
Maximize What Matters
Customize your choices to maximize what matters and minimize what doesn’t over time. There are direct trade-offs between having more stuff and having more flexibility. Defer to simplicity over complexity with finances and quality over quantity with ownership. Remember that time and health are often your most valuable resources.
“If you get rich, you have an apartment with an extra bedroom – and then you die.” –Arunachalam Muruganantham
The ‘SWIM’ recommendations are related. The more you focus on one, the more value can be realized in the others – minimizing purchases drives savings which drives investment, etc. Your future self with thank you for aligning your financial choices in the present.