We do not have many clients in their 20s, but many of our clients' children are approaching college or have recently graduated. This segment of population is not well-served by the traditional wealth management industry, but they do need solid advice. Savannah Warren, an Associate Advisor at MFA (and a young professional herself!) has created a great resource that can be shared with the young adults in your life. Enjoy!
As many young people are beginning their first jobs or going off to college, they are left to struggle with managing their finances on their own for the first time. These years are periods of massive transition that can be scary and filled with uncertainty regarding how to maintain financial stability, particularly with a lower income. The habits developed in these years will set you on the path to a financially stable future, so here are some ways to begin building good habits to support that goal.
One of the most important things that you can do at any income level to understand your finances is create a budget. Whether you have a part time college job exclusively for extra spending money or a full-time career, a budget is a useful tool. It can be made on a yearly, monthly, or even weekly basis, but monthly budgets are probably the most common. To create a budget, you will first want to identify how much income you will earn in a regular month. We want to look at a standard month, so don’t count on any additional income like birthday presents or wedding gifts.
Once you have identified your standard monthly income, you can begin to identify consistent and necessary monthly expenses. These are things like rent, car payments, gas, or groceries. A general rule of thumb is that these necessary expenses should not exceed 50% of your monthly income. Another 30% of income can be used for things you can enjoy now. In this category would be things like dining out, shopping, or going on vacations. For some people, leaving this category broad is best because it allows for greater flexibility. Others, however, prefer to break it down into smaller pieces to accommodate smaller spending groups. These smaller categories may be helpful if you want to cut spending in a specific category. The final 20% of monthly income can go to saving for long term goals. Whether those goals are buying a car, saving for a house, or even getting a head start on retirement, be sure to put some money away on a regular basis to plan for large future expenses.
There are many ways to create a budget, and in the internet age, it’s easier than ever. Of course, you can create a physical budget, written and tracked on notebook paper. Or you could try the famous “envelope method” that requires an envelope full of cash for each budget category. However, there are many apps that can help you create and track your budget. One of the most popular in this category is called Mint. Mint allows you to create your budget categories and link your credit cards, bank, and investment accounts so that each transaction is automatically sorted into these predetermined buckets. Besides the automatic categorization, Mint also allows you to view analytics regarding your spending patterns. For such a small amount of direct effort on the user’s part, Mint is quite a powerful tool.
You can download the app using this link: https://www.mint.com/
Today, the average American has close to $38,000 in personal debt. This number includes student loans, personal loans, and car loans, but excludes any home mortgages. On top of this, the percentage of Americans carrying no debt has decreased as the cost of higher education has increased. Although debt is surely an uncomfortable topic, not all debt is equally problematic. The lower the interest rate, the less damaging the debt may be to your financial health. For someone carrying debt from a variety of different sources, one strategy to debt payment includes paying off those debts with the highest interest rate first. Unlike most investments where a rate cannot be guaranteed, paying down debt provides a future benefit that is easy to measure.
Generally, credit card debt carries the highest interest rates and holding that debt can negatively affect your credit score. Therefore, if you do have any credit card debt outstanding, that is likely a good place to begin paying down debt. Of course, these payments will need to come from somewhere, so as you are budgeting, make sure to account for these goals.
Ideally, everyone, should be saving some percentage of their earnings. For many people, saving 20% of income is often recommended. What’s important now, is to simply develop the habit of putting a portion of your income away. The type of saving you do will depend on your goals. For those of us who are just beginning our journey to financial stability and may not have a lot of money to put away initially, opening a high yield savings account to create an emergency fund may be the best option. A standard savings account at your local bank will often have a very low interest rate. A high yield savings account, will often offer higher rates. Accounts like this can help you save for your goals more quickly and may be insured by the FDIC. This accounts are often very conservative with extremely low minimum deposits required.
Other larger goals, such as saving for retirement, might necessitate more specialized accounts. Often, companies will include some sort of retirement savings plan for their employees. Many of these plans include a company match as well, allowing you to double a portion of your contribution. It’s essentially free money, so if you haven’t already, inquire about the plan and see if it would be a good fit for you.
Although learning to independently manage your finances can seem like a scary task, it can also be exciting to start working towards your own goals. Remember, everyone starts from somewhere and by developing good habits now, you can get a good head start on creating financial freedom.