Personal Finance and Investing Guidance to Address TodayPersonal finance and investing is an enormous field that provides many options. This whitepaper was created to help individuals in their 20’s and 30’s navigate the world of investing and personal finance and to help them start thinking seriously about their financial future.
IntroductionIn your 20s and 30s, you probably have quite different personal finance and investing priorities than your parents. Instead of managing Social Security benefits and catch-up IRA contributions, you might be worrying about digging yourself out of student-loan debt, buying a house, or establishing yourself in a new career. You will also have a different retirement to navigate than that of baby boomers. Today’s retirees can look forward to Social Security income, defined-benefit pension plans, and the benefits of decades-long careers. The next generations of retirees may not have those assurances, making personal savings and investing critical. Early financial strategizing can help you get out of debt faster, save for important life goals, and give you a head start on retirement. Here are 6 powerful moves that can help jump-start your financial future:
1. Take Control of Your HealthThe quality of your health can directly relate to the quality of your financial standing. Medical debt is the leading cause of bankruptcy in the United States.[i] If you are not currently covered by health insurance, you should make it your first financial priority. Studies show that young Americans (age 18-34) are the age group most likely to go without health insurance.[ii] According to several Gallup polls in 2017, 16.6% of people aged 18-25 and 20.4% of people aged 26-34 were uninsured. Meanwhile, the national average for the uninsured is lower, at 11.7%.[iii] If you do not have employer-sponsored insurance, you may not want to incur the costs of annual checkups and doctors’ visits. Gambling on your health is a mistake. Avoiding medical visits can cause relatively minor medical or dental issues to worsen and become serious health and financial problems. Even if you are generally healthy, a car accident or unexpected illness can bankrupt you. And when looking to your future, the quality of your health can affect your retirement costs. Today’s female retiree can expect to pay $135,000 on health-care expenses alone, while a male retiree can expect to pay $125,000.[iv] Costs are only increasing; paying for healthcare 30 or 40 years from now in retirement could be even more costly, especially if you have poor health.[v] Fortunately, being young has many advantages, one of which may be lower insurance premiums. Basic health insurance does not have to cost a lot of money. If you are under the age of 26, you may be able to get coverage under your parents’ policy. If you are not eligible for employer-sponsored or your parents’ insurance, you can shop for health-insurance plans on the Affordable Care Act (ACA) federal or state insurance exchanges. Visit www.healthcare.gov to find a plan that works for you. Depending on factors like age, income, and health status, you can qualify for lower monthly premiums that take the sting out of high health-care costs.
2. Negotiate A Better Salary
Average Annual Salary By Age 16-19: $21,840 20-24: $27,456 25-34: $39,416 Source: “The Average Salary for Americans at Every Age.” Business Insider. http://www.businessinsider.com/the-average-salary-for-americans-at-every-age-2017-4.If you are like most Americans, you will make the majority of your wealth by working a job and collecting a paycheck. One of the savviest financial plays you can make early in your career is to learn how to negotiate a higher salary. Since your employers will base subsequent raises and job offers on your previous salary, you can drastically improve your lifetime wealth by setting a good standard early on. And doing so is important; today’s millennial employees are making 20% less than their parents did at the same age.[vi] Fortunately, according to one study, 70% of employers will negotiate starting salaries with college graduates on entry-level jobs.[vii] So while wages may not be on the same level they were in decades prior, you can still maximize the salary you bring home. Here are some negotiating tips for boosting your salary:
- Do not be afraid to ask for a raise or salary bump.
- Demonstrate why you are worth more money.
- Do your homework so you understand the market for your skills.
- Ask for written goals, and set a future date for another review if initially declined.
- Consider salary alternatives, like performance bonuses and noncash perks, that can improve your lifestyle.
