Financial Planning: Ages 20–30
The early bird gets the worm.
Our future seniors ignore personal finance the most. Why not, right? After I graduated from college I was concerned with finding a job, an apartment and a date for Friday night—not what my contribution rate to my 401(k) was.
First things first: Find a job. In this environment, it’s easier said than done, but it is a primary objective. Your student loans are your second priority—that is, until you pay them off. If you are fortunate enough to have had your tuition paid for, then you should be very concerned with your contribution rate to your 401(k). When it comes to saving cash, time is your best friend. Start your retirement plan contributions at the minimum level to receive the maximum match from your employer. From there, increase it by 1 percent of your pay every year until you can’t stomach another penny.
Next, review how your money is invested. This is where it gets tricky. You need to take a step back and figure out what to invest in, as allowed within your retirement plan. Typically this is a choice of several mutual funds, company stock and index funds. Reach out to an expert (if you don’t know one, go through your contacts on LinkedIn or Facebook accounts or ask your parents for a referral) and have them help you. Don’t go to HR. They don’t have the answers. Don’t go to the person in the cubicle next to you, they have their own problems. Figure out what your goals and objectives are in the short run and invest a good portion of the balance for the long-term.
Here’s how: Determine your tolerance for risk. Ask yourself how much you are willing to lose in a given year—5 percent, 10 or 20 percent? Yes, you have many years until you retire, but don’t let that fool you. Risk is risk to all age groups, and needs to be managed effectively by utilizing various asset classes simultaneously. (This is where a professional planner could help.)
If you are having difficulty or an aversion to creating a budget, it’s as simple as this:
• Determine what income comes in versus what you pay each month in expenses.
• Break your budget into sections (living expenses, entertainment, and the like).
• Track it, live it, thank me later. Avoid the mishandling of revolving debt (read: credit cards). Yes, you need to build your credit, but do you really need the iPad? Pay for the extras with disposable income. (Chances are you won’t have much after you pay your bills.) Focus on saving money now so you can have more to spend in future years.
You’ll also need to get a basic term life insurance policy. Have enough to cover every debt you have, and a little extra to cover funeral costs. Term insurance is the lowest cost life insurance available. The word term refers to the amount of time your policy will last. Say 10, 15, or 20 years. At the end of the term the insurance ends. If you are already married with children, consult an expert to determine what type, and how much you need, since income replacement will likely be your primary need. This is never a cookie cutter process. You need to do what’s right for your situation.
As for your investments, do maintain product diversity. For example, if your company-sponsored retirement plan (401(k)) uses all mutual funds, then consider using exchange traded funds (ETF) or other investment products in your brokerage account.