This article is about 3500 words in length. While writing, I felt this topic demanded a far more precise approach than the ones I’ve written before.
I request your full attention for the 24.5 minute read ahead.
- A freshly graduated college pupil’s first ‘regular job’ is the most important landmark in his adult life. This is the point where you become independently responsible for your life and choose what lifestyle to lead.
- For most of us, this comes at the most inappropriate moment when we least realize that with our first day at work, a countdown on our productive days in the global work force has begun.
- Part time jobs not withstanding, a regular job for a graduate at 22 is like letting a 12 year old lose in a video game parlor with one grand in cash. There’s so much you had always wanted to do and now you suddenly have independent resources to apply and utilize as you wish. You need to ensure you don’t burn out your self and your resources.
- I’m 29 right now and reasonably successful as a ‘Life coach’. I always knew I wanted to become a public speaker in some capacity and that I wanted to touch people’s lives and motivate them to overcome their setbacks and succeed. I never knew being a ‘Life Coach’ is how I would do that.
- About 7 years ago, as a 22 year old intern in his penultimate semester of Computer Science Engineering, I had pictured a career as a .Net Developer. I wasn’t making much as an intern at that stage and that somewhat frustrated me. So in my last semester back in campus I decided being a Web Developer was too cliched and I wanted something with more ‘room’ for rapid growth.
- I dropped the idea of becoming a Software Developer, opted for as many management electives as I could in that semester and shifted my focus towards ‘Services Marketing’. I figured that with my set of skills, I could succeed in Software Sales a lot more, than I could in Software Design. I had the technical chops and a degree to show for it with relevant industry experience. Then I had natural oratory skills honed over many many years of practice in the school debate team etc. etc. which aren’t skills they ‘teach’ you at school.
- In hindsight I feel this was a really good assessment of my personal talent. Focusing on the skills that gave me a clear strategic advantage over my peers, got me a job before them; before I graduated. Coming from a somewhat obscure grad school, this was a major achievement for me back then.
- My life has changed many many times in the last few years until I finally made my way towards what ‘really’ excited me. For most of us, this is going to be how it is. You won’t see the complete picture at 22 but you need to act with the data you have.
- Most of us aren’t going to develop Facebook in our early 20s in a dorm room. Most of us aren’t going to win Olympic Gold Medals in our 20s and most of us won’t really have discovered who we really are in our 20s!
- That’s just the way it is. I wish more people told me that while I wasn’t going to make it big instantly, I would certainly get better and better and grow steadily… building up to where I wanted to be, back then.
I wish more people told me that my first salary was in no way a reflection of my talent or skill. That my first paycheck was just a drop in the ocean of wealth I was set to create in the years to come. That’s how life is for regular folks.
You learn, you apply, you work, you save, you invest and you grow your wealth. That’s it. Then repeat.
When I look back I remember either those batch mates and friends who were too hard on themselves to ‘save’ or friends who lived from ‘paycheck to 10 days before paycheck’. The ‘sweet spot’ in managing your money doesn’t come until you’re 25 and a lot less impulsive.
I think the most important advice i would give to my 22 year old self, working his first job as an intern, is this:
- What you are making is peanuts and will always be peanuts compared to the earnings of your future self.
- Even if you end up in depression (god forbid) in your later years after having ‘been there and done that’… this.. salary that you are drawing right now is still going to be peanuts and you’ll never feel grateful for this sort of money ever in the future.
- Even if you’re an MIT graduate earning $50,000 a year, it’s still nothing compared to what you’re going to be earning 7–8 years from that day. So just accept the fact that you’re starting out and this money is not enough.
Now champ, knowing what you know after hearing me out…
How good a job can you do at budgeting, growing, saving, investing and gambling with this money?
- Yes, you heard right, I said Gambling. Let’s start with that first.
Hold on, I didn’t mean a poker or black jack kind of gambling though.
