How To Build Wealth and Stay Out Of Debt
Lesley Scorgie, author of “Rich by Thirty: A Young Adult's Guide to Financial Success” has advice for young people who dream of being rich by age 30 and their parents.
Commitment: What are eight things young people under 30 should understand if they truly hope to be rich by age 30?
Lesley Scorgie:
1) The earlier you start saving and investing, the more money you'll have. Compound interest is more powerful when you've got more time on your side.
2) Hang in for the long term. Growing money takes time and dedication. Jumping around from investment to investment costs you money.
3) Contribute to an investment plan regularly. By doing so, you develop healthy financial habits and also take advantage of the average costs of investments.
4) Utilize helpful savings programs. Most companies have investment plans (401 (k) or IRA) for their staff. Use them because they often have a matching component – free money.
5) Avoid bad debt. Bad debt doesn't help you grow your asset base - things you own. Eg. Credit cards and vehicle loans
6) Learn to navigate good debt. This is the type of debt used to grow your assets (i.e. mortgage)
7) Use a budget to track your spending
8) Plan your finances around the goal of increasing your net worth which is a combination of debt reduction and asset growth
Commitment: What are five things a young person can do this week to begin working towards financial security?
Lesley:
1) Scrounge up $10 to $20 each week. Cut back on eating out, buying expensive coffees, drinking and smoking.
2) Open a savings and investment account.
3) Set aside that extra dough from point one and get in the habit of 'paying yourself first' – set aside a certain portion of your income immediately. Aim to save 10% of your income. If you can't save 10%, start with what you can save and grow that number as time passes.
4) Sign up for your company's investment plan - 401 (k) or IRA. This will take no more than 30 minutes.
5) Cut up all but one or two credit cards. If that's too hard, put the real problem cards in a Ziplock bag, fill it with water and stick it in the freezer so you can access it easily.
Commitment: How can a young person make a budget for themselves that they are able to stick to?
Lesley: My first piece of advice is this – build your budget around your savings goals. If you are aiming to save at least 10% of your total income, put your savings first. Then build your expenses around it. This is also known as paying yourself first.
My second piece of advice is to have your savings automatically deducted from your pay-check the day you get paid. That way its tucked away safe and sound before you can spend it.
Third, ensure the rest of your budget is realistic. Evaluate what expenses you currently have. Ask yourself if you really need to be spending that kind of money or if you could do without.
Fourth, cut back expenses that you don't really need. For example, cut back cell phone, cable and Internet plans to save money each month.
Commitment: Tell us how you became a guest on Oprah as a "whiz kid" because of your early interest and understanding of investing?
Lesley: I started investing when I was 10 years old. With my birthday and Christmas money I bought a $100 Canada Savings Bond knowing that 7 years down the road it would be worth approximately $135. Though it might sound like a strange interest for a 10 year old, I became fascinated in learning how to earn more 'free money'. I quickly learned that 'free money' was compound interest. So, from that point on money became my hobby – learning how to make it, spend it, save it and grow it.
In my senior year of high school, I helped one of my teachers explain the concept of responsible money management as it pertains to young people. My knowledge of this area was unique and quickly attracted the attention of my high school principal and later, our local newspaper – The Calgary Herald. A journalist from the Herald interviewed me on the topic of money management for young people. Her story became a front page piece which was then posted on the Internet and found by the producers of the Oprah Winfrey Show.
The Oprah Winfrey Show contacted me to be a guest in 2001 on a show entitled Ordinary People, Extraordinary Wealth. It was a fabulously uplifting experience to meet her and showcase my hobby – a form of promoting financial literacy amongst young people.
Commitment: Can you explain the power of compound interest? What type of savings plan do you recommend for young people who want to take advantage of compound interest?
Lesley: Compound interest is, in essence, the power of earning interest on the principle amount you invest. It's so powerful because as time passes, you start earning interest on the interest on the principle and then interest on the interest on the interest on the principle and so on. It begins to grow exponentially.
Think of compound interest as a making a snowball.
Here is an excerpt from my book on compound interest:
The Not-So-Boring Truth about Time
I know, I know. All this stuff about retirement and choices and freedom makes perfect sense to you, but still… You're probably scratching your head right now, trying to figure out how you—an average person under thirty, with hardly any disposable income—are supposed to take control of your financial life when some fifty and sixty year olds haven't gotten the hang of it yet. They have good jobs, houses, and lots of other stuff you don't have, right? That's true. But you have one thing they don't have, and it may be the most important thing of all: time.
