Frugal advice, but very difficult for most 20-somethings to follow. My list is a bit more realistic:
- This is most important, and is in the article: live below your means. If you become accustomed to a larger income, it's much more difficult to cut back if your income is reduced for any reason. And, it also means you will need less assets to replace that income at retirement -- making it easier to retire early.
- Contribute at least enough to your 401(k) to get any company match. That's "free money".
- If your company offers a high-deductible health care plan paired with an HSA, enroll in it. Then, make the maximum contribution to your HSA. You don't have to spend the balance each year, and if you don't spend it all by age 60, you can use it for non-medical expenses (but will be taxed like an IRA).
- Next, max out your contribution to your 401(k). Social Security will be in horrible shape in about 20 years, and you don't want to depend on it.
- The article suggests a lifecycle fund that will automatically reallocate as you grow older. That's fine, but you can do it yourself with two funds: an S&P 500 index fund and a bond index fund. The fees are really low.
- Pay off your credit cards every month. NO EXCEPTIONS. If the balance gets larger than you can pay off, stop spending.
- Make a budget to figure out how much you have to pay every month on necessities, and don't forget to account for your annual/quarterly expenses. Then, you'll know how much you have to spend on everything else.
- If you have to finance your first car, shop for the best rate at your local credit union. Don't accept 0% financing, as the interest is just built into the price of the car -- ask for a discount because you are bringing them a check.
- Don't finance a car for longer than 48 months, and preferably 36 months. In a 60-month loan, the car depreciates faster than your loan balance.
- When you pay off that first car loan, don't go buy a new car -- put that car payment in the bank each month. Keep doing it until you have enough cash to buy your next car outright, then repeat.
- Don't finance a house purchase with a 30-year mortgage. The payment on a 15-year mortgage is only about 15% higher, and you will save a small fortune on interest.
Small changes over your 40-year working career can make a large different. If you skip that margarita or a couple of expensive coffees and invest $10/day into an S&P index fund, it will grow to $1,000,000 by the time you retire. Don't believe it? Open Excel and enter this formula:
=-FV(8%/365,365*40,10)
Can you talk a little more about #5? Do you start off with the S&P 500 index fund and then transition over to the bond index fund as you get older? If so, on what schedule do you make the transition? Should you have investments outside of these funds for diversity? How do you feel about mutual funds?