I did not grow up in a wealthy family who taught me how to handle my money. Fortunately, I had my uncle, who was my role model from an early age. He visited me every year on vacation and always talked to me about life and finances.
Let’s face it, the million-dollar sprint rarely happens. It is much more realistic that it will be a million a marathon. So how do we get to the finish line? For my uncle, the journey began when he was a teenager.
With books, he taught himself everything he knows about money. He dealt with the works of John Bogle and Peter Lynch. After careful planning, he retired at the age of 56 and used the knowledge he had acquired to help family, friends and co-workers. It proves that becoming a millionaire is entirely possible as long as you live within your budget, manage your funds well, and save.
I learned the following three lessons about money from my uncle. And I still do it today.
You should save early and consistently
It is much easier to develop the habit of saving when you are young and have few responsibilities. My uncle started saving with his first job after college, increasing savings as his income rose. I followed suit and by saving early I was way ahead of my peers at the age of 30.
The more complex life becomes, the more difficult it is for you to find additional room to maneuver in your budget to save. By saving early, your money can grow and you can take advantage of compound interest.
Not only did my uncle start saving early in his career, he also saved at least 15 percent of his income. In a recent article, Fidelity Investments showed that you can retire at 67 if you save 15 percent of your income from the age of 25.
The article also showed how saving will affect your financial career later on. For example, if you don’t start saving until five years later (at the age of 30), you should be saving 18 percent. At the age of 35 this amount jumps to 23 percent. The longer you wait, the more money you have to save each month. Saving 15 percent of your income is a good start. However, if you want to retire early, you should save even more.
Are you only now starting to save? Do not worry. It is important that you start – regardless of whether you save 10 or 15 percent of your income. Try to increase the savings amount by at least one percent every year – and more if you raise your salary – until you reach your goal.
Think carefully about any loan
Taking out a loan seems easy and painless in the short term. In the long term, however, this has unfavorable financial consequences. Whether it’s “good debt” or “bad debt,” the monthly payments often add up quickly. And before you know it, you are spending a large portion of your paycheck not only on your regular living expenses, but also on debts. That leaves little room for retirement provision.
My uncle therefore recommends asking yourself before taking out a loan and thus before taking on debt: “Is the debt really worth it? You are charging your credit card to buy what you want now. How will the debt burden you in the future? If you have another degree that you might be considering, is a raise likely to get a raise?
I took this advice to heart. Although I financed my way through college myself, I graduated with less than $ 10,000 in debt. I’ve also always fought the temptation to buy things I couldn’t actually afford, thereby avoiding consumer debt.
Are you in debt too much? Then start now to regain control of your debt. Deal with high-interest debt such as credit cards and personal loans first, then move on to low-interest debt. The sooner you pay off your debts, the sooner you can start saving and investing for the future.
Relies on long-term investments for the future
Investing is a long-term game. Many new investors have turned to the stock market for quick profits during the pandemic. Anyone who tries to make short-term profits runs the risk of failure. In contrast, investments in a diverse portfolio help to absorb the ups and downs of individual stocks.
Short-term investment thinking also feeds our natural tendency to make emotional decisions – especially in an unstable market. This results in stocks being bought when the market goes up and sold when the market goes down. My uncle says: “In order to be able to benefit from the proceeds, you have to be willing to take risks.”
How can you safely stay on course despite difficult market conditions? You should only invest money that you will need in ten years at the earliest. My uncle always had a nest egg to cover unforeseen expenses or a job loss. And he kept this money in cash. He also set aside money that he would need over the next three to five years. He kept the money in cash so that it was not subject to market fluctuations.
What if you feel the need to speculate on the stock market? My uncle has a small account from which he can buy and sell individual shares as he likes. He keeps this account small (no more than ten percent of his total assets) and relies on a diversified mix of index funds in his long-term investment portfolio.
Even as a financial planner, I still follow the lessons I learned from my uncle: save early, rethink loans, and invest long-term. The path to financial success is all about the delicate balance between the desires of today and tomorrow. It is possible to save yourself the road to the million and retire early. Start now – your future self will thank you.
This article was translated from English and edited by Ilona Tomić. You can read the original here.