As a young adult, you have recently entered a phase of life that will prove critical to your future career and finances. If you're a recent graduate or a young worker, creating a solid financial plan might not be high on your list of priorities. Many young people imagine that the financial future is many years from now, and that they've got plenty of years to earn money to save for retirement.
However, taking several steps now can make a big difference. Although it's never really too late to start saving, steps taken early in life can improve your financial resources and total quality of life. Making several of these key decisions now, and taking some practical steps today, can align your ideal future and finances. Use this financial guide for young adults to get on the right track.
It's never too early to begin saving for the future. Whether you're a high school or college graduate, taking the right steps now can make qualifying for a mortgage loan or other credit much easier in the future. Many young people make poor financial decisions. These bad financial decisions can range from assuming too much debt to making unwise spending decisions.
Unfortunately, unwise financial decisions made in the moment can have lasting results. Bad credit scores and reduced discretionary income result:
- A low FICO credit score can mean waiting years to buy a car or own a home at a reasonable cost.
- Paying too much for credit can affect your future in far-reaching ways. Not only will repaying debt rob you of well-deserved pleasures like vacations. Bad credit can cost you a plum job or career opportunity. Some employers check prospective employees' credit ratings before making a decision about extending job offers.
Although legislators around the country want to change these practices, it is important to know that building good credit is almost as important as physical health.
Starting To Save
Take simple steps to limit spending sprees. Pay yourself first every pay period. Deposit a part of each paycheck, such as 10 percent, into a savings account to create an emergency resource fund. Job loss and unemployment can happen to anyone, so budgeting and saving can help you get back on your feet more quickly.
Establishing savings is a good habit to begin early in life. If you're a saver and not a spender, making good financial choices includes comparing prices at the grocery store or using coupons. Some grocers make it easy to load coupons to your smartphone, so managing large amounts of embarrassing paper coupons is unnecessary. Some grocer programs extend benefits to gasoline purchase rewards to reduce your fuel costs.
Buying a home is the first major financial goal of many twenty-somethings. Since lenders are likely to require a down payment, savings can accrue to help you buy a home sooner. Real estate is considered one of the best ways to grow rich slowly because equity in your home can accumulate over time. In contrast, paying rent only makes your landlord rich.
Although is the most important thing you can do to build a financial future, you must have access to credit. Along with the emergency fund, build a good credit score and keep it. Without an existing credit history, start first-time credit by applying for a student credit card. Many banks offer a student package that includes a checking and savings account along with an unsecured credit card. Remember, getting retail credit accounts or credit cards is only the beginning. Make sure each account is paid on time.
If you've already got some credit problems, ask the bank for a secured credit card. A small deposit kept by the bank allows you to build a credit history. Make small purchases and pay them off right away to establish good credit. Of course, address any credit issues right away.
Request a free copy of your Experian, TransUnion, and Equifax credit reports once each year. Study them and dispute any errors by writing the credit reporting agency. Submit the dispute with any documentation. Follow up about a month after making a dispute to see if the error(s) have been removed.
Managing Credit And Debt
Credit cards are one of the best ways to build a good credit score, but it is easy to max out credit accounts. Higher debt levels make getting additional credit more difficult. A debt-to-income ratio that is too high will lower your credit score.
Control spending to maintain good credit, and only use a credit card when it's necessary. Don't fall into the trap of buying groceries and other essentials on a credit card because impulse purchases drained your checking account. Only use credit when you are in a positive financial position to pay these charges.
Carrying balances from month to month can be costly and, ultimately, lower your credit score. When you use a credit card, pay off the balance in full at the end of each billing cycle.
Investing In Your Future
Investing for your future retirement might seem like a silly idea in your 20s, but it is actually a savvy decision to do so. There are many ways in which you can invest your money to gradually build wealth. Investing today in an employer 401(k) plan or an Individual Retirement Account (IRA) is a smart way to save. These accounts are tax-deferred, so savings grow without the current impact of taxes. This fact is a significant gift from the U.S. government, so take advantage of it.
You can't withdraw retirement plan funds in cash without incurring a penalty. You can move retirement plan funds from one plan to another. For example, you can move 401(k) money from one employer plan to a self-directed retirement plan or to another employer's retirement fund. According to IRS, other benefits of retirement plans may include:
- Lending money to yourself (as a defined rate of interest over a specific period) in an emergency.
- First-time home buyers can access up to $10,000 from retirement plans to make a down payment.
- Paying for qualified educational expenses.
Hiring A Financial AdviserYoung adults are typically busy building a career and/or family. As your savings grow, you may be tempted to spend too much time managing money. You should be involved with your financial affairs, but making day-to-day decisions about investments might be unwise. The adage "Making money requires time in the market, not market timing" holds true here. Even in the information age, the real inner workings of finance remain hidden behind marketing rhetoric and technical jargon.
For these reasons, trying to become a self-styled stock market investor yourself can be a waste of time. Building a solid portfolio for the future always includes purchasing quality investments. If you take a long-term view, buying even small amounts of professionally managed, conservative growth or growth with income mutual funds can make good financial sense. There's little need to buy and sell these funds and, over time, many retirement plans allow you to purchase additional shares.
The U.S. market has gone up over time, but prices rise and fall according to supply and demand. Accumulating new professionally managed, high quality mutual fund shares can help you to diversify investments and decrease risk. Plan to purchase new shares when market drops occur. Expect them, and don't sell shares in a mutual fund at a loss. You cannot deduct losses in tax-sheltered accounts.
Your financial adviser can help make difficult financial decisions, too. For instance, all investors should rebalance portfolios if market growth causes an imbalance. If your original financial plan placed 50 percent of funds in stocks and 50 percent in bonds a few years ago, stock market growth caused portfolio imbalance. Financial growth is desirable but, without balance, adds risk. An adviser can easily make sure your portfolio remains balanced regardless of how much or how little you have invested.
If hiring a financial adviser makes sense in your situation, know that not all financial advisers are the same. Hire a fee-based financial planner instead of transaction-compensated adviser to avoid irregular expenses.
Managing Your Money
If you're focused on cleaning up past debts and improving your credit score, engaging a money manager may make good sense. A money manager evaluates your income and debts before creating a monthly financial plan.
For instance, your money manager may recommend setting aside a certain portion of monthly income to repay your debts. If you're tempted to spend money that should be directed to paying down debt, engaging a money manager can be a simple and cost-effective decision that benefits your credit score and financial future.
Financial PlanningA financial adviser such as a certified public accountant (CPA) or certified financial planner (CFP) can assist you in tax planning and investments. As you earn and save money, your adviser can help you keep more money by considering the impact of taxes. For example, buying a home can be an excellent tax planning decision because mortgage interest allows you to reduce taxable income by the annual interest paid on the loan.
Tax planning is a year-round process. For example, if you receive a large tax refund, it might make sense to adjust tax withholding at work. File an updated IRS W-4 form at work by contacting the payroll office to have less tax taken out of each paycheck. This simple step can help you access an average $200 each month if you are an average wage earner.
Every young adult should take stock of their current finances and make a financial plan for the future. Depending on your circumstances, deciding to save 10 percent of current income or fund a retirement plan can be the first step. As your assets grow, hiring a financial planner can help you reach loftier financial goals.