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Thursday, 26 June 2008

Graduating to a Happy, Financially Secure Future

by Laura Rowley

Every year around this time, the New York Times prints a roundup of commencement addresses. I always find a little inspiration there to cut out and stick on my office wall. This year, its author J.K. Rowling's address to Harvard grads about the benefits of failure -- although if I were to nominate a group for the "least likely to fail" award, it would probably be that audience.

In any case, I had some thoughts for my own commencement address. Here's what I would tell the class of 2008 about money.

Believe the Clichés

Personal finance advice is so similar, and so often repeated, it's become a cliché:

• Live within your means.

• Set up an emergency fund with three months of living expenses.

• Stay out of debt.

• Join your company's 401(k) plan or open an individual retirement account; set aside at least 10 percent of your pre-tax income every year.

• Invest in a diversified portfolio of mutual funds to help your money grow over time, and make sure you're not paying too much in fees.

Clichés are easy to take for granted and easy to tune out. But here's the truth: Believe these clichés. Because if you actually follow the advice, it will transform your life.

The Roaring 20s

I'm convinced that real happiness comes from identifying your values, and then being brave enough to expend your strongest talents and best energy in their service. I think genuine happiness comes from naming what you care about most deeply, setting priorities around those values, and then translating them into real, concrete goals. Money is one instrument in the toolbox of resources and people and experiences that help you journey down that path toward the person you were meant to be.

Your 20s represent a personal finance paradox: You have the most financial power that you may ever have because of the phenomenon of compounding. (Someone who saves $2,000 a year for retirement between age 21 and 30 and then stops will have a bigger nest egg than someone who starts at 31 and saves until they're 65.) At the same time, your 20s can be a bit of a bust in terms of figuring out why you were put on the planet.

It's a confusing decade -- you charge out of college knowing everything and ready to rule the world, and spend the next decade realizing you know almost nothing at all. Then, in your 30s and 40s, you recognize that it's OK to know almost nothing -- and is actually a finer way to approach life, because you really listen to and learn from other people, take risks, and benefit from mistakes and failure. (If you continue to simply know everything, you don't grow and become an arrogant bore.)

The Ghosts of Purchases Past

So here's the problem: Many people lurch around in their 20s trying to establish their identities. One day, you pick up a magazine or see a television show that suggests one can establish an identity by buying $500 designer shoes. Or $900 designer golf clubs. Or some other stupid thing that costs a whole lot less to manufacture than you paid for it. Because you weren't just paying for straps of leather or sticks of iron but for an identity attached to a lifestyle that somebody made up in a brainstorming session in an advertising firm somewhere in New York, or in a scriptwriting meeting in Los Angeles.

And this isn't entirely your fault. You're bombarded with signals to buy in a way previous generations were not. There are 1,000 cable channels telling you on a daily basis that your face, body, home, and possessions are in need of an extreme makeover. Technology and credit card companies have made it effortless to act on those impulses.

And then you get into your 30s and 40s and have a better understanding of who you are and why you were put on the planet. You're now ready to use money as a tool to help walk down that road. That's when your 20s can come back to haunt you. Maybe you're still paying the credit card for the $500 shoes and the $900 golf clubs (or for all the money spent in chic bars showing off the shoes, and at golf courses showing off the clubs).

Reality Bites

So you had some fun, but now you're playing catch up. That's usually when the magical thinking starts. You do things like buy a house with an adjustable rate mortgage (because you didn't save up a home down payment). Or you listen to some guru who tells you to put everything you have in gold or oil, or to buy stocks on margin or speculative real estate with no money down.

And maybe you have a couple of kids, and the media that told you to buy the shoes and golf clubs is now suggesting you invest in Suzuki violin lessons, private tutors, and traveling sports teams.

You're scrambling to save for retirement, scrambling to meet your rising mortgage payments, getting in deeper on that credit card to take a few fun vacations with your kids before they grow up and leave you, and God knows how you'll pay for college (since the gold-oil-stocks-real estate thing didn't work for you the way it did for the guru).

And it's really hard to follow your deepest values, and pursue that thing you were meant to do and become that person you were meant to be, because you're really stressed out about money.

Happiness Gained

I was a naïve kid from the Midwest living in New York City in my 20s -- naïve enough to believe all those clichés my father told me about staying out of debt and saving for retirement. So I did both -- it was just something I made a requirement, as routine as brushing my teeth. (And I had a lot of fun at the same time; I just bought my shoes at sample sales, frequented bars with free happy-hour buffets, and traveled to Europe on a shoestring.)

And when I was 37 (which happened a hell of lot sooner than I expected) and working 14 hours a day in television with two kids under age three, I could walk away from my full-time job and start my own thing. My values had shifted, and I knew I had to find a better balance between work and family. I had the luxury of using money to journey down the road in pursuit of my values -- not because I had a big win in oil or gold or sold a bazillion get-rich-quick books, but because I had stayed out of debt and consistently saved for almost two decades.

And that has made me happy.

Commence with Being Happy

So here's my advice:

• Live within your means.

• Set up an emergency fund with three months of living expenses.

• Stay out of debt.

• Join your company's 401(k) plan or open an individual retirement account, and save at least 10 percent of your pre-tax income every year.

• Invest in a diversified portfolio of stocks and bonds to help your money grow over time, and make sure you're not paying too much in fees.

Believe in the clichés. Follow the advice, make it as routine as brushing your teeth. Because one day it will open up a world of options, and transform money from a potentially huge source of stress into a resource to help you follow your values -- and hopefully figure out why you're on the planet.

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