Financial planning can seem overwhelming and complicated, especially if you’re young and feel like you don’t know anything about investing. Most people put off thinking about their financial future as long as possible because they don't know where to begin, but starting with some well known basics makes establishing good financial habits much easier. Here are five things that new graduates and beginning savers should know about financial planning, and how to use them.
Everyone needs to have some savings in investments. This is not the same as putting money in a savings account. Savings accounts, typically provide minimal interest and cannot provide the growth required to meet long term needs. For those goals, you really need to look at appreciating investments, like stocks. Of course all investments involve some level of risk, so you need to take into consideration your individual circumstances and risk tolerance before you begin any investing. But there are tools & professionals who can help you answer those questions to begin building your investment portfolio. You can even open accounts for free at places like TD Ameritradeor Charles Schwab.
2) Start small, start now
So how do you start? Whether you have $100 or $100,000, starting earlier is more important that how much you start with. Thanks to something called compounding interest, the earlier you start, themore time your money has to grow exponentially.The following hypothetical chart by Business Insider shows the difference between two savers, both of whom put away $200/month into a retirement account with an estimated 6% rate of return until they are 65 years old. Emily starts at age 25, while Dave starts at age 35. These ten years adds up to a difference of $200,000, although Emily only put in $24,000 more than Dave. This is the power of compounding interest.
3) Automate transactions.
The advent of online banking has given us the ability to build smart financial behaviors into our daily routine through the process of automation. This is especially useful to young savers whose first concerns tend to be around managing their budget and reducing their debt. Scheduled payments take emotion out of the process and can help you gradually increase your payments to bring down larger obligations like student loans. A similar process can be applied for increasing your savings and investments. By simply setting up regular money movements to savings, retirement, or investment accounts, you have the ability to start small and build it up over time. At the same time, you will also be applying another smart financial behavior known as Dollar Cost Averaging. This occurs when you invest a fixed dollar amount at regular intervals, so that you buy more shares when prices are lower and less shares when they are higher.
4) Take advantage of employer match.
Graduates beginning their career can miss an opportunity to grow wealth easily when they don't participate in their employer retirement plan, especially when your employer offers a match to your contribution. A good goal to set for yourself is to at least contribute enough to meet the maximumof your employers contribution. Many times this equates to an immediate 50% return, or in some cases 100%. This is, quite literally, free money! Almost 40% of workers in their 20's forgo these matchesbecause their biggest concern is how it will affect their paycheck. However, the contributions are made “pre-tax”, meaning you lose less of your income to taxes, and reduce your take home pay by a lesser amount. Essentially, contributing to an employer match is one of the fastest and easiest ways to save for retirement without losing what you need to live on today.
5) Get some kind of financial help.
Managing your finances can be overwhelming at the beginning but you do not have to do it on your own. There are good financial professionals out there that can help you. Just take a little time to interview a few of them to understand what they will do to help you, what investments they use, and what they will charge in the process. Asking just a few questions will help you find an adviser that meets your needs & preferences on a budget that is right for you.
Financial planning for younger savers doesn’t have to be intimidating or out of reach because of their age. In fact, we want to prove it by offering a new series designed to help students, new graduates, young professionals, and anyone else learning how to manage their own finances for the first time. If you have any topics you'd like to see discussed, we'd love to hear from you! Shoot us an email at firstname.lastname@example.org with any questions you want answered for your financial planning or investing needs.
This information is for educational purposes only and is not an offer to buy or sell, nor a solicitation of any offer to buy or sell the securities mentioned herein, or considered to be the rendering of personalized investment advice. Past performance is no guarantee of future results. Therefore, no reader should assume that future performance of any specific investment or strategy (including the investments and/or strategies discussed), will be profitable or equal to past performance levels. Conscious Capital Management, LLC assumes no responsibility for loss or damages resulting from the use of this information. A professional advisor should always be consulted before implementing any of the options presented.