Time is a pretty handy thing to have on your side. With time, you can grow your money substantially, without doing nearly as much work as you might expect. You can do this through the power of compound interest.
Imagine yourself at the top of a hill, making a snowball. It's a nice, round snowball taking you all of thirty seconds to make. When you aren't looking, the wind blows the snowball down the hill. As it's rolling, it picks up more and more snow until, a couple of minutes later and with no additional help from you, a giant snowball stops at the bottom of the hill. That's how compound interest works. You earn interest on your initial investment, which is then reinvested, allowing you to earn interest on it, as well. So now you're earning interest on your interest. As time passes, your growth "snowballs" into something quite impressive.
Commitment: What are some ways to organize finances, bills and money?
Lesley: I'm a huge fan of tracking both income and expenses (budgeting) using a spreadsheet. Use other tools like online banking to help track bill payments. Being financially organized means keeping monthly statements, checking on your money situation at least once per week and filing away important financial information. Lastly, don't just file away your finances; ensure you're tracking your progress towards increasing your net worth (a combination of debt reduction and asset growth).
Commitment: What are some of your money-saving tips for those who want to live frugally?
Lesley:
Save Thousands:
- Pick up the phone and negotiate the interest rates on all loans and credit cards. A 10 minute phone call can result in thousands of dollars in interest savings each year.
- Downsize your home and/or rent for less.
- Get a roommate or rent out your basement. Also consider leasing out storage or a parking space.
- If your family owns two vehicles, sell one and share the other.
- Sell luxury items online and when making purchases, buy used.
- Get another job doing something fun - if you like sports, for example, why not consider refereeing a few games each week.
- If you have a hobby (decorating, writing, photography, body building, etc.), start a small business to increase your cash flow.
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Save Hundreds:
- If you're used to driving, try taking public transit, car pool, walk, run, bike or roller blade wherever you need to go.
- Rather than eating at a restaurant and going to see a movie, try eating at home and renting a flick.
- When shopping for household items, buy in bulk.
- If you like to socialize, have friends over rather than go out.
- Cut back cell phone, cable and Internet plans.
- Stop smoking and drinking.
- Take a lunch and make your own coffee.
- If you like date nights, try going for a coffee rather than dinner, a walk rather than a drive, test out a recipe at home, watch old flicks (you can rent these from the library for free) or spend more time chatting rather than doing costly things.
- Save on utility bills by wash laundry in cold water, turn the temperature down a few degrees in your house, increase the humidity a few notches, turn the lights out, and properly seal your doors and windows.
Commitment: What do you think are some of the biggest mistakes young people make when it comes to money?
Lesley:
1) They don't start early enough. To mitigate this, start saving and investing early - even as little as $25 per month can make a big difference in the long run.
2) They overspend. So, stick to a realistic budget.
3) They get into credit card debt.
Commitment: Can you give our audience under 30 a quick lesson in investing?
Lesley: What's unique about the current economic state is investors have an unprecedented opportunity to buy into to a cheap and undervalued market. But, investing in a volatile market requires careful evaluation of many factors.
To invest properly in this market, get familiar with your personal investor profile by considering your long-term goals, investment time frame, tax considerations, risk tolerance, etc.
A financial advisor can help walk you through a series of questions which are used to determine your investment personality. Whatever you invest in, ensure your investments are aligned with your personal preferences and needs.
There are some overall investment fundamentals to keep in mind. First, aim to buy low and eventually sell high - think long term.
Second, get professional advice on how to properly diversify your portfolio so as to reduce risk and increase potential returns. Third, utilize a 401 (k) or IRA by signing up at your financial institution or company – you'll save on taxes. If you're company offers a saving or investment plan, sign up for their matching program.
The last investment fundamental - contribute regularly to an investment plan so that you're taking advantage of currently low unit/share costs. Your dollars now, purchase more units compared to just a few short months ago because units/shares cost less. As the values of the units eventually increase you'll begin to see significant growth in your portfolio.
On to specifics - looking for a hands-off approach to investing in a volatile market? Consider buying index funds which mimic the performance of the market. Index funds rarely out-perform or under-perform the market because they're a reflection of the companies within the market.
So, if the market goes up, so does your fund. The opposite is also true. Because the market has been severely battered, you'll be purchasing at low unit prices. As the market regains strength and recovers from its recessionary lows, unit values will likely increase. Index funds also have low expense ratios because they are managed by a computer and require very little effort to maintain.
If you're a hands-on and more conservative investor, stick to 'tried and true' companies that have existed for many years producing stable returns both in the form of share price appreciation and dividend payments. I like to think of conservative investments as non-cyclical type industries – banks, utilities, pipelines, railroads, etc.
