Saturday, January 9, 2010

Income Advice to Young Workers: RELY

Over the years, I have had the good fortune to speak to countless Universities and Colleges on a variety of technical topics.  Lately, popular topics have included security, open source, cloud computing and Trusted Services Oriented Architectures.  

While I have the attention of these young folks (it helps when you also pay for the pizza and soft drinks as well as bring along some t-shirts that have the school's logo with Sun's technology also on the t-shirt :-) I bring up career advice that I believe is very important.   One of my favorite phrases about Unix was when Neil Groundwater told me that "The design of Unix is elegant in its simplicity." 

RELY is the acronym that I coined to make it easy for young people to remember how to think about your income.

           Emergency Funds
           Living Expenses

Specifically, here are some rough guidelines that have worked for me.

                  Max out your 401k if your employer has a 401k plan.  Do the math on the tax savings.   Check out a Roth IRA and see if that makes sense.  Checkout your companies stock program, but if you decide to do this, BUT have a plan to sell your stock over the years because a concern is having all of your eggs in one basket.  My personal belief is that you should put a quarter away in your retirement fund for every dollar you make.  Yes, it is a chunk of change, but, trust me, it will HUGELY benefit you in the long run.  You will sleep soundly at night, even when the economy is a mess and your job situation is unclear.

           Emergency Funds
                  Starting out, it is too easy to think that your Emergency Funds and your Retirement Funds are the same thing - they're  not.  You need to first know your actual living expenses, be honest and figure that out, then add 20% as a buffer.  For every year of employment, aim to have one month of living expenses (include the 20% buffer).  So, that at five years you have five months of living expenses in your Emergency Funds.  The logic is that as you get older, it takes longer in higher income levels to find new jobs as well as you have more expenses and individuals depending on your income ie kids, dogs,houses, car payments, out of pocket medical expenses, houses that need expensive repairs, ...
           Living Expenses
               This is also called your BUDGET.  You need to sit down with a spreadsheet and put in every single expense you have on a regular basis.  The only way to do this is to start by tracking your every expense for at least three months.  Then you can create your realistic budget.  This is HARD.  This might cause a LOT of difficult conversations with yourself and/or your significant other.  BUT, you must do this step or you will always be in trouble.

                You have to budget for fun.  It is totally unrealistic to not plan and budget for fun.   If you are not having fun, what the hell are you living for?  OK, that might be blunt, but certainly you need to have plans for vacations, sports cars, tools you want but do not need, home theaters, gaming systems, in other words wants and not needs :-)
Below is one of my favorite quotes that you should apply to thinking about your income.

To measure is to know.    
       If you can not measure it, you can not improve it.

In physical science the first essential step in the direction of learning any subject is to find principles of numerical reckoning and practicable methods for measuring some quality connected with it. I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely in your thoughts advanced to the state of Science, whatever the matter may be.

        Lord Kelvin - Sir William Thomson

Finally, go read two books:
  1. Roger Smith's "Advice Written on the Back of a Business Card"   I am quoted in there on multiple pages :-)
  2. The Wealthy Barber book that I discuss in an earlier blog entry.  The most important point I want everyone to understand is the magic of compound interest.  Albert Einstein called compound interest “the eighth wonder of the world” and "the most powerful force in nature."   

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