I spoke of Gambling more in terms of following your gut and instinct not necessarily backed by logical proof or statistics, business logic or sufficient data. Relying more on the element of ‘chance’ and ‘luck’.
The reason is pretty simple.
There are people in your peer group who are going to succeed big and early… and how! Capitalize on that. I’m not saying you’re not. I’m just saying if a gifted friend could use your help financially for an idea they’re building in the garage or apartment… you should try to get in on good ideas at the ‘incubation stage’.
You never know if their idea could be the next big thing.
You never know at 22, if the opportunities you let go just because you don’t logically find them worthy of your investment turn out to be big misses that you rue well into your 30s.
- That’s how a lot of early investors got their hands on sweet Apple stock and Microsoft stock and then there are those who let it slip. People can say what they want but a big part of success is just.. ‘chance’. You can work step by step and eliminate ‘chance’ in the long term, but you can’t deny its existence! There IS such a thing as being at the right place at the right time.
- But the only way you’ll take more chances at 22 is, if you function with the knowledge that at this stage… What you’re making doesn’t matter. What you’re learning is all that does.
- At the most you’ll have a bad month and lose a few speculative investments but would be wiser because of them the next time. This will help you understand and read the markets and learn to experiment with as little and reasonable an investment possible, to begin with.
- This way when you’re 30 and have a lot more money saved up, you won’t make the mistake of putting all your money in a single investment, no matter how great the prospects are.
- It is important to learn to lose a little in your early years just to understand how the market dynamics function within your domain.
- It will also drive a point through your head that situations can change over night and you need to learn to use this to your advantage and always protect your downside.
Smart Move: Learn to take chances with money early on. You’ll know money a lot better. You’ll understand the fluid nature of wealth and learn that it takes guts to put in money into projects so you can create more wealth.
Yes you’ll fail many times initially but if you can learn to perfect this art, you’ll win many times over.
2. This brings me to the second point: Investment
Read the fun fact in the poster above? Most long term investments work quite similarly.
- Core ‘Investing’ as a means of securing your future, is where you take a realistic view of your money and rely on structured and predictable tools like compound interest.
- “ It’s the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein
- Yes, putting money into speculative investments such as crypto currency, antiques, high yield mutual funds and volatile market conditions is still investment. If you’re investing by your gut feeling however, completely unarmed without reasonable data, it’s gambling.
- Now don’t take it personally, some people are just good gamblers and fancy their chances on their intuition about the markets but gambling is still gambling. Trust me, I learnt this the hard way.
In the words of the greatest investor in the world, Warren Buffet:
“Risk comes from not knowing what you’re doing.”
Investment is really money you’re putting in knowing perfectly what the yield will at least be in such and such period with such and such amount.
At 22, I advise starting with a tax free SIP to save up for the later years. If you think it’s too early to begin saving for your retirement at 22, let me show you the difference when you start investing can make:
- Investing 5k per month for 25 years at a fixed interest rate of 10%
- Investing 10k per month for 15 years at a fixed interest rate of 10%
The difference in your bank balance would be.. drum roll please.. a whopping 2.3 million! .. in favor of the investment with the longer duration.
- In addition to a SIP, make sure you have a health insurance and life insurance.
- Life insurance plans these days pay you back the principal amount with interest for the investment period… tax free… upon maturity.
Smart Move: Secure yourself and your future family against emergencies that could put you in debt by investing in basic insurances like life insurance, health insurance and accidental insurance. Start investing early so you can retire early. Or at least.. stop ‘having to work’ for money early!
Which brings us to the third point:
3. Asset Building
- Sure, ‘investments’ are quite literally, ‘assets’ that give you a periodic return. But what about your car, house and gadgets?
- When you’re 22 and earning, the first instinct is to get your hands on all of the things you couldn’t afford with your family’s money or your part time job, or both.
- The ‘point’ on the other hand is to understand if things get broken, you’ll have to spend more money on repairing them. You’ll have to spend regularly on maintaining your car, your house, your cable connection etc etc.
