Many young people procrastinate when it comes to planning for retirement, saving, and investing, but the best time to do these things is earlier rather than later. Creating a solid financial plan and taking advantage of such things as corporate retirement benefits options and available tax deductions can make the difference between being able to retire comfortably or having to work long after the golden years have begun. Here are some financial tips for young professionals to help insure bright and financially healthy futures.
1. Plan early and often
It's common for a young professional to concentrate on working hard to grow their career, purchasing a home, and starting a family. People sometimes get so caught up in those basic things that they fail to plan for their finances, both now and in the future. You should start by creating a simple financial plan. Ideally, the plan should include goals for six months, a year, five years, and ten years into the future. You should then monitor your progress and make adjustments as needed, depending on your changing financial circumstances. This plan can include things like retirement, savings, investing, college planning, among other things.
2. Importance of paying off debt
While carrying some amount of debt can be beneficial, having too high of a debt-to-income ratio can make the difference between being approved for mortgage applications, car loans and other significant purchases. Additionally, when you carry a high level of credit card debt, the high interest rates on that type of debt make paying it off quickly vitally important. You may want to consolidate higher interest credit cards into a lower-rate one (or better yet use a home equity line which allows you to deduct the interest on your taxes) and set a goal of paying the balance quickly, while not incurring new expenses. Doing so will free up money to use for investing in retirement and other savings.
3. Save every month and build up an emergency fund
When you start something new, after a while, it becomes second nature. Starting a savings habit works the same way. You should figure out your budget and choose an amount you can comfortably afford to invest and save. It is also important for a primary savings goal to include saving at least six months’ worth of income in the event an unexpected emergency happens. If an emergency occurs, you and your family will have a better chance of making it through unscathed financially.
4. Utilize tax code for best benefit
Although it might not seem obvious, the IRS tax code can be your friend. The law makes certain contributions for retirement tax-free, allowing a certain amount to be invested in accounts each year while providing a deduction. For money help, people should discuss various options with their financial advisor to choose the best types of retirement vehicles to reap the most benefits under the tax laws.
5. Take advantage of corporate retirement benefits
If you work for an employer that offers an employer-matched 401(k) retirement account, it makes sense to invest at least up to the matched amount. The employer-matching portion is essentially risk free money that can then grow tax-free along with your portion. When a plan like this is offered, you should take full advantage of it in combination with other investments.
6. Review insurance and make certain sufficient insurance is obtained
One of the biggest mistakes people make is not carrying sufficient insurance. Medical debt is the largest reason people cite when filing bankruptcy. Even people who had insurance at the time of an unexpected accident or illness may fall victim to spiraling medical debt if their coverage is insufficient. A careful review of your medical insurance coverage should be done.
Similarly, you should also make certain you have sufficient life insurance in the event the unexpected happens. By doing so, you can make sure your family will be provided for in the event of a tragedy. There are several life insurance strategies that may be undertaken to ensure maximum return, such as laddering terms and multiple term insurance policies that you can discuss with your financial adviser.
7. Design an investment portfolio with your risk tolerance in mind
The investment portfolio you design is important, as returns over time have more opportunity to grow in value. Ideally, investments should be varied, representing different asset classes and stock categories. The younger you are when you establish an investment portfolio, the more risk you should be able and willing to tolerate. It is still important to regularly review the portfolio and make adjustments as needed. Reinvesting returns and dividends is also a good idea, because the overall value has more time and more value to increase.
8. Don't forget the importance of estate planning
While it may seem odd to think about estate planning when you're young, it is an important component of any financial plan. Accidents and illnesses may strike at any age, and ensuring that a plan is in place in the event such an accident occurs can help your family deal with the financial consequences. A good estate plan should include such things as a durable power of attorney in order to allow a spouse or a trusted person to make financial decisions and transactions in the event you're incapacitated. You should additionally consider whether establishing a trust account designed to pass assets to intended beneficiaries makes sense, as doing so can help avoid the expense and litigation associated with probate court. And for all you young parents out there, your will will designate your child's guardian in the event you both passed. This is a big deal I see young parents forgetting.
It is never too soon for you to start planning and working towards your retirement and financial future. By carefully planning and seeking out professional advice, you can help make certain that you can enjoy a financially healthy future for many years to come.