So, you’re on your own in the Real World, with the full time job and 401(k) to match. You’ve built a decent credit score for yourself, you’re keeping an eye on your student loans and you want to know what else you can do to maximize your finances.
This is the second article in TwoCents’s latest series, What to Know About Money at Every Age. You can also read about what you should know before you’re 20, and stay tuned for more tips for your 30s, 40s, 50s, and beyond.
You’re even starting to think about saving for retirement and maybe even buying a house one day. But how do you actually do all of that at the same time? Here are some tips for setting yourself up for financial success.
Make a Debt Repayment Plan
Ideally, you’ll have a plan to pay back your loans before you leave school, but if you don’t, now is the time to get serious about it.
First, don’t be a money ostrich: Confront your debt. Figure out how much money you owe to what lenders and at what interest rate, and write it down on one sheet of paper (or in an Excel sheet). For student loans, this can typically be done via the National Student Loan Data System. If you have credit card debt, check your bank website.
Then, sit down with your spouse or partner, if you have one, and determine what your financial priorities are. You need to make sure you’re on the same page when it comes to aggressively repaying debt or saving for something else concurrently.
Then, rank your debt in terms of interest rate. Credit card debt will likely have the highest rate, and should therefore be your highest priority to pay off.
“If you find yourself in debt on more than one account, be strategic about the order you pay the accounts off,” says says John Ganotis, founder of CreditCardInsider.com. “You’ll minimize the amount you pay in interest fees, getting you out of debt faster, if you pay off the account with the highest interest rate first.”
If you have just student loan debt, consider what it would take to pay it off faster, or if you’re going the forgiveness route (note that this is only an option for federal loans). If you’re racking up credit card debt, see if you can transfer the balance to a card with a 0 percent introductory rate. And check all of your loan agreements to see if there’s a penalty for prepayment, which could negate the benefits of paying off your debt early.
You may also decide that you’d rather tackle the smallest bill first, regardless of interest rate, to give yourself a confidence boost from having paid something off in full. And that’s fine, as long as you have a plan and you know what your priorities are.
Master These Personal Finance Clichés
There are a few personal finance standbys that you’ll want to master. The first: Automation.
Automating your savings is the easiest way to make sure you’re doing what you’re “supposed” to do, financially speaking. Humans are prone to error and short-sightedness; automating a deposit into your 401(k) and savings account each month is a simple and proven way to circumvent your instinct to spend money as soon as you get it.
You should also be minimizing fees as much as possible. Automation, incidentally, can help you with avoiding late payment fees on various products, but banking and investment fees are your biggest enemy here. Banking fees are simple enough to avoid (more on that here) but it can get more complicated with your investments. Roi Tavor, CEO of Nummo.com, a financial management platform, says to watch out for the following:
Transaction fees
: The trading fees associated with buying and selling securities.
Trailer fees
: An annual “commission” paid by the fund manager to the firm managing your money as an ongoing “thank you” for investing your assets in their fund.
Order routing fees
: How a fund manager places trades, has a cost impact. While some routes are cheaper than others, that cost might be charged back to you.
Foreign exchange commissions
: Charges that apply when you exchange dollars for another currency like euros or pounds.
Mark-ups
: The investment manager might round up the price of securities when trading, making the trade more expensive than it should be.
Account inactivity fee
: Can apply if your account falls below a certain minimum balance.
Account maintenance fees
: For services like tax reporting and recording contributions.
Late fees
: Can apply when payments are overdue.
Front-end load
: Commission or sales charge that applies at initial purchase of an investment, typically mutual funds.
Exit costs
: Charges that apply when closing an account.
You won’t be able to avoid all of them, but investments should have expense ratios of no more than 0.5 percent. Many great funds are much cheaper than that.
Next, know your worth. What you’re earning now will influence what you earn for the rest of your career. As Money Magazine notes,
The typical worker’s wages grow the most between ages 25 and 35, according to
research
by the Federal Reserve Bank of New York. A pay boost of $5,000 when you’re 25 adds up to $634,000 more in lifetime earnings, a
study
by researchers at Temple and George Mason universities found.
So if you’re starting a new job, ask for $5,000 more than they offer you, particularly if you’re a woman. If you ask in a respectful way, they’re not going to take the offer away—and you just might end up $634,000 richer in the long-run. It might be awkward, but think about it: An uncomfortable five minute conversation could net you over $600,000. It’s definitely worth it.