- What I realized pretty late is that when you invest in building assets, their value will depreciate with time but what you’re looking for is the ‘opportunity cost’ of the money you’re spending on them.
- So what’s opportunity cost?
- Simply put: ‘opportunity cost’ is the loss of other alternatives when one alternative is chosen.
- You can’t earn interest on the monthly installment you shell out for your car. In the same way, you can’t pay your monthly installment with the money you spend to buy an Xbox.
- It’s a wise decision therefore, to spend on building assets with Zero marginal utility and spend well.
- Putting your money into building quality assets that you only need one at a time is a smart move. It takes people years to learn to prioritize their spending on assets that depreciate in value with time like a car, plasma tv or jewelry but it’s really that simple.
- Putting a large chunk of your money on designer clothes that you can only purchase a single pair of, is silly because they’re clothes. You could have a closet full of designer clothes and still feel you have ‘nothing to wear’.
- On the same note, if you did shell out a lot of money on a Honda (keeping the opportunity cost of that money in mind) it’s not so bad because a good car will serve you for many years and still have a decent market value after all the depreciation in value.
Smart Move: Buy what you ‘need’ everyday for maintaining your productivity and need just one of. Then make sure you buy ‘good’. The ‘best’ is for later…
But just make sure to…
4. Never get emotionally attached to assets.
- If your assets aren’t performing up to par, it’s better to offload them asap lest they sink more of your money. This rule goes for everything. From shared in your investment portfolio to physical assets.
- Most automobile brands have exchange offers every season. This goes for smartphones, laptops and all other fixed assets that you’ve put your money in.
- Think of assets with a lot less attachment. Why buy if you can lease? If you’re not sure which city you could be transferred to next, putting that amount in a short term mutual fund is a better idea than committing to a personal owned vehicle you’ll have to worry about selling and/or moving.
Don’t stick to investments past their sell by date. If you feel you need to reshuffle your investments, do that from time to time. Yes, in most mutual funds, you’ll most probably have to pay a transfer fee and the relevant tax cuts etc. but you’re not here to marry your fund manager.
Smart Move: Never forget that your assets, are just ‘tools’ to help you build wealth directly or indirectly. You need the wealth to build the life you want and that is where it ends. No one gets to take their money with them.
So upgrade your assets in the most economical way possible as often as you can. Fix or sell them before they decline in value and/or efficiency.
To be able to do this, you need to have knowledge about every little thing that your money does for you and who charges what for whatever it is they do for you!
This brings us to the next point:
5. Hire a good accountant (or become your own accountant)
- Almost all of my more successful clients, are great with numbers and calculations. They can calculate how much they owe the government, the broker, the bank and the the lender even before the money has reached them.. in a matter of minutes.
- A friend of mine who works for Hilton customer support told me how an esteemed ‘Life time Diamond Member’ once spent an entire hour haggling on Hilton Chat Support for…. drum roll please… $ 11 !
- These ‘ Life time Diamond Memberships’ for your knowledge are ‘awarded’. ‘Lifetime Diamond Membership’ cannot be bought. The minimum criteria just to be eligible for Lifetime Diamond Membership is at least 10 years of Diamond membership and 1000 paid nights.
- Let me calculate the average cost we are talking about here:
- Conservative average cost per night: $ 150
- For 1000 nights: $150,000
- Also, 10 years of diamond membership means approx. at least 600 nights (as per criteria) which is $ 90,000.
- So that fine gentleman who just wouldn’t let $11 go had spent at least $ 240,000 on Hilton stays!
- Why am I telling you this story? To show how rich people get miserly with time? No, it’s just to show you that rich people are rich because they know exactly where every penny is coming from and exactly where it’s going.
- Either that… or they have a really dependable guy who does that for them. Usually, it’s both.
Smart Move: Learn the plumbing of your finances in and out! You can’t fix a leak you can’t see. Always keep your money in sight.
