It’s hard to save money. Especially in your 20s, it’s easy to say you’ll save when you make more. But automation has made it significantly easier for young people to save small amounts on a regular basis.
Adam Nash is the CEO of Wealthfront, the world's largest and fastest-growing automated investment service. The company has $1.7 billion in client money under management. Nash has worked in senior positions at some of best companies in Silicon Valley, including Apple, eBay and LinkedIn. With an interest in personal finance and investing since college, he describes his current position as a dream job.
Nash recently spoke to Mic about what young people need to know about managing their finances and the immense value in getting a head start. Here’s an edited excerpt from our interview.
Start saving today
1. Spend less than you make: "The first thing to do when you’re starting out is to figure out your budget and then to figure out the hardest thing, which is to spend less than you make. I wish I could tell you if you make more money it’s an easier problem. Whether it’s your first job out of school, $30,000, $50,000, $100,000, it turns out everyone has problems spending less than they make."
2. Build an emergency fund: "An emergency fund is like a buffer. You can’t build long-term goals if every time your car breaks down or some unexpected expense comes up, you have to hit your long-term savings. That actually is worse than not having long-term investments at all, because you’re pogo-sticking back and forth between your goals. People recommend about four to six months of expenses saved in something very safe -- we’re talking a cash savings account, FDIC-insured."
"The biggest advantage you have when you’re young is time."
3. Start saving for the long-term: "Once you have the emergency fund, you’re ready to go for long-term savings. Great investing, unfortunately, can be somewhat boring. It’s not about making a lot of money this day, this week, this month. It’s about doing the right things with your money over years, even decades. The biggest advantage you have when you’re young is time, right? Compounding [interest is] amazingly powerful, [since] young people have more time than anyone."
Every penny counts
4. Savings are a gift to yourself: "In many ways, savings is like a gift you give to yourself. It may seem far off, but someday you’ll be celebrating that 30th birthday, that 40th birthday, even that 50th birthday, and the savings you put away now, that gift grows the longer you wait. The problem with compounding [interest], too many people learn about this too late in life. A lot of people in their 40s and 50s have to save a lot of money just to achieve the save gains that you could have received if you put a little bit of money away early."
Source: J.P. Morgan
5. Compounding interest is magical: "We all underestimate compounding interest. A lot of people know that compounding interest is a bad thing when it’s credit card debt -- it turns out that bill gets bigger and bigger and you never pay it off. But when it comes to your money, compounding is a fantastic thing, and the great news is many investments compound at rates that are much higher than either bank accounts or the price of milk or bread and inflation. If you have an investment that pays 8% and you save that away, 50 years later that can grow to be more than 46 times the original amount you saved."
Be strategic and invest
6. Play the long game: "I see a lot of young people open a bank account and it only pays a couple percent interest, and so they look at that account a few years later and it turns out that after a few years of making a percent, it’s just not that impressive. But they are missing the point: It’s not about how it looks after a few years, it’s about after a long period of time, it grows to many many multiples of your original money. So dollars you invest in your 20s, if left up to their own devices, can actually grow to many, many times what they are by the time you’re later in life."
"The decision to not invest is an absolute certainty that you will lose money against inflation."
7. Savings accounts won’t keep up with inflation: "The savings account isn’t safe. Don’t get me wrong, if you put a dollar in a savings account, you will get a dollar out in 30 years, but it’s not going to be worth as much as you think it is. Because the one thing that’s certain is that no savings account will match inflation, and inflation is one of those compounding effects. We don't like when our parents tell us a candy bar used to be 25 cents, but it’s actually true. Things get more expensive, and we’ll all be shocked in 20 years at how expensive a candy bar is. The decision to not invest is actually an absolute certainty that you will lose money against inflation. Investing is this idea that you’re putting your money into something that will grow over time."
Image Credit: Fidelity Investments
8. Watch those fees down to the decimal: "If you’re paying 1% or 1.5% fee on your investment, I know that sounds like a tiny number, but remember, if you have investments that pay 6%, paying 1.5% is like giving up a quarter of your money. A quarter of the gain, that’s a huge difference, that builds over time."
9. Active managers aren’t that great: "I know it sounds funny, but when it comes to professional money managers, most people are below average. A Princeton economist named Burt Malkiel was the first to talk about the evidence that said that most individuals would be better off not trying to pick the next Coca-Cola or the next Google, but just to buy a little bit of everything. That’s when the index fund was born."
10. Ignore the ups and downs: "People are very emotional about money. We don’t like losses -- we hate them. We hate losing money far more than we even like making money. You have to make $3 to make up for the pain of losing a dollar. But all the research says that when you look at the investments on a daily basis, they do worse than people who look at it on a weekly basis and better yet, a monthly basis."
Where you should put your money and why
11. Fees are lower than ever: "The fee for owning all those 3,000 different stocks in a total market fund is five basis points, which means it’s five hundredths of a percent. So when you invest $10,000, only $5 goes to fees. If it sounds like this is amazing, it’s because actually this is amazing for individuals. Our parents did not have this ability, our grandparents did not have this ability, and for individual investors, it’s a fantastic opportunity because it means you can invest in stocks, bonds, real estate, commodities with ease that we’ve never had before and at costs that are lower than multimillionaires paid even 30 years ago."
12. Automation is your friend: "Good investing is not about what you do today, or tomorrow. It’s about what you do over the next five, 10, 20, even 30 years. I wish I could tell you that diligent individuals will do a good job of taking care of their money, but it just turns out that life gets in the way. We’re very emotional, so that lack of attention combined with being emotional with money leads individual investors to make a lot of mistakes. At Wealthfront, we feel like we’ve helped solve that problem through automation."
"You are not going to pick the next Google or Facebook...instead, keep your costs low, stay diversified, and be smart about taxes."
13. Index funds are great investment vehicles: "Three years [after Malkiel’s book], Vanguard rolled out index funds, and now there is almost $3 trillion invested in index funds. At Wealthfront, we’re big believers in index funds. We follow a philosophy that you are not going to pick the next Google or Facebook, and actually even professionals who do it most often fail, more often than they succeed. Instead what you should do is keep your costs low, stay diversified on a little bit of everything and be smart about taxes."
14. Exchange-traded funds are fantastic: "[An exchange-traded fund] is just a mutual fund that trades on the stock market. An ETF is simple no matter what your favorite brokerage is. You can walk into any brokerage offline or online and they have stocks you can buy, a Vanguard total market that owns a little bit of every stock in the United States."
"Rip Van Winkle is very, very happy to invest in the stock market."
15. The market always comes back: "If you go through the last 70 years, there have been a number of different downturns. The market always comes back. If you went to sleep in 2003 and woke up in 2013, you would not be unhappy that you invested in the stock market. You would wonder why everyone got so upset in the middle. You’d be hearing these stories, but Rip Van Winkle is very, very happy to invest in the stock market, because if you ignore the daily ups and downs (which, by the way, you should), you always end up in a great place over time."