3. Figure Out Your Financial GoalsTake a moment to think about what you want out of life. Do you dream about owning a home? Do you want to travel every year? Do you want your children to go to college? Whatever your personal goals are, you’ll need to prepare for them. Your goals might include the following:
- Additional education: College, graduate school, and advanced certificate programs can open doors and seriously boost your career prospects. However, tuition and fees for public, four-year colleges increase by 3.5% each year.[viii] Living expenses and little-to-no income (depending on your employment status as a student) will also raise the cost of education. Preparing now can help ensure you create a strategy to balance your college savings and loan needs.
- A house: Owning a house is still the dream for many young Americans and a way to stabilize their financial lives. In fact, for homeowners between the ages of 18-34, 79% believe that buying their homes positively affected their financial futures; further, 86% believe that owning is more affordable than renting.[ix] For most people, a house will be the largest purchase they ever make. Now’s the time to prepare by saving for a down payment, learning about your credit score (and fixing it if necessary), and studying market trends in your area. An investment representative can help you run the numbers on renting versus buying so you understand your options.
- A business: Being a business owner is popular among millennials, with 49% planning to start their own business within the next 3 years. And 62% of them have an idea for a dream business they want to start.[x] If you aspire to be an entrepreneur, then preparing financially will help you get ahead. Create the vision for the company you want to build, and identify the overhead you need to get started. From there, you can develop the ongoing financial strategies to help you launch a business with a sound financial standing.
- A sabbatical: An increasing number of Americans in their 20s and 30s are taking time off from their careers to travel, pursue passion projects, or make a difference in the world. If a career break is in your future, some advance goal-setting can help ensure that you have enough money set aside and don’t have to worry about finances while you are out of the rat race.
4. Pay Down and Eliminate DebtWhen we think about saving and investing, most people’s minds immediately turn to retirement. While retirement is an important goal, many other intermediate life objectives also require you to develop financial strategies. The amount of debt that individuals from 21 to 34 years old hold is staggering: 31% of U.S. consumer debt is in the hands of this demographic.[xi] And for those who took out school loans to attend college, the average loan was for $30,000.[xii]
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You can see that the high APR on most credit cards pales in comparison to the historical performance of the market. For most people, it makes sense to pay off expensive debt instead of investing at lower rates of return. Every dollar that you pay toward your debt reduces the amount of your money that goes to interest. Student-loan interest rates are typically lower than most other forms of unsecured debt-such as credit cards and medical bills-making the decision about whether to pay down debt instead of investing more complex. If you are not sure whether to pay down your debt or start investing, a financial representative can help. The professional can explain the advantages and disadvantages of each option and help you make the right decision for your needs.
“It is only the farmer who faithfully plants seeds in the Spring, who reaps a harvest in the Autumn.”
-B. C. Forbes
5. Protect Your CreditFor better or worse, your credit score is one of the most important indicators of your financial health. A variety of people can use your credit to make decisions about you, such as lenders, employers, and landlords. Among other debt characteristics, your credit score can reveal whether you pay bills on time or have ever defaulted on a loan. Damaged credit can be very costly over time. The chart below shows how credit scores can affect mortgage points. Source: Trulia, Fannie Mae. Chart assumes conventional purchase mortgage and 20% down payment. This graph details a $250,000 mortgage that is assessed 1 loan-discount point, resulting in $2,500 of closing costs. High credit rating scores-such as 740-show you are a less risky borrower, while lower credit scores reveal higher risk. Mortgage lenders give applicants with lower credit scores a higher risk rating, since lower scores indicate a higher risk of applicants defaulting on their mortgages. Thus, lenders will assign higher borrowing costs when you pose more risk to them as a borrower. This calculation translates into higher closing costs, as shown in the graph above. For example, a 640 credit score incurs $7,000 in closing costs, whereas a 740 credit score incurs $0 in closing costs. Many people can’t afford to pay these extra costs at closing and choose to convert the discount points into an increased mortgage rate, raising the overall cost of the loan. Typically, every discount point converts into a 0.25% increase in mortgage interest.[xv] In short, the financial consequences of less-than-stellar credit can haunt you for decades. Unfortunately, no secret formulas or easy fixes exist for bad credit. Rehabilitation takes time and discipline, but improving your credit is entirely possible. Here are some simple steps that you can take now to improve and protect your credit:
- Check your credit report every year for free, and dispute any errors.