6. Be a ‘definite optimist’
In his book ‘Zero to One’, Peter Thiel writes about four categories of economic outlooks namely Definite Optimism, Indefinite Optimism, Definite Pessimism and Indefinite Pessimism.
Definite optimism is described as the US outlook in the 1950s-60s with a booming economy, peak military strength and rapid growth in suburban housing, consumer goods and automobiles.
Being a definite optimist is being ‘focused and specialized’. It is about aiming for monopolistic hold on the one thing you do best and not worrying about doing many things well.
- You envision a certain future where the result of structured action is a certain accomplishment. Then you go build it with your specialization.
- At 22, it’s lucrative to ‘explore’ and ‘test’ but the smartest thing to do is to build the set of skills that you know for sure you can master in the next 5-10 years.
- The most important thing to understand is that building skills takes money and at 22 we know already you’re making peanuts compared to what you’ll make later. Train yourself to be meticulous about which skills you’re going to master to dominate your field.
- Discipline & Focus. Unless you’re a musician, why shell big bucks for that expensive yellow electric guitar and processor that you’re not going to have enough time to play anyway?
- Especially if you’re aiming to be a top notch Corporate Lawyer or a Systems Engineer? After a while it’s just a depreciating asset with no real utility or resale value. That’s just money down the drain.
- If you spend the same amount on books and courses in your chosen discipline, it will pay off many times over in the future. All the ‘cool stuff’ you’re after is easily procurable with your future income. At 22, the intelligent thing to do is to invest your money only where there is a definite plan of reaping dividends.
- Smart Move: Don’t invest in hobbies or skills ‘just because you can’. Have a definite plan for the future and align your skills, hobbies, habits around it. Aim for skills that make you the best. Build a monopoly for your personal brand.
7. Don’t just dream. DO the Math.
- In his book ‘Money Master The Game’, Tony Robbins talks about having a clear financial goal to work towards. The point is, a lot of people have only a vague idea about the exact amount of money they need to build the future they want. To build a future of financial independence where you are not dependent on ‘working’ just to support your expenses.
- It works like magic really when you actually begin to do the math for the funds you need to support your dream lifestyle way into the future and past your retirement.
- The point is to think smart. A lot of people dream about owning a private yacht, a private jet, a beach house in Bali etc. When you really sit down to do the math you realize, what happens to these fancy assets. It’s the same as what happens to the fancy red electric guitar you never play and the fancy set of golf clubs you only take golfing once in 60 days.
- You end up shelling money for the purchase as well as the upkeep of a luxury asset that is fast deteriorating in value and has negative marginal utility.
- You can avoid this by opting for a cheaper option to rent or lease the property, private jet or yacht. Just calculate how much you’d actually have to pay per use and get a figure that is surprisingly… achievable.
- There are practical alternatives to fulfilling almost everything you’ve ever dreamt of but you need to have a clear idea of how much money you want.
- If you want to just dream about your dream life, by all means continue. If you really want to build your dream life, you need to know exactly what you need to get there and how much and when.
- Dream of owning a beach house? Why do you want to ‘own’ one in first place? You can just rent one when you need one. Why do you have to get one in California? You could get one in Bali or Sri Lanka or Kerala. All beautiful places and a lot lighter on your pocket.
- At 22, planning the future with a visible financial goal, you have age on your side to realistically achieve your dream life. All you have to do is be realistic and concrete with the goal you need to meet. Then divide that into landmarks and apply the 6 points above.
- Smart Move: Knowing where to go is the smartest move to make. “When you don’t know where you’re headed, all roads lead to Rome!”
To get a personal life coaching session with me where I assist you with all sorts of areas of your personal development such as finances, career and relationships, check out my personal life coaching service.
Image credits: Chicago Tribune, nipkinfinance.com, ‘Zero To One’ by Peter Thiel, ‘Whisper’, Casino Royale, Space Cowboy.