The Twenty-Something’s Guide to Financial Stability

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You can pretty much be broke at any age. For me, I was pretty poor growing up. So, there was really only one way to go, and that was up.

When it comes to financial mistakes, though, I believe that most of them are made between the ages of 25 and 35 years old.

You see, that’s the first quarter of the football game of life, or the earning years, which for most of us is between the ages of 25 to 65. It also looks like some of us may be going into overtime too, as the government keeps pushing back the retirement age (which I believe is now 67).

So, where do most of us go wrong when it comes to controlling our money?

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Financial Stability = Discipline

Recently, I read where Dave Ramsey, the anti-debt guru, tweeted that if you could just save $100 a month between ages 25 to 65, at 12%, you’d have $1,176,000, thus making all of us potential millionaires. He then explained that this statement was intended to inspire people to save.

I think Dave does a great job getting folks, who are in financial trouble, back on track by eliminating all of their debts. Although this puts folks in a much better financial picture, it does so by making the assumption that all debt is bad.

For example, good debt is something that you take on to improve or to build wealth (i.e. a student loan to get a better paying job, a mortgage for a rental property, or a loan to expand your business). Bad debt is when you purchase something that goes down in value or doesn’t throw off any additional cash flow (i.e. credit card debt, a loan for a leisure vehicle, a pay-day loan, etc.).

I also believe that it’s making the assumption that people, who aren’t necessarily good with money, are not disciplined, and therefore, should not have any debt.

The downside is that this person is limited by the negative stigma surrounding debt and is less likely to utilize disciplined leverage. By this, I mean utilizing good debt to build wealth. For example, if I took a HELOC (Home Equity Line of Credit) and I used that to buy or fix-up another property or I purchased a note with a higher return than the interest rate I borrowed at, this would be a disciplined way to leverage debt.

Utilizing these types of strategies, by the way, is how I was able to build most of my personal wealth.

Other than establishing bad debt and not utilizing disciplined leverage, another common financial mistake is living beyond your means.

Related: The 5 Steps Necessary to Master Your Personal Finances

Budgeting: Wants Vs. Needs

One thing I see wealthy people do is that they have a cash flow budget, and they pay themselves first. They know their own numbers (exactly how much they need to live on, their income, expenses, etc.), and they have a plan for the rest of their cash.

When I used to meet with first-time homebuyers, as a Realtor for a homebuyer qualification, the first thing we talked about was their family budget. This consisted of all income and expenses and how much they would qualify for as far as housing expenses go (the biggest bill for most). Often, this is the first time many couples even look at all of their expenses written down.

For many, this was also the first time that they analyzed their wants versus their needs. They got to see firsthand how much was too much from a lender’s perspective. They also learned exactly what the bank was looking for in a mortgage, which is usually based on the borrower’s stability and ability to pay (things like front-end and back-end ratios).

Then why are so many who are starting out living beyond their means?

Maybe it’s in our instant gratification culture. Maybe we all want to show off to family and friends. Maybe instead of taking control of our money, we’re letting it control us.

In George Clason’s book, “The Richest Man in Babylon,” he tells parable-like stories about how clay tablets found in the Middle East from 8,000 years ago hold the secret to becoming financially well-off. Besides paying yourself first, one included instruction is to live off 70% of your income, save 10%, invest 10%, and give the remaining 10% to charity.

If this simple formula is the key to attaining financial stability, why is it that most of us don’t follow it?

Related: 8 Traits of Successful Real Estate Investors

Financial Stability = Choosing to be Rich

In Robert Kiyosaki’s “Guide to Raising Your Kids Financial IQ,” which comes with the Cash Flow for Kids game, he states that every time a dollar hits our hand, we’re choosing to be rich, middle-class, or poor by what we decide to do with it (from a cash flow perspective anyway).

If we spend it on expenses, we’re choosing to be poor. If we buy something that we think is an asset but it’s really a liability, then we’re choosing to be middle-class. But, if we invest our money in an asset that throws off income, then we’re choosing to be rich. Sure, this is a very simplified way to look at it. But, if you think about it, it ties back into paying yourself first and hopefully investing that money in something that cash flows, so that someday you’ll have more than enough passive income to pay all of your expenses and become financially free.

So, I guess the secret is… there is no secret. You need to be disciplined, live within your means (unless you can figure out a way to expand your means), and have a budget, as well as a plan to invest in cash flowing assets. The sooner you can do this, the faster you’ll build true wealth.