- Pay all bills on time by setting up payment reminders or enrolling in autopay when possible.
- Avoid late charges (all collections report 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.
6. Save and Invest for the Future
Intermediate Financial GoalsBuild on the good financial habits you have set in your 20s, or recommit to better ones. Max out your retirement plan contributions, especially if you have an employer match. Set 5-year financial goals for major life expenses, like a house, a wedding, a car, or a milestone vacation. Pay off your student loans. Start thinking about college savings for your children.
SavingTrying to save when you are early in your career and living paycheck to paycheck are tough. A few strategies can help you establish good saving behaviors even when you do not have a lot of extra income.
- Automate your savings: The simplest way to save is to automatically direct a portion of each paycheck into your savings and investment accounts. You will quickly become used to your adjusted budget, and your savings will grow automatically.
- Focus on saving a percentage of your income: Even if you can only save 5%, as your income grows, your savings will rise to scale.
- Build saving into your budget: Including a monthly savings goal in your budget makes sticking to your plan more likely than if you save whatever money remains at month’s end.
InvestingAlong with saving, investing is one of the best ways to grow and protect your hard-earned wealth over the long term. When you are in your 20s and 30s, retirement can seem a long way off, but it is important to start saving for retirement as soon as you can. Why? You may seize the benefits of compound interest, which may continue to help grow your money by building interest on the starting amount you invest. Let’s say Joe is a 25-year-old investor who makes a single $5,500 contribution to a Roth IRA. If his portfolio earns an average rate of 8% per year, that single contribution could grow to $119,485 by the time Joe’s 65, even if he doesn’t add another dime to his IRA. However, if Joe waits until age 35 to start investing, that same $5,500 investment would only grow to $55,345. While a simplistic example that discounts the effects of fees, inflation, and is not representative of any specific investment, the basic principal is evident: Time is one of the most importantingredients to long-term investment success.
Putting your money to work through investing gives you a greater potential for return than saving alone. It is important to know that all investments involve some degree of risk. Understanding and managing risk is one of the most essential pieces of a long-term financial strategy. Though it is impossible to remove all risk from investing, professional investors use tools like diversification* and asset-allocation strategies to help mitigate some risks. The reward for taking on risk is the potential for greater investment return. If you have financial goals with long-term horizons (generally 5-10 years away), you may be able to accept additional risk by prudently investing in assets like stocks and bonds. Savings that you earmark for short-term financial goals should generally be in cash or cash-equivalent securities. Keep in mind that it is a good idea to speak to a qualified investment professional before making any investment decisions. Markets can be volatile and many investors may worry that stocks are too risky. However, a portfolio that contains too little risk can reduce your potential for long-term growth and leave you vulnerable to inflation, which slowly eats away at returns each year. While stocks generally have a greater potential for loss than most bonds and fixed-income investments, they also have a greater potential for gain over the long term. As a long-term investor, it is important to develop a clear understanding of your goals, risk appetite, and timeline. Financial representatives can work with you to develop a clear-eyed evaluation. A professional can help you identify your risk comfort and an investment strategy that helps you mitigate risk while pursuing your long-term financial goals.
“Someone is sitting in the shade today because someone planted a tree a long time ago.”
7. Take Your Investing to the Next LevelFinancial representatives are not just for older, wealthier investors. They work with a variety of investors at all stages of life and can help you build a strategy for the future. New investors often start out investing on their own and then turn to a financial professional when they want access to sophisticated tools, experienced advice, and help developing targeted financial goals. A good investment representative can help you find the answers to important questions, like the following:
- Should I pay off my debt first, invest first, or both?
- How much should I be contributing to my company’s retirement plan?
- Do I need a Roth IRA?
- Which investments are right for me?