I really think that we should all try to focus on one thing at a time. Every time I try to split my attention across multiple ideas I get a little frustrated. I think this applies well to the idea of personal finance.
It seems like most people in the US don’t really follow this path. We try to have it all as soon as we possibly can. After we get out of school and start working, we want it all. We buy a car with payments. Get married. Buy a house. Furnish the house. Have kids. Buy a bigger car. Buy a bigger house. And on and on.
This leads to a massive amount of debt and bills. After ten years, people look back and realize that they have no idea how they got into the debt and signed up for the bills they are paying now. It gets hard to dig your way out. If you have credit card debt on top of it, you’re even more frustrated.
I’d propose that we do it a different way. I think people should do things one at a time.
College: If you go to college, go right away after high school and put all of your focus into it. If you have to take out student loans, that’s okay, but keep in mind how much the total balance you owe is. Write it on a white board on your fridge. Update the number every semester. Looking at that will help you to not screw around as much and focus. Also, avoid any long term relationships in school. You’ll have time for that later.
First Job: Once you graduate and get your first job, keep living the college lifestyle. Keep living with room mates or in a small studio apartment. Find the cheapest livable place and stick it out for a while. Don’t buy any new furniture. Check out thrift stores and garage sales. Immediately max out your 401K, Roth IRA and any other tax advantaged accounts. Put the rest into your student loans. Your job right now is to save as much as possible and pay off any debt as fast as possible. Avoid getting into a serious relationship as much as possible. If you do end up in one, make sure to talk about what you are doing with your money. Definitely don’t finance a car.
Post Student Debt: Now that you’ve paid off your student debt, you’re feeling good. You should be totally debt free now. You should also still be maxing your retirement accounts. Now you’re seeing an excess amount of cash flow coming in and you’re starting to wonder why you still live in a dump. That’s okay! Your job now is to save up a 20% downpayment for a primary home. Depending on where you live, this could be a house or condo. You’ll also probably have started some kind of relationship at this point. It would be good to ear mark some savings for a wedding.
Home Purchase and/or Wedding: Now that you have a solid foundation of savings, you can think about buying a home. Make sure to buy something that you can rent out if you need to move. You may be thinking about getting married too. That’s great! Just don’t take on debt to do it. Make sure you put 20% down on your home and buy just what you need. You should still be driving a car you own outright. There are plenty of options out there for $5k or so. You also are still maxing your retirement accounts.
Kids: Only have kids once you can really afford it. They can cost $300-$500k to raise, so make sure you are ready. Don’t have kids if you are in any debt other than a mortgage.
These are just the main big life events. There are many other milestones along the way. The main point is to do things one at a time. If you buy the house, wedding, have kids, nice car and everything else all at once, you will be buried in debt. This is extremely stressful and really sucks. Freedom in life is all about freedom from these types of stress. Do things one at a time and you’ll thank yourself later.