Young professionals face a variety of financial challenges, such as paying off debt, saving for the future, navigating workplace benefits, and starting a family. It can seem overwhelming to understand what you should be doing now for a successful future. Given the recent uncertainty surrounding market volatility, now is a great time to review your finances and make an actionable plan. Here are 6 crucial steps to ensure you are on track to financial stability!
1. Understand and Follow Your Budget
A thorough and easy-to-follow budget is the foundation to a strong financial future. There are numerous ways to track your income and expenses, either through applications that conveniently link your accounts or you can budget the “old-fashioned way” via paper or Excel spreadsheet. The goal is not to follow your budget exactly 100 percent of the time; instead, it is to understand your income flows and how you allocate savings vs. spending your money.
Once you understand your cash flow situation, you can begin saving for your emergency fund. Our team recommends having 3-6 months of living expenses held in a separate bank account, invested in a money market fund or CDs. If you are single, self-employed, or face job uncertainty, it may be beneficial to increase your emergency fund to a year of living expenses. If possible, set up automatic payroll contributions to take this action item off your list.
Predominately, it is extremely important to live within your means. If you are consistently spending more than you are saving, your debt load will rapidly increase, causing financial stress. By prioritizing your essential expenses vs. discretionary expenses (ex. new clothing, electronics, or entertainment tickets) and saving for emergencies, you will build a strong financial foundation and have better peace of mind over your finances.
2. Build Your Credit Score
It is important to check your score at least annually, which you can do for free at Credit Karma. A good credit score (generally 700 or above) gives you the opportunity for low-interest rates on credit cards and loans (such as a mortgage or student loan refinancing), a better chance for approval, and more negotiating power with credit lenders.
There are simple steps you can take to improve your credit score, including paying your bills on time, keeping low or 0 balances, and monitoring your accounts for unauthorized charges. When selecting a new credit card, choose a card with a reward program that works best for you with no or low annual fee(s).
3. Make a Plan for Your Debt
It is hard to save for the future with high amounts of debt weighing you down. Prioritize paying down high-interest credit card debt as soon as possible.
Are you aware of your student loan repayment options? There are several different choices available, including standard repayment, private consolidation, and income-based repayment options. We can connect you with a student loan expert if you have questions in this area!
4. Start Saving for Retirement
If your workplace offers a retirement plan, such as a 401(k), sign up as soon as you are able to, and make sure you are receiving the full employer match, which is usually between 3%-6%. The funds will automatically be pulled from your paycheck, allowing you a convenient and consistent way to invest. The IRS maximum 401(k) contribution for 2022 is $20,500, which may seem like an extreme number to reach now, but automatically increasing your contributions each year by a percentage or two will get you there before you know it!
If you do not have a retirement plan through your employer, you may be able to contribute up to $6,000 this year to a Traditional or Roth IRA. A health savings account (HSA) is another great tax-advantaged way to save for future medical expenses and retirement. Waiting to start investing can cause you to have to work significantly longer than expected due to insufficient retirement funds. Get started now!
5. Protect Your Wealth
If you suddenly got sick or hurt and no longer were able to work, how would you pay your bills? It is important to have the correct disability insurance in place. If you have or plan to start a family, life insurance and estate planning documents, such as a will, should be a top priority to protect your loved ones. Ensure your healthcare and financial Power of Attorney documents, will, and other necessary estate planning records are stored in a secure place.
6. Prioritize Your Goals
Although this list can seem daunting, the key is to take small steps consistently to reach your financial goals. Which one of these steps is most important to you today? Create a realistic plan with simple, achievable goals, and do not be afraid to ask for help!
Working with a financial planner will help ensure you have set the right goals and are on track to achieving them, as well as serve as a valuable resource to all of your financial questions.