Life & Money Principles for the Young Professional

I recently finished a book called "Principles," by Ray Dalio. From my perspective, the essence of the book is simple but brilliant: choosing and committing to some principles that we will live by will make it much more likely we will make the right decisions, leading us toward the life we want.  Great decisions get made when they are screened by a deeper set of values, principles, and philosophies.

I am often asked by my clients, many who are in their 50s or 60s, to sit down with their children to give them not only financial advice, but life advice. I have been talking to several of them recently about Ray’s book and we have been discussing principles relevant for them. The irony of most wealth managers and advisors, myself included, is that we tend to spend time with people that are already rich, but the younger the client, the less resources they typically have, meaning the more we can help. The reason is simple – learning the right principles early can have a compound impact on your life. If you develop the right habits, informed by the right principles, it is amazing what is possible.

Here are life and financial principles I have been discussing with the under-30 crowd. I hope you find them helpful (these are more specific than Ray’s principles and they border more on philosophies than principles, but since I don’t have hundreds of pages to explain myself, I wanted to make sure they were specific and helpful):

1.    Follow the 50/20/30 Rule (fixed expenses/savings/discretionary). These numbers reflect what percentage of after-tax income should be in each category.

2.    Find a way to save 20% of your income, or else you will eat it, drink it or spend it away.  Good habits have a compound impact over time, and you won’t miss the money.

3.    Make all savings automatic, either out of your checking account or paycheck.

4.    You should have at least 3 months of spending saved in an emergency fund.

5.    The maximum mortgage you should have on your home is 2-3 times your income. Your default should be a 30-year fixed rate mortgage, but don’t go below a 5-7-year adjustable-rate mortgage (ARM). If your time is shorter than that frame, then you should rent.

6.    Your default down payment when buying a house should be 10-20% down, but you can get away with as little as 3.5%.

7.    Keep your car payment under $500/month.  Your default should be to purchase vs. lease, unless you drive 15,000 miles a year or less and keep cars for less than 3 years.

8.    Always carry a $0 balance on credit cards each month.

9.    Don’t spend more than $5,000 on an engagement ring. Most people can be rich or act rich, not both.

10.    Newlyweds are encouraged to merge their accounts when they get married. Too little transparency can lead to problems.

Information is for educational purposes only. Consult with a financial professional for recommendations based on your individual circumstances.

Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Joseph B Beshear is an agent of NM, Representative of Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI (fiduciary and fee-based financial planning services), a subsidiary of NM and federal savings bank. Registered Representative of Northwestern Mutual Investment Services, LLC (NMIS), a subsidiary of NM, broker-dealer, registered investment adviser, member of FINRA and SIPC.