So, what’s your secret?

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

28 Comments

  1. Bryan Drury

    Dave, I think you pretty well summend it up.I just recently read The Richest Man In Baylon.The secret holds true going back to eternity.I think a lot of people do become inpatient and try to keep up with the Jones thus diminishing their odds of gaining wealth.Your article is a good reminder for all of us .Thanks

  2. Okay, I’m in the third quarter of the “football game of life,” which gives me a unique perspective on how people manage money and time. There seems to be an overwhelming desire to compare our financial life with that of our friends and neighbors (e.g., “keep up with the Jones); however, a quick examination of the Jones’ household finances would reveal a less than desirable picture of a content life. You see, having a content mind leads to a content life, which helps put the focus on your life and family, unencumbered by comparisons to neighbors, family, and friends.

    I spent six years in the military before completing college, which gave me a late start on those prime earning years; in fact, all my worldly possessions upon graduation were neatly and securely tucked away in the trunk of my car. It was apparent to me, at age 25 (God willing), that I would be in my 50s one day, which made me visualize a path to financial security. It forced me to think about certain self-evident truths in life:

    1. Examine wants over needs;
    2. Keep your family secure;
    3. SAVE;
    4. Invest in your future;
    5. Avoid bad debt;
    6. Don’t compare yourself to others; and,
    7. Have a solid plan to grow your net worth!

    My solid plan was real estate, hence the BiggerPockets blog. My goal was to live completely on passive income, which was reached within 15-years of leaving college. I have many friends from my college days (after living lives of excess) that are just now thinking about financial security. For young people, understanding the time value of money is a critical aspect to achieving financial security. It doesn’t matter where you start in life or your level of education, just that you relentlessly and unapologetically follow you plan. Investing in real estate is a get-rich-slow proposition, so living a disciplined and content life is the first step to financial security.

    • Dave Van Horn

      Randy,

      You’re right on the money here, I think you even said it better than me!

      Now that I’ve just entered the fourth quarter, my mode of thinking has changed. Although I still have the same mindset, I’ve shifted a bit out of accumulation mode and now I’m working more towards preservation/legacy mode – with a lot of work dedicated towards utilizing my Self Directed IRA. My only regret is not working that IRA capital sooner, making as much tax free income for the future as possible. But the good news it’s never too late! And it’s never too early to think about the fourth quarter!

      Thanks for reading.

      Best,
      Dave

  3. Frank Jiang

    For some reference points to the Dame Ramsey quote of saving $100 a month:
    – A pack of cigarettes every day costs more than this
    – 4 beers per weekend at a bar costs more than this
    – Getting a drink from Starbucks every day costs more than this
    – Using many recreational drugs costs more than this

    It may not feel like much at the moment, but these are all million dollar decisions.

  4. Jerry W.

    Dave,
    I really like your articles and this one is no exception. We have to realize that we are in charge of our lives and our decisions have much greater reach than just the next paycheck. The whistle is about blow between 3rd and 4th quarters for me. I have been very careful with my money, mostly because I had very little. I was 28 when I graduated from Law school, and in debt for medical bills and some student loans. The one thing I did not do enough was invest or take more risks. I did invest a little, and I began investing in real estate very young but only one at a time. Eventually I added more and the last 3 years I have added 8 more houses and a 4plex. With the economic downturn in my area I have to change tactics. Had I started fast growth sooner I would be set. In the last 5 years I added almost $400K of property with no money down. Sure wish I had done that 20 years ago. I had to make a conscious effort and goal to add that. I paid off my home, my cars, my office, and put some money into retirement. The idea of true wealth never hit me until after I was 50. Better late than never.

  5. Great article and equally insightful comments, which is why I follow the BiggerPockets blog. I left one thing out of my earlier comments, which is to be a keen observer of human behavior. My experience has taught me that EQ (emotional Intelligence) is far more important than IQ in attaining success in one’s life and career. Think about it, our success in any endeavor requires the ability read other peoples’ signals, understand their behavior and react appropriately. The ability to understand other people, what motivates them and to learn from their decisions is a key element to our success. Studies have identified the following five categories of emotional intelligence:

    1. Self-awareness;
    2. Self-regulations;
    3. Motivation;
    4. Empathy; and,
    5. Social skills.

    It is a self-evident truth that we need other people to succeed in life, so these five elements of EQ play a more prominent role in ones’ success than just a keen understanding of facts and figures; of course, no one should downplay the importance of facts and figures, but without the emotional intelligence to guide you, the factual information is not acted upon appropriately. There is a great Aristotle quote to describe emotional intelligence:

    “Getting angry is okay so long as you get angry for the right reasons with the right person to the right degree using the right words with the right tone of voice and appropriate language.”
    Understanding how people process information has been an enormous benefit to my real estate and sales career. Zig Ziglar put it a better way, “Some of us learn from other people’s mistakes, the rest of us have to be the other people.” Don’t be the “other people.”

