In this article for Business 2 Community, Cindy Joyce shares her insights on personal finances for young adults — how they can move on from the economic fallout of the pandemic and plan for a secure financial future.
This past year demonstrated the importance of planning ahead and doing whatever you can to be financially prudent. Having savings to fall back on can make all the difference during tough times. The good news for young adults is that they’ve got time on their side.
Cindy shared these four financial management lessons:
Make Sure You Are Financially Literate
A 2019 USA Today story reported that only 57 percent of adults in the U.S. are considered financially literate. Other studies have shown that only about half of college-educated young adults between 25-34 years of age correctly answered questions to test basic financial literacy. These findings highlight the lack of financial planning education taught during school years.
Young professionals should educate themselves to ensure at least a surface-level understanding of common financial issues, such as budgeting, interest rates, loans, taxes, financial priorities, and debt. Financial advisors and others can help, but you need to have that foundational knowledge.
Start Saving Early and Don’t Stop
Compound interest is incredibly powerful and young professionals are in the best position to use it to attain their financial goals.
We recommend saving a little bit from your very first paycheck and continuing to add to that account. Add a little more every time you get a bonus or raise and keep that savings or retirement account locked. Don’t touch it and watch your money grow.
How do you know if you’re saving the right amount? A good rule of thumb is to save until it hurts just a little (i.e., skip eating out one night per week). The earlier you start saving, the more power compound interest will have and the less you’ll need to save later in life.
As you consider how much to save, think about your goals and risk tolerance. A generic savings account at a bank is a start but won’t do the trick for high returns. Research low-cost accounts with higher yields, such as money market accounts.
A final note on savings. If you get a surprise cash influx – stimulus check, tax refund, bonus, etc. – treat yourself with a small portion and put the vast majority into savings. You’ll want that on hand in case there’s ever a financial emergency. A good rule of thumb is to have two savings accounts. One account should be an emergency fund with six-to-eight months’ worth of regular expenses and the second account should be used to save for your future retirement or bigger expenses, such as your first house.
Begin Retirement Planning Now
Saving is important so you have a cushion as you age and so you’re set for retirement. For young professionals, retirement is decades away, but if you want a lifestyle you can truly enjoy when you retire, you need to start working at it now.
Here’s an easy strategy that young professionals can implement early in their career (although it’s really applicable to anyone at any stage): Max out your 401(k) savings option through your employer. This money will be automatically deducted from your paycheck and placed in your 401(k). It’s like you never had the money in your pocket to begin with, so you won’t miss it (but you will appreciate it later in life). This move helps you maximize your company match as well, resulting in even more money directed to your retirement account. Similar to other types of saving, the earlier you start the less work you have to do in the end.
Remember, if you start saving when your career is in its early stages, you can even become a 401(k) millionaire. Cindy shared additional tips on 401(k) millionaire strategies last year as well.
Look Ahead: More Financial Planning for Your Future
Looking ahead is more than just planning for retirement. Retirement planning is certainly crucial for all young professionals, but you shouldn’t stop there. Some other common financial planning considerations to keep in mind include:
- Life Insurance: It’s cheaper and easier to get when you’re younger.
- Long Term Disability Insurance: Same as life insurance, easier to qualify for and less expensive the younger you are. Fun fact: More people need disability insurance than need life insurance.
- Tax Planning: Review withholdings annually so you don’t overpay. Getting a refund check is essentially giving the U.S. government an interest-free loan.
- Employee Benefits: Take advantage of programs, insurance policies, and incentives your employer offers because it’s usually cheaper (or free) when packaged through your company.
The right preparation and planning can put young professionals on a financial path that will reward them for decades to come. It just takes getting started.
For more information, check out Financial Planning Analyst Grant Wilburn‘s blog post, Financial Management for Young Adults.
For some back-to-basics financial planning education, please see our blog post, Three Components of Personal Financial Planning.