For many of my peers the last 2-4 years has been a period of much transition. You have graduated college, began establishing yourself in the workforce, and likely have moved out into your own place. Congratulations, things are coming along quite nicely. This transition is one that a lot of people refer to as “adulting.” Now, this is a term that I find sort of cringe worthy, however it unfortunately does a nice job at describing the transition that I am writing about. This period of transition also leads to a lot of money related questions “what am I not doing that I should be doing?” Being a younger financial professional, I do get a lot of questions about what people should be doing at this point in their lives. In an attempt to begin this conversation, I have compiled 4 things to do to serve as a starting point.
1. Establish a Debt Reduction Plan
If you are like most of my peers, college debt is something that we have to contend with. Almost 70% of US College graduates will leave college with some amount of student debt. College debt is usually a double edged sword considering that while it is typically the largest liability someone will hold at this age, it typically does come at a lower interest rate. The federal student loan interest rate for undergraduates is 4.53% for the 2019-20 school year. Now, I am not the person who will tell you to literally throw every dollar at that debt until it is gone. I find that strategy to based more on emotion / feeling than anything. The important thing is to commit to a pay down plan and to stick to it. If the interest rate is not egregious, commit to a monthly payment schedule that fits into your budget. The important thing is to stick to it. PS - please be careful with the credit card…
2. Establish an Emergency Savings Account
A new thing you might need to contend with now that you are adulting (again, really sorry I have to use this terrible term) is dealing with unexpected expenses. In your teenage years, and possibly college years if you were lucky, your parents were probably able to help you cover the unexpected big costs that came along. What I mean by unexpected big costs are things like car repairs, broken phones, pet’s medical bills, etc. Force yourself into the discipline of literally opening up a separate savings account and labeling it “EMERGENCY FUND.” This helps psychologically isolate that money as true “rainy day” money and helps you to not be tempted to touch it for the unnecessary. A good rule of thumb for this emergency fund is that it should be able to cover around 3-6 months of your expenses. It might sound like a high hurtle, but you will thank me in the moment where you have to tap into this.
3. Contribute to Your Employer Retirement Plan
It blows my mind when I learn that friends of mine are not contributing to their 401k. I blame this on the fact that they likely were never educated on this topic, but that’s deserving of a completely separate post. One of the age old principles of saving / investing is START EARLY. While this likely is something you have heard from your grandpa or saw on CNBC or something like that, it really is what you should be doing. You should be contributing to your 401k as soon as you are eligible (talk to HR if you are unsure about this). At a minimum, you should be contributing at least up the employer match amount. To not be doing so would be leaving “free” money on the table. Some friends of mine have told me that they didn’t want to contribute to their 401k because they anticipated leaving that job in the next 2-3 years. An important thing to know about these 401k accounts is that they typically are portable if you leave the company. What that means is that if you contribute to a 401k at a company and leave that company to move to a new job, you can “pick up” that 401k (your contributions and sometimes employer contributions) and transfer it to your new employer. Do not ignore this.
4. Establish Bill Pay Discipline
More than ever before it is especially crucial to have tabs on what you are spending month over month. Try to avoid the temptation to automate your bills. While this may seem convenient at first, it can potentially cause you to actually be unaware of what you are spending on various bills. Rather than setting bills on auto pay, set payment reminders. Setting payment reminders will help force the discipline of going in and paying your bills on time. Going in and paying your bills each month will help you keep tabs on your actual expenses.
5. (BONUS) Open an Investment Account
You might be in the position where you find yourself each month with leftover money that you don’t know what to do with. This might be a situation where it would be a good idea to open up an investment account. Opening up a separate investment account can be a great way to supplement retirement savings or to accumulate money for a more intermediate goal. A lot of people are under the impression that simply contributing to their 401k will be sufficient to fund their retirement. Hate to be that guy, but it will not. While the 401k is an excellent first step to begin accumulating retirement assets at a tax preferred manner, it is only the first step. Opening an investment account can also be a good way to accumulate money for a near term goal, think 5-10 years. The money in your 401k is “long term” money, you cannot touch that money until you are at least 59 ½. The investment account can be used for accumulating funds for a down payment on a house, a wedding, anything. Even if the amount seems inconsequential ($20 / month) it will still benefit you in the long run to be accumulating money in an investment account. Give me a call if you have questions about this one.
For some of you these above items might sound really obvious, and to that I would say good for you. But for the other 70% of you who are reading this and thinking about some of these things for the first time, I say good. There is a lot of pressure for people our age to be doing certain things that we might not necessarily have been taught. Take this list as a beginning point to begin putting your financial life in order. If any of the above has lead you to any questions please do not hesitate to reach out.