  6. Huy N.

    well written article – i’m the living proof of your blog! It hurt to see the people at my age keep screwing with their life but oh well..”all you can do is set an example and then may be they will see the light and follow you” – T Harv

  7. ryan butler

    Definitely appreciate the approach to the post. I would even go a little deeper and say debt, like money is neither good nor bad/evil and be careful with labeling something entirely good (i.e. student loans- too many can really hurt) or something entirely bad (i.e. a financed car- 0-1% interest). Just a thought.

  8. Andrew Syrios

    Young people today (including myself to some degree) seem to be totally clueless in this department. Of course, that’s probably true for young people throughout most of history. And well, most people throughout most of history. But financial discipline is such an important lesson to learn. Great article!

    • Dave Van Horn

      I agree with you Andrew, so many young people are clueless but so are a lot of old people are too! The good news is that for most people, especially now in this country, your financials situation is something you can change!

  9. Wharton P Smith

    Dave

    I have to agree with the post quiet a bit. Being in the 25-35 age group, I have seen many of my peers focus too much on the pleasure now department. Talking with my parents who are approaching the 4th quarter, they have wanted me to be financially disciplined in life. They started teaching my siblings and myself at a young age with “The Farming Game”. It allowed you as a child to develop math, money, and investment skills. I would recommend people start teaching their kids at an early age how to be disciplined either through games or activities.

    Best regards
    Paul

    • Dave Van Horn

      Hi Wharton,

      I couldn’t agree more, which is why I teach my grandson similar values. The one big benefit of starting young too is the compound interest. It’s also important to teach early on, it’s not about what you make it’s about what you keep.

      Thanks for reading.

      Best,
      Dave

  10. Matthew Swisshelm

    Dave,

    This is a great article, thank you for taking the time to write it. Being in the targeted audience I can’t but agree with the points you’ve made. When I talk to my peer groups and I hear/see the things that they spend their money on it saddens more times than not!

    I think it’s interesting the point you made about assessing your wants vs. needs. I’ve notice that this ties in very closely with living below your means. When you reassess what is important to you and decide what you want for your future then it makes living a more conservative life in exchange for meeting your long-term goals so much easier.

    Thanks again Dave!

  11. Brandon Whitaker

    Dave Van Horn,

    Thank you for such a great article. I am young and trying to get myself into a position to purchase RE and hold on to it to create passive income. I was thinking of taking out a personal loan and use some of the funds to place a down payment on two SF properties and keep the rest in the bank as reserves. Unfortunately the more I thought about it that probably would not work because the mortgage lenders would see that large loan on my credit and would not let me buy the properties. But in your article you mentioned a HELOC, that can only be used if you already own a property right? ( hence the name) I was also thinking of taking out a personal loan and then thinking of a way to transfer the funds into my LLC to use as “business start up money” but I’ve read about the importance of keeping your personal finances and business finances separate so your corporate shield can not be pierced just in case you get into legal trouble ( tenant tries to sue you ) So not sure where to go from here. Any advice from your travels and experiences would be greatly appreciated.

    • Dave Van Horn

      Hi Brandon,

      Apologies for the late response, just saw this comment. You are correct, a personal loan isn’t the best idea in this scenario. If you weren’t brand new I’d suggest you find a good deal and bring it to a hard money lender or find a private money lender. But everyone gets afforded 10 doorways in their own name, so it’s best to use up your regular residential mortgages before going that route.

      I actually wrote an article about this that you might appreciate:

      https://www.biggerpockets.com/renewsblog/2015/10/01/real-estate-strategy-newbies/

      Also you should buy every property with a seller assist if you can, and I talk about why here:

      https://www.biggerpockets.com/renewsblog/2015/10/08/buying-strategyseller-assist/

      Hope these articles could be of help, do let me know if you have any other questions.

