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It’s all in the basics: The ABCs of good financial habits

David Blain, CFA is CEO and Founder of BlueSky Wealth Advisors, and author of "Invest in Your Life, Not Just your Portfolio."

My dad had it exactly right: “Don’t spend more than you make, pay yourself first and set aside something for the future. When you can, pay in cash and be careful with debt.”  If only everyone had heard these words when they were young and starting to build their lives and their portfolios.

Starting out smart means getting help, admitting to what you don’t know, and learning the basics:

  • Regulating cash flow
  • Saving
  • Managing debt
  • Saving for the kids’ education
  • Retirement planning

If it were that easy though, every adult in their early 20s would be compounding money in their savings accounts instead of running up credit cards. Here are the four most important things young adults should focus on with their finances.


1. Know where your money goes. Clients Marcus and Nicole were doing most things right, but an incisive look into their finances helped them realize that the family was spending 20 percent of their income on eating out and more than $30,000 a year on premiums for an array of specialty insurance policies they didn’t need. I didn’t tell them how to spend their money, but by illuminating where the money was going, they were able to free up funds for investing. 

2. Avoid the B Word. No one wants to budget, but saving is easier when cash flow planning is highly organized. Quicken and Mint can be helpful, but you don’t want to get lost in the weeds either. Instead, keep your eyes on the big picture, budgeting for 50-30-20. That is 50 percent of your take-home pay for essentials (e.g. rent or mortgage, utilities, car payment), 30 percent for lifestyle variables (e.g. eating out, shopping, vacations) and 20 percent for financial priorities (e.g. 401(k), home repairs, car maintenance). Obviously, there will be unanticipated expenses, and I recommend you always keep a cash reserve and emergency fund on hand. Try to identify your short-term needs (e.g., this year I need a new car), anticipate expenses, and start to save.

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3. Keep your debt down. Debt is common, a big problem, and completely avoidable. Most debt comes from purchasing too much house. There’s no need to pay cash for a home, but make sure the amount of your debt is appropriate for your income. Avoid impulse buying by deciding on a certain amount as a personal threshold. Wait a day on a major purchase. I also recommend not spending money financing a fancy car in your early years because you jeopardize your long-term security. Buy used cars for cash – financially independent people do not have to finance a BMW or Mercedes.


4. Being Educated about Education. Young couples usually start on new families in their late 20s or early 30s. When you set up the first college savings account, you and your spouse need to agree on a college philosophy. Let me explain.


My clients’ son, Sammy, had a $200,000 education that allowed him to pursue his dream of designing video games – an incredibly competitive field. Unfortunately, much of that education was funded through loans. Upon graduation he found a job. His starting salary was $30,000. Get the picture?

Keep in mind that the value of the degree needs to weigh against the amount of the loans. Tuition is a major expense that should be discussed well before you are paying any. What’s your philosophy? Do not endanger your own financial plan. There are options including reasonably priced in-state schools, and you can have an expectation that your child should secure scholarships to pay for any amount above in-state tuition.

The basic building blocks for financial independence may seem easy, but too often, I see very educated people who have yet to learn them. These are lessons for a lifetime. I’m lucky that I heard my dad’s sound advice early in life and took his words to heart.

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