Quick question: When should you start planning for your financial future? I have posed that question countless times to scores of young professionals—including my own children. The right answer, no matter how young you are, is right now.
Most millennials—those between the ages of 18 and 35—believe they have plenty of time to financially prepare for post-work life, especially since it won’t arrive for another 30 or 40 years. I have often been bewildered by the fact that a good number actually believe sound money management is spending every dime until the next payday.
Those who embrace that short-sighted, paycheck-to-paycheck practice often make colossal financial blunders or lack the reserves to handle emergencies that could have been manageable with a bit of planning. They find themselves forced to resolve major setbacks and play catch-up during peak-earning years instead of maximizing assets that they could have started accumulating at the onset of their formative professional years.
Money is not just for consuming but for investing. The acts of financial folly I’ve witnessed remind me of so many young athletes who finally make it to the pros and earn multimillion-dollar paychecks but whose stories tragically end with them winding up bankrupt because they invested in a lavish lifestyle instead of a stock portfolio that could have provided financial security after the cheering stopped.
This lack of disciplined money management comes down to aptitude and attitude. A recent Junior Achievement study reveals that 51% of millennials had not held a conversation related to handling their finances with even one person; only 21% talked with someone who has a financial background. Moreover, a 2014 Bankrate.com study shows that the majority of young Americans have an aversion to the stock market. For instance, 39% of respondents aged 18 to 29 say cash is their preferred way to invest money that they don’t need for at least 10 years. This approach represents a troubling trend for a generation experts say has the greatest savings burden when it comes to building a healthy retirement nest egg.
I had the opportunity this summer to participate in a private financial management discussion for pro athletes that would prove helpful to all young professionals. The owner of an NBA basketball franchise who grew tired of seeing players leave the game virtually penniless decided to hold the session for his rookies and second year players. First he shared with the group a sobering statistic: that of roughly 450 NBA players earning collective salaries totaling $2.4 billion a year—the average annual salary is $5 million—more than 50% end up bankrupt. He further offered the following realities: Pro athletes earn money for a limited time; half of their annual wages go to pay taxes and agents; and “post-retirement” opportunities rarely provide similar earnings. So they don’t risk being financially benched in the future, he offered a formula for long-term financial stability:
Save 50% of one’s salary during playing years + Earn 10% by investing wisely during and after one’s career = Lifetime Money.
Although it may be unrealistic for most people to save half their annual income, the approach is achievable. Young professionals should pay themselves first by allocating 10% to 20% of wages for saving and investing. Through sound planning, sacrificing immediate gratification, and disciplined investing, you can secure your future—and that’s without earning a superstar’s salary.
So whether you make $50,000 or $5 million, if you spend more than you earn you’ll wind up broke. Moreover, if you don’t gain access to practical financial advice or invest dollars prudently to take advantage of the power of compounding, your money won’t effectively work for you. My advice: Conserve your cash, increase your financial acumen, and invest money in vehicles that produce solid long-term returns. That’s how you really score in the game of wealth building.
You can find this and more in the October 2014 issue of Black Enterprise magazine, featuring cover subject and millennial financial educator Tonya Rapley. Subscribe today and get your dose of personal empowerment delivered straight to your door. Our coverage is about you—your lives, your challenges, your aspirations. Our expertise will empower you to make the best choices when it comes to building your career, your business and, ultimately, your wealth. Visit us here for your special subscription rate.