      Best,
      Dave

      • Brandon Whitaker

        @DAVE VAN HORN

        I completely understand Dave and I just appreciate the response, I am sure you are a very busy person. I am glad I’m thinking correctly and I am excited to look over the articles you sent me. When you say doorways and regular residential mortgages are you referring to acquiring properties under myself? If so how do banks look at a borrower if they already have a property or two? Also once I acquire a property can I just move it under my LLC? Thank You for all your help and knowledge and if you have any other suggestions please pass them on, I am all ears… I love learning.

        • Dave Van Horn

          Hi Brandon,

          Yes, I’m referring to acquiring properties with traditional financing under your own name. So to answer your question, how do banks look at a borrower if they already have a property or two?

          It depends on the type of loan you’re applying for to buy that next property and how you plan to buy it (whether you’re buying in your own name vs. an LLC, owner occupied vs. rental, etc).

          It also depends on how you own your current properties and if you live in one of those properties you already have. But basically they’re looking to see what your debt to income ratio will be with this new property.

          As far as your 2nd question goes, you can move the property into an LLC, a trust, or you can keep it in your own name. The LLC is safer than your own name, and the benefit of the trust vs. the LLC is it gives you anonymity by removing your name from the public record.

          Best,
          Dave

  12. John Hooven

    Dave,
    I really enjoyed the article. It’s funny you talk about bad debt vs leverage, because that is the exact way a financial friend and I define each to remove the negative association we as a society have created with the word “debt”. I find though that my ability to be financially responsible is greatly tied to my earning capacity. During the school year I am stretching my bank account to its limits due to a part time income. During the summer, however, it’s much easier for me to budget because I am earning more and know how much I need to be able to not eat Ramen for every meal.
    My financial friend and I have discussed Dave Ramsey before, and we agreed that the reason Ramsey calls all debt bad is probably due to the fact that the audience he caters to is that who probably has never heard of a subject-to deal or owner financing. To me, it seems to be about the exposure one has to different ways of creating cashflow, and Ramsey seems to be more about helping people get out of uncontrollable debt. I love his method, I just agree to disagree with him on the issue of leverage.
    Just my thoughts. Again, great article!
    Best,
    JH

    • Dave Van Horn

      I agree John!

      This negativity is pervasive in many areas of investing and finance. For example, when you invest using a Self-Directed IRA you are often warned of the “penalty” for over-funding. But what no one tells you is the penalty is a nit (I think a 6% penalty tax) compared to all the tax free or tax deferred money you could make with the extra capital in your IRA account. So why don’t more people do this? Because of the negative connotation they have when they see the word “penalty”. Now of course this strategy isn’t foolproof, and it can’t be done consistently, but it’s the principle I’m really getting at.

      And Ramsey’s a good start for helping people get out of debt and budgeting. Another great book that I mention in the article is The Richest Man in Babylon, which applies ancient parables that still work for setting up a healthy financial lifestyle today. Definitely worth checking out.

      Thanks for reading.

      Best,
      Dave

  13. Brandon Whitaker

    Dave,

    Thank you for your response to my questions. You have given me much to ponder over. Since my company is not making enough to get a business it looks like I will start by purchasing properties through traditional financing and then moving them under my LLC until my LLC has enough profit or income to justify getting a business loan so I can purchase more property. If you don’t mind me asking how did you get into Real Estate? It seems kind of difficult because the amount needed to acquire property even if it is a fixer upper is very high. And if you can get a loan for part of the purchase you can not go and get a second loan for a second property because the lender can see the first property and loan under your name so they don’t want to lend to you.

  14. Dave Van Horn

    Hi Brandon,

    That’s a good question. Pretty much from the outset, and until this day, I almost never used my own money to purchase properties. When I started, I was purchasing and rehabbing houses with credit cards. I would then rent out the property, refinance, and pay off all the credit card debt. Now this can’t really be done today because of the high cash advance fees but the same theory still applies with hard money.

    So after you use up your traditional financing, you could use hard money/private money and the bank could give you the take out financing (to refinance) and pay off your Hard Money Loan.

    Like HELOCs, business lines of credit could be a good strategy but the bank likes to see the LLC up and running for a few years so it’s probably not an option for you right away. The only downside to a business line of credit is they could re-evaluate you and your loan every year or so, which could be troublesome.

    Hope this info helps.

    Best,
    Dave

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