I often receive a wide variety of questions from younger individuals on how to handle their money. They ask, “How much should I save each month?” Or “Where should I be investing?” Entering the world of saving and investing for the future can at first be intimidating. I want to share five effective strategies that can help simplify the process and make your finances a less daunting endeavor.
1. Create a budget
This strategy likely sounds familiar, but a budget’s importance cannot be understated. It is essential to have a budget, especially when you have a full-time job, and your expenses begin to add up. The biggest benefits to making a personal budget are learning self-control and understanding where your money goes. When there is a budget in place and you know there is only so much cash to spend, it is a lot harder to justify unnecessary purchases. As a result, you will begin to keep better track of your cash outflows. One of the most important items to keep in mind when creating your budget is managing your debt. First and foremost, pay off any credit card debt. Credit card companies tend to charge outrageously high interest rates, sometimes over 20%, so the less credit card debt you carry, the better. You can then incorporate consistent payments on student loans, mortgages, car loans, and any other debts you may carry. Creating and sticking to a budget develops good habits and is the foundation for investing early on in your career.
2. Start an emergency fund
We recently shared an article from collaborative fund on our social media pages that stated, “The biggest risk is always what no one sees coming. If you don’t see something coming you’re not prepared for it. And when you’re not prepared for it its damage is amplified when it hits you.” You never know when unforeseen expenses will come up, and they can really disrupt your financial situation if you are not prepared with an emergency fund. Here at Stewardship Advisors, we recommend keeping 3-6 months’ worth of living expenses (food, rent, utilities, loan payments) on hand. If you start early when you do not have as many expenses, you can make smaller monthly contributions to gradually build your emergency fund. This money can be invested in money market securities, which tend to be cash equivalents that are not risky and very liquid. Instead of earning interest at the bank, which is only a slight step above putting money under your mattress, you can have your money work for you a bit while still being able to access cash very easily. Setting aside part of your monthly income for the unknown can be tough, but with time and discipline, you will help protect your financial and mental well-being.
3. Save for retirement
For someone early in their career, retirement seems far away. However, this time is vital as you begin investing. With time on your side, you can be a more aggressive investor in the market and reap the benefit of compounded earnings. This makes the journey toward retirement much more pleasant and exciting. Nick Maggiulli from Of Dollars and Data says it well, “To illustrate why delaying savings can be so harmful to your finances, let’s imagine someone who invests $10,000 a year for 40 years while earning 7% a year. At the end of the 40 years they will have roughly $2 million in their portfolio though they have only invested $400,000 ($10,000 * 40) in total. The rest of their portfolio value came from investment growth.”
If you have access to an employer-based retirement plan, like a 401k or a 403b, it is in your best interest to participate. Most employers will match a percentage of your contributions, and with pretax deductions, you will not even notice your money being put away. If you still have some extra money lying around that you would like to invest, then open a Roth IRA. The benefit of a Roth IRA is that the money you contribute has already been taxed. Therefore, when you withdraw the money later in life, and your tax bracket is most likely higher than it is now, you can take it out of the account tax-free. The Roth IRA is so effective, that we recommend trying to meet the maximum contribution of $6,000 each year, or $500 a month. Companies such as Fidelity, Schwab, Betterment, and Vanguard all provide solid options for new investors looking to set up a Roth IRA account. Saving for retirement as early as possible and as smart as possible will set you up for success in the long term.
4. Set financial goals outside of retirement
Everyone has different short- and long-term financial goals they want to achieve outside retirement. These goals could include buying a house, getting a new car, holding a wedding, or going on vacation, and each goal requires a separate savings strategy. A good way to start is by creating a savings account for each of your larger goals, to help with organization and clarity. Knowing your goal and when you want to achieve it will ultimately determine how or if you invest in public markets. Saving for retirement in a 401k looks vastly different than saving for a down payment on a house you are expecting to purchase in a year or two. We suggest that if you plan to use the money within a few years, you should not invest it all in stocks. Having some more conservative money in bonds, CDs, and money market accounts will help diversify your savings, alleviate some of the risks, and make cash more readily available.
5. Protect your wealth
To ensure your hard-earned money does not go to waste after an unanticipated circumstance, you need to protect it. It is important to allocate a portion of your earnings toward the appropriate amount of insurance each month. Having the safeguard of insurance, such as health, home, disability, renters, and car, ultimately provides the needed protection and peace of mind. As you build on your investments, you also need to determine the risk you are willing to take. The riskier the investment the higher the potential earnings — and the loss. Make sure you are comfortable with the type of assets you invest in, so there is no future regret when the market is underperforming. These are some of the decisions you can make with the help of a financial advisor you connect well with and can trust. When searching for an advisor to help manage your money, diversify your investments, and provide recommendations for life transitions, be on the lookout for a fee-only financial planning firm. To learn more about the advantages of working with a fee-only advisor, view our recent video blog here.
If you speak to people nearing retirement age, many of them might say, “I wish I had started saving sooner.” I am a firm believer that it is never too early to start investing for your future. By being financially smart in your younger years, you set both you and your family up for success in the long haul. You can never get this valuable time back, and I can guarantee no one is ever going to say, “I wish I hadn’t invested in my 20s.”
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