Think back, not long ago, when you had to write essays or research reports. What seemed to always be the hardest step? Odds are, it was starting. But once you got a foundation for what you wanted to write about, the rest of the assignment became much more manageable. For many of us, it can be the same way with our finances. Starting is always the hardest part.
“Well, how are we supposed to know where to begin? School didn’t teach us any of this stuff.” This confusion leads many of us to do nothing or push off important financial decisions for later. Let’s change that. Here are 5 easy money tips to help you get started as a young professional.
1) Build a Budget
Budget, the dreaded "B-word". I’m sure all of you have heard of this one before. There’s good reason for it. Imagine you’re running a paper company and each year you end up with a loss. Not a very sustainable business model, right? Maybe your Regional Manager, Michael, threw too many office parties? Well, we wouldn’t know because your company failed to track expenses.
Being aware of the money that flows in and out of your accounts each month is essential for any kind of financial planning. To create a budget, take your after-tax monthly income and then subtract your essential expenses from that number. After this, we’ll build in savings and paying down debt. What’s left over is usually left for you to spend freely on whatever you want. No judgement here.
2) Create an Emergency Fund
Ever heard the expression, “When it rains it pours.”? One week your car may break down and the next you lose your job. Life can be tough sometimes, but what helps is being prepared. For most people, saving 3 to 6 months of living expenses is sufficient. Our main goal here is to not have to rely on credit cards or loans to keep us afloat in these hard times.
A great method for reaching our emergency fund goal is to automate a certain dollar amount to your savings each month, so you don’t even have to think about it. Consider using a High Yield Savings Account for your emergency fund.
If you’ve got high interest debt (think 7%+), then you may want to consider building up only 1 month’s worth of living expenses, so we can begin tackling that debt. It may seem counterintuitive to not put all your money towards debt, but in the instance another unforeseen expense happens, we’ll have to go right back to borrowing money.
3) Get Insured
Having no insurance or even possibly the wrong kind of insurance is one of the most common financial planning shortfalls young professionals have. The two types of insurance I’m referring to, in particular, are life and disability insurance.
If you’re having trouble deciding when the right time is to obtain life insurance, a great rule of thumb is to get it as soon as you’re responsible for someone else. This means getting married, having kids, etc. are all great times to reevaluate your life insurance coverage. How much and what type is entirely dependent on your situation. However, for most individuals, term life insurance makes the most sense, as it provides the most benefit for the least amount of cost.
Why would I need disability insurance? For many of us in our 20’s and 30’s, the most valuable asset we have is our income over time. For example, if you’re 30, and you have 35 years left in your working career, earning a salary of 100 thousand dollars, that’s 3.5 million dollars of income you are set to make. An unfortunate event, where you were injured or no longer able to work, is probably the most devastating thing that could happen to your financial plan. Most people have disability insurance through work, so it's important to be aware of what your employer offers. However, if your employer doesn’t offer disability insurance or not enough, you should search beyond your employer and obtain more coverage.
4) Pay Off High-Interest Debt
We want to focus on paying off any high-interest debt you may have first, as it grows the quickest. Most often, this starts with your credit cards or even some of your student loans. A common method you may have heard of is called the “Debt Avalanche Method”, where you pay off the debt with the highest interest rate first and work your way down to the debt with the lowest interest rate.
Remember, as we covered above, to build at least 1 month’s worth of living expenses in an emergency fund, before putting any extra income towards high-interest debt. We don’t want to get caught up in the never-ending cycle of borrowing money, each time a misfortune occurs.
5) Save for Retirement
Retirement seems so far away, why would I start saving now? At a young age, you have time on your side and can let compound interest works its wonders for you. Compound interest is essentially when your money makes more money. The earlier we start, the higher the odds of reaching our retirement goals.
If your employer offers a 401(k) through work, take advantage of it. Try and contribute at least as much as your employer will match, as that is a guaranteed return. Next, if you still have some additional funds, either increase your 401(k) contributions or start a Roth IRA.
Retirement may seem far away but starting early and taking advantage of compound interest is powerful!
Bonus: Start a Health Savings Account (HSA)
An HSA is a type of savings account that lets you set aside money to pay for qualified medical expenses. If you have a high-deductible health insurance plan that qualifies, contribute to an HSA and let it grow. If you can afford it, try not to touch the money in this account. However, if you incur high medical expenses that you can’t pay for on your own, you should certainly use your HSA to help cover the cost.
An HSA can be a great tool, as it is tax deductible, grows tax-free, and can be withdrawn tax-free for medical expenses. The reason to not use this on a yearly basis is because you can invest it and let this account grow overtime and use it in the future.
Remember, this isn’t a perfect science. Your goals, personal preferences, and risk tolerance all matter when deciding how to go about handling your finances. But don’t let time go by and do nothing. Start now and be purposeful with your planning!
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.