We are back from a rowdy New Year celebration at my sister’s house. This time my 23 year old nephew invited a bunch of his friends which resulted in what can only be described as a big frat party. Drinking, dancing, yelling and screaming was happening on the first floor of the house while my son was somehow sound asleep on the second oblivious to all the noise. Midnight was punctuated by the sounds of popping champagne bottles, with contents of several ending up all over the walls and the ceiling. My brother-in-law was not happy…
Beer pong and other festivities aside there was serious business at hand. My nephew is about to graduate from a prestigious university after a 6 year program to become a pharmacist. He did very well in his studies and internships and already has 2 job offers with starting salaries around $130,000 per year plus benefits. At the same time we all know that a degree from one of the top schools doesn’t come cheap. Despite securing several scholarships he will start out his professional life settled with about $150,000 in college loan debt carrying interest rates anywhere between 4 and 8 percent.
My nephew lives with his parents and commutes to school to save on housing and food costs. He’s been working in pharmacies part time for several years now to have some cash to pay for his expenses. He has a good grasp on finances but there are a couple of things that are not helping at this point.
The biggest issue is that my sister and her husband lead a typical consumer life. Both work long hours but whatever they make is immediately spent on stuff with very little saved for the future. Money flows like sand through the fingers committed to housing, car leases, commuting, food, HD cable, cell phones and data plans for 5 people, Apple products, decade long home renovations, incandescent lighting, “throwaway and replace” SOP, heating, cooling and on and on. They both admit that they “have no plan” and will have to work till they drop, yet eyes become glossy when the subject of finances and expenses comes up. I still try to drop hints like gifting CFL light bulbs and plugging holes in their drafty house insulation, but it appears that they are set in their ways and not looking to change.
While they are some of the most loving and caring parents I have ever met, this is a challenging environment to learn about finances. Looking at my nephew I’m proud of what he’s accomplished at such a young age and get excited talking with him about the opportunities that he now has. Earning six figures in his early 20’s can set him free in a decade, but only if he can do a 180 from his parents lifestyle.
When he started college I offered help with any financial questions that he might have. This led to conversations about credit, houses, cars, taxes and many other big topics that I wish I had someone to talk with at his age. I showed him how I could’ve been financially free by 40 if I only tweaked a couple of variables in my early 20’s: saving, investing and spending. He does not have to follow the path chosen by his parents; there is another way.
A while back I got him “The Millionaire Next Door” book as a present hoping that it will help to cut through all the “Keeping up with the…” bullshit. He is surrounded by the rich kids predictably flaunting their “wealth” with designer clothing, jewelry, cars and other material possessions. He was surprised to find that statistically these kids and their parents are destined to work till they die to support their treadmill lifestyles. I was glad when he brought up the book and shared his thoughts some time later saying that it was an eye-opening read. To be honest, I thought that he would never even read this book.
Sensing the opening, I gave him the “Automatic Wealth for Grads” book about a year ago. He was getting closer to graduating and I felt that it would give him a good foundation in what it takes to become and stay financially independent. I picked up the book from a shelf in his room and was happy to see highlighted paragraphs and dog-eared pages.
His birthday is coming up and I plan on getting him “Your Money or Your Life” book to really drive home the point that there is another way. YMOYL really opened my eyes on what is it worth working for and hopefully it will do the same for my nephew.
While at my sister’s house, I was happy to hear my nephew mentioning that he found a couple of finance blogs on his own. I recommended some other ones and he jotted them down. He was also proud to show off his Mint.com account where he started keeping track of expenses. He also admitted that it was probably a mistake to lease a $40,000 car even if his parents pay for half and even subsidise insurance.
Building on the momentum we came up with a high level game plan for the next few years.
Continue living with parents for 3-4 more years to save on living expenses. Parents are encouraging him to stay anyway.
Pay off 150K in student loans within 3 years after graduation.
Max out 401(k) at work. Keep it simple and invest everything in one target date fund like a Vanguard 2055.
Save up 20% down payment and purchase a duplex. My nephew is really interested in owning an income producing property at some point and this is a great way to get into rentals. Live in one apartment and rent out the other while learning how to DIY maintenance and repairs.
Open a brokerage account and start building a taxable portfolio. This one is done as we set up an account at Vanguard while I was at my sister’s. They wanted a $3,000 initial investment to fund the brokerage account which my nephew did not have. We called Vanguard and found a loophole where if you send a paper check for any amount, they will deposit it into your brokerage account allowing you to make a trade bypassing the minimum. My nephew wrote a check for $200 and mailed it in.
Use any extra money to buy shares in Vanguard funds. At this point I recommended putting everything into VTI for simplicity and cost reasons. This ETF index fund represents 100% of the US stock market and carries a super low 0.05% fee. We will revisit investment allocations at a later time when there is a substantial buildup in capital. *I just got a text from my nephew saying that the check has cleared and he bought 2 shares of VTI today!
Continue using Mint.com to track expenses and net worth. I find it extremely motivating to be able to look at all the pretty graphs showing progress and I know my nephew will love it too.
Once the car lease is over get an older model, preferably a low maintenance Japanese 4 cylinder hatch or sedan. After a no-fault accident and random scratches just from parking his leased car in a big city and the associated costs and hassles, my nephew is on board with this.
Watch out for lifestyle creep as big paychecks start coming in. This should be mitigated by the second bullet point as large part of each paycheck will be committed to paying off student loans. We talked about continuing “living like a student” and my nephew reluctantly agreed… This area will need to be watched closely.
Design a lifestyle where saving at least 50% comes naturally without any hardship. This should be relatively easy given a six figure starting salary.
Based on our conversations I’m confident that my nephew is serious about starting his journey to financial freedom. Looking back to when I was his age it’s obvious that he is already ahead of the game. While I can’t go back in time to change a couple of things for myself, it’s great to watch and be part of this adventure in the making.
I also see now why mentoring can be so fulfilling… In a way, mentors see a shadow of themselves and get a chance to re-write history.
Readers: Do you think that we came up with a good financial plan for a six figure earning, six figure debt-laden 23 year old? Would you add or change anything?