And finally, your lifestyle choices really will make a big difference on your bottom line. Sure, a bigger starting salary will be much more helpful than cutting back on fancy coffee drinks, but where you live, what you buy and who you surround yourself with will also play major roles. Try your best to limit your impulse spending and be more deliberate with where your money goes.
Get Comfortable Investing Your Money
People in their 20s and 30s are holding too much cash according to a few recent surveys by financial firms. But as I wrote in my money newsletter, now’s the time to embrace risk: You’re young enough to ride out any dips the market will take, and the younger you are, the further your money will go, because your earnings will compound.
If you’re just starting off, that will mean contributing to and investing in your 401(k) or IRA for retirement. Experts recommend contributing 10 percent or more to your retirement savings each month, but if that’s not realistic, “start saving what you can, but commit to bump up your savings one percent per year until you’re contributing 10 to 15 percent,” suggests Joleen Workman, Principal’s Vice President of Retirement and Income Solutions. Here’s more on committing to improve by one percent.
Candice Sherman, VP of Product Development at Lexington Law, says to think of saving as another monthly bill that you need to pay. If you have a 401(k) at work, aim to contribute at least the employer match. If that’s unmanageable at first, “something as small as $25 per month will exponentially grow over time, and the sooner the better,” says Sherman. Then steadily increase the amount every few months. “The longer you keep your retirement money invested, the more it can grow with the magic of compound interest.” (Hey, I just wrote about that.)
If you don’t have a 401(k) (or the investing options are subpar), open an IRA or a Roth. And when you’re investing, keep it simple and boring: Focus on minimizing fees, maximizing your contributions to the extent that you can and diversifying what you invest your money in. Low (or no) cost index funds will get the job done.
Figure Out Your Priorities
It’s time to get serious about your goals and financial stability. That means beefing up your emergency fund and considering what your other priorities are. Do you want to own a home someday? Have children? You’d better start putting some money away for a down payment and/or investing in a 529 college savings account.
“There will never be a ‘right time’ to start saving, so if you’re waiting for that you’ll be waiting an awfully long time,” says Principal’s Workman. “Life only gets busier and more complicated, so take a little time to set yourself up for success.”
Again, if you have a partner, sit down together and decide what your priorities are. Maybe you’re fine renting, but you want to help your future children pay for college, so you open a 529. Maybe you want to pay down your own debt and then put any excess toward your retirement fund, or a once-in-a-lifetime vacation. Maybe you’d prefer to forego the lavish wedding.
Estimates on how much you should have put away at any one time vary and will be dependent, of course, on your income and personal situation. I’m not going to tell you to save double your income by the time you’re 35, for example. But a house, retirement, your kids’ college—it’s all going to cost something, and the money isn’t just going to appear in your bank account. So sit down and take some time to figure out what you want out of life and how much it will all cost. Then start making a plan, recognizing that trade-offs are going to occur. You’re going to give something up in order to get something else, because, for most of us, the amount of money in our bank account is finite.
Decide If Buying a House Is Right for You
You’ve likely already considered this if you tackled the goal section above, but for many people a house is the biggest purchase you’ll ever make, and has a serious impact on our lifestyles and well-being. It deserves extra scrutiny.
An expensive housing market has made owning a less attractive investment than it once was. In fact, a study published last year posits that home ownership isn’t the path to wealth it once was, and that people who invest the money that would have been put toward a down payment may build more wealth than those who buy a home. Additionally, many homes aren’t appreciating enough to beat or even keep up with inflation.
“I’m not sure I would use the word investment in regards to buying a home. If you’re buying a home simply as an investment, the stock market will provide much higher returns than your home, based on historical data,” says Oscar Vives Ortiz, a Certified Financial Planner and Wealth Strategist at PNC Wealth Management. “But if we look at it from a different perspective, it’s like forced savings. The more money you have to pay toward your mortgage, the more you’re building in home equity. It can be a good investment from a behavioral standpoint.”
Still, a house isn’t just about wealth accumulation for a lot of people. Many of us dream about the white picket fence, expansive backyard and three-bedroom home to raise our children in, no matter how bleak the outlook is. You’ll have privacy, stability and a place to call your own. Like so many other financial decisions, buying a home isn’t just about the bottom line (nor should it be).