Though we've seen seemingly stable companies like Merrill Lynch and Lehman's Brothers fall, don't let this deter you from considering more conservative industries. Just keep in mind you'll want to invest in companies with low debt, stable returns and intelligent management teams with track records of success. One of the most helpful websites I've found for basic stock and investment research is www.finance.yahoo.ca.
If you're a higher risk investor, you may be drawn to more cyclical industries that tend to be commodity based – oil & gas, precious metals, etc. These industries tend to be hit hardest during recession and have the greatest recovery when the markets bounce back. They are highly volatile, but can produce significant returns when markets recover. Be careful when selecting a cyclical stock in a market like this as there's uncertainly as to whether the market will continue to dip lower than it already has.
Before diving in, evaluate analyst research, company financial statements and management's future initiatives. Cyclical companies with ample cash and low debt tend to be the ones that survive rough markets – they may even be in a position to acquire other companies that are struggling.
Check out www.bloomberg.com.
Commitment: Any advice for a young person who already has a lot of credit card debt and has a low credit score?
Lesley: If you currently have credit card debt, try the following:
Have only one or two cards. So, go into your wallet, remove all but one or two cards and cut up the rest. If what's left is maxed out – so are you.
Another way to remove the temptation is to phone your credit card company or bank and have them remove you from their mailing lists or telephone solicitation lists. These can be called the 'do not call' or the 'opt out ' list
Pay your bill when you get paid automatically
Pay biweekly (you'll end up paying off your debt sooner because you're tackling interest and principle more frequently)
Negotiate your interest rate or switch the balance to a card with lower interest
Don't pay just the minimum payment. Even a few extra dollars makes a huge difference
Read the credit card articles posted on www.richbythirty.com to get more ideas
If you have a low credit score, many people resort to canceling all their credit cards at the same time. Unfortunately, this can result in reducing your score further. Your credit rating is based on how you manage available credit, not on how much credit you have. Creditors look for a utilization ratio, balance owing to available credit, of 30 to 35%. Cancel the cards one at a time and ensure you keep within that target ratio.
Here's the best way to go about it;
1) Don't cancel all cards at once – just one at a time. Your available credit should then grow on your existing cards.
2) Keep the cards you've had longest as they're proof of your credit history.
3) Pay down balances to improve your utilization ratio.
4) Once a card is canceled, ensure you receive written confirmation that it's closed and the balance is 0. Ultimately, having fewer cards with a small (or no) balance is best - less temptation to spend and reduced debt.
Check out www.bankrate.com for great information on credit scores.
This piece is out of my book:
Sometimes debt can spiral way out of control, in which case, you may need credit counseling. In this situation, you work closely with a credit counselor who can help you develop a plan to beat your debt and negotiate with creditors. They also give solid advice aimed at helping you avoid bankruptcy.
If you're sliding down the slippery slope of debt faster than you can dig your way out, contact a credit counseling agency, like the Association of Independent Consumer Credit Counseling Agencies (www.aiccca.org), National Foundation for Credit Counseling (www.nfcc.org) or Consumer Credit Counseling Services (www.cccsintl.org).
Foreclosure
If you're looking into the eyes of foreclosure, do everything in your power to prevent this from happening. Foreclosure hurts both you and the bank. Therefore, attempt to work with your bank to arrive on a potential solution. They'll be in a position to negotiate with you if you're serious about arriving upon a solution.
To Purchase Rich by Thirty: A Young Adult's Guide To Financial Success click here.
About The Author: Lesley Scorgie is the bestselling author of Rich by Thirty: A Young Adult's Guide To Financial Success published in January 2007 and printed in English, French and Korean. Lesley owns and operates Rich By Inc., a financial consulting company dedicated to providing education, resources and tools for a variety of demographics. Lesley's passion is to encourage financial literacy, a topic she has enthusiastically promoted through speaking and writing since 2001.
She has made numerous television appearances including The Oprah Winfrey Show and Montel Williams, and her financial writing has appeared in publications such as Unlimited magazine, the Calgary Herald and the Calgary Sun. Lesley has worked in the banking and securities industries and as a spokesperson for Canada Savings Bonds.
In 2005, Lesley Scorgie graduated from the University of Alberta with a Bachelor of Commerce degree in marketing and finance. She currently works diligently to promote financial literacy through speaking, educating and writing. In addition to this Lesley dedicates substantial time, energy and resources to non-profits within her community.
