By Toby Mathis
COVID-19 has destroyed a buzzing US economy and jeopardized many retirement plans. With the manufacture of vaccines, however, hope for a recovery is slowly being restored.
Meanwhile, the reality is that the less wealthy have been hit hardest during the pandemic, and millennials have taken an unfair share of the damage. Overall, the rich keep getting richer and the gap between rich and poor continues to widen.
With a potential recovery, will a period of economic expansion occur, similar to that which followed the Great Recession of 2008-09? It’s hard to say, but millennials, the largest demographic of America’s workforce, are not in the best position to take advantage of a financial boom. And this scenario is eerily similar to their predicament during the economic recovery 10 years before the COVID crash.
Many millennials did not experience economic gains at the time. As the economy grew and the stock market continued to climb, millennials were crippled by student debt, dipped into retirement savings, and relied on high interest loans. Researchers who now focus on financial literacy warn that another wasted decade could be in store for many millennials for essentially the same reasons – habits centered on poor financial literacy and poor money management practices.
But there are ways for young people entering their richer years to break those bad habits and pull themselves together financially, which will put them on the path to solid retirement planning. It’s really not complicated, mostly requiring knowledge and discipline to make smart choices. These are the top three non-financials that many millennials commit that keep them in prison financially, and how to avoid them:
Never pay an expense with a liability. An easy to understand example is not using credit cards to pay your rent. Some of you might say, “I have no choice. But you have a choice. Cut spending. Return to relatives or share the space with others. Work hard so that you don’t incur debt to pay your expenses. Just say no.
Plus, it doesn’t make sense to incur significant college debt for a degree in fields that have low average salaries, such as English, history, or philosophy. The only exception to not paying expenses with a liability is if you are a student pursuing an engineering, professional, or other degree that has a high market value that you can verify. But if you’re a full-time working-age adult, absolutely don’t pay an expense with a liability, because you’ll dig your hole much deeper, and retirement just might be a pipe dream.
Don’t buy liabilities with your income. Resist the temptation to buy something just because you are financially eligible. First-time homebuyers are often surprised to qualify for a large home purchase, but that doesn’t mean they can afford it. It is often the beginning of the pain.
Your real estate agent would like to sell you a more expensive house because he earns more on the commission. Lenders would like to maximize you to earn money from the loan. Credit card companies love that you buy things with your card and have a large balance. The furniture store salesperson would like to sell you new furniture for each room in your home and will likely have internal credit to offer as well.
Rather than buying liabilities with your income, buy assets with your income. When you have enough assets, you can start with larger purchases, but not before. It’s like a game of Monopoly. Your first rounds of the table several times, you buy assets that will produce income later. But don’t spend lavishly now just because you want stuff.
Don’t buy liabilities with liabilities. Let’s look at something a lot of people do – buy a car on credit. No. You must have an asset that pays for this car.
Let’s say I have a rental home that generates positive cash flow of $ 500 per month and I get a car loan of $ 500 per month. It does not matter, because I do not incur any additional expenses. I pay it with the income from an asset. The same is true for boats, RVs, or anything else that is a want and not a need. This is even true for your home. For clarity, there is a reasonable base expense for just about any need. For example, if you need transportation, you don’t need a Bentley. Almost everything you buy is a need. But whatever you do, don’t buy the need on credit or by borrowing.
If you know, for example, that you can rent a reasonable house in a reasonable neighborhood for $ 1,500 per month, that should also serve as a budget for buying a house. And remember, this number doesn’t just represent your mortgage, but also your insurance, interest, maintenance, and all the other additional expenses of a home. What you should do is rent the reasonable house in the reasonable neighborhood and build up assets with the extra money you can save. As these assets increase, your ability to buy liabilities with the cash flow from those assets increases.
These no-no’s should be avoided like the plague, yet so many people fall prey to them, and it’s not just millennials. I call it a losing loop, and it has progressed to the point of a national crisis. People fall into the trap of low interest rates and bargains and end up buying one liability (i.e. a car) with another liability (i.e. a loan). So many people in our national workforce who are in their prime earning years feel financially trapped and retirement seems impossible.
But it is possible, because these problems that bring pain and suffering are easy to avoid with the right knowledge and disciplined decision making that has both short and long term impact.
About the Author: Toby Mathis
Toby Mathis, author of the next book Infinity Investing: How the Rich Get Richer and How You Can Do the Same, is a founding partner of Anderson Law Group and current manager of Anderson’s Las Vegas office. He has helped Anderson evolve his business and estate planning practice to a thriving tax practice and national registered agent service with over 18,000 clients. In his work as a lawyer, Mathis has focused exclusively on the areas of small business, taxation and trusts. Mathis is the author of over 100 articles on small business topics and has written several books on good business practices, including Corporate property for tax purposes and 12 steps to running a successful business.