For those just starting their careers or beginning to save for their future retirements, the financial planning world can be quite daunting. One flaw of our education system is the lack of preparedness it provides for younger investors just starting off.
When it comes to stocks, bonds, 401(K)s, debts, the task of planning is overwhelming to most.
AUTOMATE YOUR CONTRIBUTIONS AND USE INDEX FUNDS
The easiest way to invest is to automatically direct a portion of each paycheck into your investment accounts. You’ll quickly get used to having less money to spend each month, and your savings will grow automatically. If you’re employer offers a match into your retirement account, be sure to take advantage of that. That’s free money! Take advantage of it! Active management of a stock portfolio requires skill, education, and experience. Young and inexperienced investors have none of these skills, and those who try will be doing nothing more than speculating. When you’re in saving and accumulation mode, it’s best to buy low-cost index funds that track major indexes. You also want to make sure to have small cap and international exposure for diversification purposes.
For those just entering the workforce, consider a Roth IRA or Roth 401(k) to begin diversifying the tax status of your accounts. The Roth accounts are funded with after tax money, so take advantage of current tax rates and the fact that younger investors are likely to earn substantially more later in their careers. A Roth IRA may not be an option if your income exceeds the legal limit for these highly advantageous retirement accounts. Paying the tax now while your tax bracket is lower and before the politicians raise tax rates will ensure that you get to keep more of their hard-earned investment.
TAKE CONTROL OF YOUR HEALTH
You might think your health doesn’t fit into a discussion financial planning, but being proactive when it comes to health—whether it’s getting in your annual physical, or getting your daily exercise in—will pay dividends in the future. Just like you should contribute to your retirement accounts systematically, your health should be the same way. A retiree today is expected to spend $275,000 over their retirement on healthcare. That’s a lot of money. By investing in your health now, you can reduce your potential for future healthcare costs.
PLAN FOR FUTURE HEALTHCARE COSTS
While there are all sorts of different ways to go about saving for your health costs, contributing to a Health Savings Account (HSA) is almost always a good plan if you’re eligible. An HSA is triple-tax advantaged, tax deductible when you contribute, tax deferred while it grows, and tax free when taken out for qualified medical expenses. Odds are, you will have medical expenses at some point in your life, so take advantage of this account while you can. Even if an HSA isn’t offered by your employer, you can open an HSA at a variety of different companies, such as healthequity.com or healthsavings.com.
GET OUT OF DEBT
The average American under the age of 35 has between $23,000 and $30,000 of debt in the form of credit cards, student loans, auto loans, and other forms of personal debt. The average U.S. household owes about $7,000 on its credit cards. With an average 15% APR on credit cards, the average American family is making over $1,000 in interest payments each year.
If you are living with high interest debt, paying it off is one of the smartest financial moves you can make. The reason for this is simple: You are likely paying more in terms of interest than you are likely to earn by investing. Every dollar you contribute toward your debt reduces the amount of interest expense you must pay each year and every year after that. Student loan interest rates are typically lower than most other forms of unsecured debt, making the decision about whether to pay down debt instead of investing more complex. If you’re not sure whether to pay down your debt or start investing, a financial representative can explain the advantages and disadvantages of each option and help you make the right decision for your needs.
LIVE WITHIN YOUR MEANS
This one seems obvious, but most Americans are not living within their means. That’s why so many of us are carrying so much debt. Why are Americans in so much debt? Because they are overspending. Why are Americans overspending? A gallup poll in 2013 shows that just under one in three Americans utilizes a household budget, let alone follows it. That’s a recipe for disaster. If you don’t already have a budget, it’s time to make one and stick to it. If you do have a budget but aren’t meeting it, it’s time to reconfigure your budget or tighten your spending in the areas where you are overspending. It’s also possible that you’re spending a lot of money on things you don’t use or even want. Going through your expenses, line by line, and formulating a budget you can meet is critical to spending wisely and, hopefully, investing as much as you possibly can to your retirement, your health, and your savings.
DON’T BUY YOUR COMPANY’S STOCK
No matter how much you love your company, avoid the temptation to invest in your employer's stock. It’s better to diversify than to be loyal. If you absolutely have to own some, limit your exposure to no more than 3% to 5% of your portfolio. Being an employee does not give you an "edge," and it never will unless your title begins with a "C" (CEO, CFO, etc.). That said, if you already own company stock, don’t run out and immediately sell it. There are special tax advantages for highly appreciated stock under the Net Unrealized Appreciation provision that must be evaluated by a qualified professional before taking such an action.
BUY INTO PANIC, NOT EXCITEMENT
If the stock market sells off by 5%-10% over any given month or week, take your excess cash and buy the dip. Only use excess cash, not any cash that is needed to pay bills. Make this a rule and make it systematic. No matter what, keep to this strategy. If you don’t have any excess cash, wait for the next dip when you do have some cash to invest. On the flip side, when the market is going up and up, and it’s all anyone is talking about, you might want to wait for a correction if you’re sitting on the sidelines. Younger investors are now using acronyms such as BTD (Buy the Dip) and FOMO (Fear of Missing Out) to describe this.
GET WITH THE TIMES & DOWNLOAD THESE APPS
Smartphone apps can help you start improving your finances today. Mint will help consolidate financial accounts and track spending. Acorns will round up all credit card purchases and invests the change in low-cost funds. Major custodians like TD Ameritrade and Fidelity will allow you to open an account (IRA, Roth IRA, Individual, etc.) and buy certain ETFs commission free. Robinhood will allow you to trade stocks and ETFs at no cost. Ebates will give you cash back on everyday purchases like clothing.
BUILD, MONITOR & PROTECT YOUR CREDIT
Your credit score is an indicator of your financial health. The list of people who have an interest in your credit score seems to keep growing every year. Damaged credit can be very costly over time.
Here are some simple steps that you can take to protect your credit:
- Check your credit report every year for free at annualcreditreport.com and dispute any errors. Sites like creditkarma.com allow you to check more frequently
- Pay all bills on time by setting up payment reminders or enrolling in autopay where possible.
- Avoid late charges (anything that goes to collections gets reported to the credit bureaus)
- Pay down any balances on cards (high balances relative to your total available credit ding your credit score)
- Pay off your credit cards in full each month
Richard W. Paul is the president of Richard Paul & Associates, LLC and the author of “The Baby Boomers' Retirement Survival Guide: How to Navigate Through the Turbulent Times Ahead.” He is a Certified Financial PlannerTM professional, Registered Financial Consultant, Investment Adviser Representative and an insurance professional holding life and health insurance licenses in Michigan and Florida.
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