As a young professional, you might feel like you've been thrown into a complex world with new responsibilities: saving money, navigating benefits, managing 401(k)s, and taking out loans. Did we fall asleep during this lesson at school…?
It can be overwhelming to suddenly have to make important "grown-up" decisions, and it's easy to become indecisive and avoid them altogether. But by implementing the following steps, you can establish a strong financial foundation for yourself.
1) Start With a Budget
Creating a budget is not just about managing your finances; it's about aligning your values with your resources. When you set financial goals and create a plan to achieve them, you gain the ability to prioritize your spending based on your core values.
This can be a powerful tool in realigning your values with your hard-earned cash, as you make conscious decisions about where and how to spend your money. In the long run, you’ll avoid wasteful spending and ensure that your money is going towards the things that truly matter to you.
2) Build Your Emergency Fund
As much as you may think you are invincible, life can still throw unexpected curveballs-- and sometimes all at once. Think job loss one week and broken-down car the next. Without adequate preparation, you may find yourself forced to rely on debt to fund unforeseen expenses.
To avoid this situation, it's important to establish an emergency fund with at least three months' worth of fixed expenses. Automating your savings into this fund can make it a hassle-free process, allowing you to prioritize your financial security without even thinking about it.
3) Take Advantage of Your Employers 401(k)
A 401(k) is a retirement account offered by employers that allows your money to grow tax deferred. They can also provide you with free money. That's right, free money! By contributing to a 401(k), you can lower your taxable income while building your retirement savings.
As a general rule of thumb, it's recommended that you aim to contribute enough to receive your employer's match, such as a 100% match up to 3% of your income. While retirement may seem distant, taking advantage of these accounts early can help you maximize the power of compounding over time.
4) Tackle High Interest Debt
Focus on paying off this debt first as it grows the quickest. Far too often, people get caught up in a never-ending tunnel of credit card debt. Don’t let this happen to you!
5) Move to Lower Interest Debts
If you have student loan debt, it's important to prioritize it after you've paid off any high-interest debts. Although student loans may carry higher interest rates, they are currently on hold, so they are not as pressing of a concern. One approach is to continue saving money in a High Yield Savings Account until a decision is made about the future of those loans. This way, you can be prepared to make a well-informed decision about how to allocate those funds once more information is available.
6) Increase Retirement Savings
After all the above have been completed, if you still have some additional funds to allocate, open an IRA. Depending on your eligibility, a Roth IRA allows you to contribute Post-tax dollars and then never have to pay taxes again in retirement. Stick around to learn more about Roth’s in future blogs.
7) Chip Away at Low Interest Debts
If you have any remaining debts such as car loans or low-interest federal student loans, it's okay to chip away at them slowly. These debts should be at the bottom of your priority list because low interest rates are not a pressing concern. Paying off debt is a psychological decision, in that some people may prefer to have complete freedom from debt while others are comfortable with making minimum payments on debts with a 3% interest rate, so they can invest in the market instead.
While this is not an exact science, It's important to consider your feelings about investing, debt, and risk tolerance when making financial decisions. Let’s get to work!
Five Pine Wealth Management is a registered investment advisor offering advisory services in the State(s) of Idaho and Washington and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
The information in this blog is for informational purposes only and should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security or advisory service in any jurisdiction where such solicitation, offer, or recommendation would be unlawful or unauthorized.
The information provided should not be relied upon as the sole factor in an investment making decision. Past performance is no guarantee of future results.