By Phil Gephart
Wouldn’t it be great if we could always learn from other people’s mistakes? Some of us were taught sound financial principles from our parents. I was taught how to shoot a basketball. While that opened doors for me to travel the world and share the Gospel while doing it, I was broke because I didn’t have those basic financial skills to help support myself.
After basketball, at age 27, I went back to school to get my master’s degree in one of the most expensive places to live in America – Orange County, California. I got my degree and started my own business. After a few years I started making more money than I had ever made before.
I was still broke.
I had no idea how to save money. I had no idea the importance of compounding interest. I had no idea how bad debt could be.
No one has invented a time machine yet, so I feel compelled to help Catholics professionals under the age of 35 avoid the same mistakes I made.
Here are three rules to help you never live paycheck to paycheck and take control of your finances for good starting right now.
Rule One: 20/60/20 Rule
This simple concept can help you understand how to live within your means. Use the framework of living off of 60% of your income, saving 20% and use the remaining 20% for discretionary expenses. Do the math for yourself and if your essential expenses like housing, transportation and food are more than 60% start looking where you can make adjustments. Saving and investing 20% is ideal. Where to save, however, is where I take an individualized approach unique to your situation. For dining out, the latest tech and entertainment? That falls in that remaining 20%.
This will help you stay out of debt by not living above your means. Proverbs 22:7 says, “The rich ruleth over the poor: and the borrower is servant to him that lendeth.” Translation? Having debt can keep you from being financially free.
Do you need to spend more than 60% on living essentials? Not a problem. Because we can potentially reduce what you need to apply to your savings bucket by 5% from that 20% because of…
Rule Two: The 15% Rule
It should be your goal to create the habit of saving 15% of every dollar you make by the time you turn 25 years old. If you’re not saving at all right now, just start. Woody Allen famously said, “80% of success is just showing up.”
Just start today.
If you need to, simply start with saving 5% of your income and add 1% every 6 months. In 5 years you will be at 15%.
Just like getting physically strong you can’t expect to go to the weight room and on day one squat 300lbs. You must develop the coordination, the skill, the strength and the habit. Start saving 5%.
Save by design, not default.
It’s never too early to start. Create a budget and start saving as much as possible, even 20% of your income if you can. Chances are you will never have the small amount of expenses that you have in your 20s ever again.
We know the saints intercede for us. Saint Matthew is the patron saint of accountants, bankers, stock brokers, bookkeepers and tax collectors because he famously wrote in Matthew 6:21, “For where thy treasure is, there is thy heart also.” He said three verses later in verse 24, “No man can serve two masters. For either he will hate the one and love the other: or he will sustain the one, and despise the other. You cannot serve God and mammon” (mammon is debt).
Maybe it’s time you ask Saint Matthew for intercession surrounding your finances.
If you start saving 15% of your income by age 25 in a retirement account, using modest career income levels ($60,000 annually adjusted for inflation at 2.9% annually), assuming a 7% annual rate of return, you could have about $460,000 saved by the time you are 45 years old. And that number could more than double to over $1 million by age 55 and more than double again to $2.3 million by age 65 because of the third rule – the rule of 72.
Rule Three: The Rule of 72
This rule helps you estimate how long it will take to double an investment. Simply divide the amount of years you want to double your money into the number 72 and you’ll get your answer. For example, if you want to double your money in 10 years then 72/10 = 7.2%. That is the return on your investment you need to double your money in 10 years time.
And wouldn’t you know it, but that is about what the S&P 500 has returned historically annually since 1957. And over the past 40 years the S&P 500 has an overall return of over 8%. If you reinvest your dividends that return is 10.51% and you could double your money even faster – in 6.8yrs!
I hope and pray you apply these financial principles into your budget this year, this month, and this week!
Phil Gephart is a financial representative with Northwestern Mutual. He is a committed Catholic, happily married and father of three. You may reach him at philip.gephart@nm.com
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