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Video Transcript
A solid financial foundation is important to ensuring success in the career and personal life of a young professional. From managing your budget and credit, saving and investing, to understanding company benefits, coordinating these pieces to your overall financial picture can be a daunting task. Today, we will highlight a few tips as you get started on your financial journey.
Creating and managing a budget is critical to controlling your finances and reaching your near and long-term financial goals. A budget is a plan based on your income and expenses and is the first step to prioritizing where to allocate funds. One popular method is the 50/30/20 rule of thumb. With this method, you would allocate roughly 50% of your income towards essential expenses such as housing costs and bills, 30% towards discretionary expenses such as dining out and travel, and 20% towards saving and investing. If you have debt, such as student loans or credit cards, build these payments into your budget.
Consider automating wherever possible. You can set up payroll direct deposit and direct contributions to retirement plans, and opt for autopayment on loans and credit cards to ensure you stay on track. If you have multiple debt items, prioritize paying off the high-interest debt first. As a young professional, you may have a steady income, but face extra expenses, so it can be challenging to think about investing for the future. However, managing your budget can help you satisfy demands on your money in the present, while working towards long-term financial goals such as saving for a down payment on a house or retirement. Generally, it is recommended that you keep an emergency fund that can cover 3 to 6 months of expenses. Once you have built up this cash reserve, any excess funds can be allocated towards your investment portfolio.
Even small amounts of money invested consistently can grow significantly over time. The earlier you invest, the more time your investments have to grow. Consider this example with 3 different investors. Each individual invests $5,500 per year and earns 6.5% annual return. Investor A begins investing immediately and continues for only 10 years. Investor B delayed investing, beginning 10 years later and continued until retirement. Meanwhile, Investor C, began contributing immediately and consistently invested until retirement. By saving and investing early and consistently, over a long period of time your portfolio can offer even more growth potential thanks to the power of time and compounding returns. In this example, Investor C accumulated over a half a million dollars more than Investor A over the same time period. One of the biggest goals for long-term investing is for retirement. There are numerous ways to plan for retirement, and a few common options include:
Employer-sponsored retirement plans like a 401(k). Be sure to maximize deferrals to take full advantage of employer matching contributions. IRA or Roth IRAs, consider contributing the maximum allowable amount each year if you can. And if you are eligible, enroll in a Health Savings Account (or HSA) and take advantage of its unique triple tax-advantage. HSAs feature tax-deductible contributions, earnings and distributions are tax-free if they are for qualified medical expenses. Think of the HSA as a retirement health care fund. Contribute the maximum allowable amount and pay for expenses out of pocket to allow the HSA to stay invested and grow.
Note that contribution limits are updated each year so review your situation regularly. Many employers offer benefits beyond a retirement plan. So, explore and understand the full spectrum of your company’s benefits package, which could include health and insurance options, tuition reimbursement, profit sharing, and other employee assistance programs.
These are just a few steps to building a solid financial future. However, even those with good money habits can fall victim to poor credit choices. A credit score is essentially a report card of your overall creditworthiness. Your credit score follows you throughout your life and determines your access to credit as well as the interest rate you will pay on loans. So, having a good credit score can save you money on loans and mortgages. There are many factors that determine your credit score, including payment history, amounts owed, length of history, whether you took out new credit, and the different types of credit you have. Building your credit and maintaining disciplined credit habits is critical. At the very least, be sure to pay your bills on time. For credit cards, charge only what you can pay off in full every month to avoid unnecessary interest charges. Limit the amount you owe. You can set up alerts to help manage credit usage and payments responsibly. Open new credit wisely. Review your budget and whether you can handle this additional cost. Think before closing accounts and keep long-standing accounts open. And finally, monitor and review your credit report at least on an annual basis. This will help you catch any errors and protect against fraud and identity theft.
It is never too early to begin taking action for your financial health. whether it is to satisfy near-term goals through building your budget and credit or long-term goals, like saving and investing for retirement. The key is consistency in practicing good money habits and these are a few steps towards a successful financial future.