For young people, finances can often be an area of trepidation and mystery. Students feel as if their lives are on hold until they graduate and begin making money, and graduates are concerned paying off student debt and meeting immediate needs, feeling as if they have no capacity to invest. This stage of life is often fraught with uncertainty and constant change. As a result, most young people live in a day-to-day mindset: make money, buy what you need. Few take the time to prepare for the future.
The problem with this mindset, however, is that wise financial management is not achieved in a day, nor is wealth simply given to us. It is through patient application of finely tuned principles that a person will be able to achieve financial independence and freedom. These principles do not have a minimum income requirement, nor do they mandate consistent employment or long-term career goals. When it comes to learning the disciplines required to wisely steward finances, one cannot begin too early.
Indeed, it is critical to pass solid financial principles to the next generation. In his book Wisdom Before Wealth, Randall Sanada shares financial wisdom for his family in what began as a letter to his grandchildren. Sanada lays out the basics of financial management, explaining in simple terms concepts like compound interest, financial independence, investing, dollar cost averaging, and diversification. More importantly, however, Sanada explains how to wisely steward your finances, no matter how much money that means. He lays out six main principles:
1. Spend less than you earn
This may seem like the easiest step, but for many young people today it is difficult to resist spending all of or even more than their income. We live in an entitlement society that demands that we spend money left and right, and it can be easy to become deep in debt. Because of this temptation, rather than “living within your means,” Sanada suggests, you should seek to live under your means. As a proposed budget, Sanada encourages to pay God 10% (tithing), pay yourself 15% (saving/investing), and use the remaining 75% for expenses. In this way, you will never exceed your income.
2. Avoid the use of debt
While the concept of avoiding debt is simple, it is especially difficult for students to avoid accumulating student loans. Debt can be detrimental to the goal of becoming financially independent. Therefore, Sanada suggests that paying off a loan must be a priority. He even urges to decrease your standard of living in order to dedicate more finances toward paying off the debt. A small amount set aside every month can go a long way in chipping away at loans.
3. Build liquidity
Liquidity describes cash or assets that can be quickly and readily turned into cash. For individuals, the idea of building liquidity is to have cash that you can access in case of emergency, a concept that is especially difficult for those who do not have a high income. Too often it is easier to use the small income for necessities and immediate enjoyment, rather than build up liquidity for future use. However, emergencies happen and it is wise to accumulate savings for the unknown future.
4. Set long-term goals
The terms “long-term” and “goals” are some of the most frightening words to a young person. They are constantly being asked what they want to do for the rest of their life, and many have no idea where they will be in ten months, let alone ten years. But it has been shown that those who set specific goals are more likely to handle their money wisely. While you may not have everything in your life figured out, setting manageable financial goals will help you make wise decisions today.
5. Remember that God owns it all
Up till now, the rules may have seemed commonplace and simple, but many may balk at this principle. After all, when we have worked long and hard for what we possess, we feel that we have rightfully earned it. Yes and no. The trick is a simple (yet difficult) switch in our minds from holding our wealth with closed fists, to opening our hands and holding it loosely. It is the difference between living selfishly and living selflessly. It is the difference between owning your wealth and letting it own you. Whatever you believe, this mindset change is vital for wise financial stewardship.
6. Rejoice in generosity
The final principle is the most fun (though it may not seem that way at first). Giving your money away not only blesses those around you, but brings joy and contentment to your life. Those who do not have a substantial income will often put off charitable giving, thinking that they will give once they do not have anything to lose. However, generosity is a habit. No matter how much you have to give, always be generous, and your wealth will become a blessing to both you and others.
Financial management does not have to be complicated. It does not have to involve great wealth. In Wisdom Before Wealth, Randall Sanada clearly explains that wisdom does not come from money. The principles that guide wise stewardship should be implemented and practiced from a very young age. Then, whether you manage $15, $15,000, or $1,500,000 your wealth will be a blessing and a gift.
Whatever your age, I would encourage you to read Randall Sanada’s book and recommend it to others, especially young people. You can never start financial management too early, and many young people are desperate for a solid foundation on which to begin.
Editor’s Note: Tessa Coker is an intern with Cedarstone Advisors and a guest author on this blog. She is a Senior at Wheaton College and (you guessed it) Steve’s daughter. As a college student Tessa can speak to the perspectives of the next generation and the need for financial literacy. Cedarstone would be happy to send you a complimentary copy of “Wisdom Before Wealth” to share with your children. Simply give us a call.