“Your home is for living and your investments are for saving for the future,” says Holden Lewis, NerdWallet’s housing expert. “If you have to choose between living in a home that makes you happy but has low investment potential, or living in a home that you don’t enjoy but is a great investment, choose happiness. Your home isn’t a means to an end; it’s an end unto itself.”
So, consider: Where will you want to live for the next decade or longer? How much money do you need for a down payment, and how can you save that much? Will you be able to keep up with the upkeep costs in retirement? Could renting in a more desirable location actually be a better investment?
Additionally, figure out how a home plays into your career and living aspirations. “If you settle down and buy a house, that may limit the career opportunities available to you. You’re less likely to be willing or able to relocate for a job,” says Ortiz. “If you’re someone who knows where you want to live and are growing a family, then it would make more sense to buy a house.”
Take Bigger Risks When You Have a Solid Foundation
Once you’ve built up your savings and your retirement investments, you can start having some fun.
Rodrigo Guara, CEO of Co-Founder of StockPitch, a value investing research tool, says his best advice for younger investors is to “go against their youthful tendency of only embracing risk.” Stability is important.
“Sure, you can take chances on innovative companies that are just entering the market that you believe will be here for a while, but you should only really do so after you’ve built a well-diversified portfolio,” says Guara. “This is why, as boring as it sounds, the way to go from being a young investor to a wealthy adult is to put most of your resources into stable vehicles that will grow slowly over time.”
This might seem counterintuitive when you consider that many millennials are holding too much cash, but what Guara is saying is that you shouldn’t take huge swings before you have a solid foundation. For example, you don’t want to raid your 401(k) to invest in your second cousin’s hot real estate tip. Once you’re making a decent salary and have put away a fair amount for a rainy day, you can start playing around with investing in individual stocks and the like, if that’s something you’re interested in.
“Don’t try anything fancy,” he adds. “If you’re not trying to outsmart everyone, you’re already ahead of most people.”
Create a Financial Plan for Having Kids
The cost of raising a child from birth through age 17 is $233,610, according to the U.S. Department of Agriculture, and that’s not counting prenatal care or childbirth (not to mention college tuition). Having children isn’t just a financial decision, of course, but you don’t want to get start a family without a plan if you can help it.
First, plan for medical care expenses. Even with employer insurance, having a baby costs a lot of money. You’ll want to be familiar with your in-network options, and call your hospital ahead of time for a run-down of costs and payment terms. Know the ins-and-outs of your insurance terms: What’s your deductible and out-of-pocket max? See if you can set up bill payments over time with your providers.
You’ll also want to consider the costs of taking time off work to actually have the baby, since America still hasn’t figure out how to provide paid leave to its citizens like essentially every other country in the world.
And though it shouldn’t be the case, this matters more for women. Research indicates that women’s salaries diverge significantly from men around the age of 32, coinciding with when many women leave the workforce to have children. Once you leave work to have a baby, and maybe take some maternity leave or a few years off to care for your kid, your earnings never recover. That has profound effects not just on your annual income, but on your retirement savings, Social Security payments, general investments and more. Childcare, too, is wildly expensive, surpassing $2,000 per month on average in some states.
This isn’t to dissuade anyone from having a family—and of course, there’s no magic number to hit, financially speaking, that will make having a child easy—it’s simply to encourage you to consider how a child will change your financial life.
Learn to Forgive Yourself and Move On
Everyone makes mistakes, especially when it comes to money: Waiting to start investing, digging ourselves into debt, taking a job that pays us less than we’re worth. But if you don’t show yourself compassion when you mess up, you’ll never get on the right track.
The truth is, you can only plan for so much, and even the most financially responsible and well-off among us trip up. Given there are no do-overs in life, the best thing to do is acknowledge your mistake, try to fix it and keep going. If you’re in your 30s with no retirement savings, the best thing to do is still to get started now. If your student loans fell into default, the best thing to do is pay them off now and try to make your payments on time in the future. If you overspent on something last month or sold an investment too early or had to pull money out of your 401(k)—forgive yourself, and move on.
And that will carry us to our next installation of What to Know About Money at Every Age. Stay tuned.