“Old age is like everything else. To make a success of it you’ve got to start young.” Fred Astaire.
Ask the CFP®
Question: What financial planning and career advice would you give our “twenty-something” year-old children?
Answer: Parents’ attitudes and behaviors influence children enormously. First, strive to be a powerful and positive example when it comes to your financial life. For many of us, childhood memories set the tone for our fiscal futures.
Here are a few of the important concepts passed along by my parents and several things we encourage in our family. Most of these will apply to anyone concerned about their financial future.
- Choose a career you enjoy. Identify what you want from your career and set goals on how to get there. This goes beyond gainful employment; it’s about doing something worthy of your time and talent. Continue to pursue skills that will advance your career.
- Create a budget and save. Cash flow analysis determines how money is spent and if any adjustments are necessary to pay off debt and establish an emergency fund. Even if you’re on a modest salary, discipline yourself to save something on a regular basis. The goal is to accumulate enough cash in an easily accessible account to cover several months of expenses in case of job loss, a medical emergency, and car repairs, or on a positive note, an exceptional and unexpected opportunity may arise.
- Pay off credit cards. Credit card interest compounds over time and you end up paying much more than the original cost. Set a goal to pay off student loans by age 30. If you’re finding student loan debt to be a burden, talk to your lender about options. The credit cards should be a priority because the interest rate on those tends to be much higher.
- Live on what you earn. This is imperative. Pay credit cards off and don’t use them unless you can pay off the balance that same month. It’s too easy to get into debt buying things you really don’t need. Try my “24 hour rule”; wait 24 hours and see if you truly “need” to make a certain purchase. Also, create a habit of paying all bills on time, late penalties are a waste of your money.
- Start investing. The sooner the better. If you start investing $200 a month at age 25 in an account with an average annual return of 8%, by age 65 you’ll have saved $703,000.
- But, if you wait until age 30 to begin saving, you’ll have only $462,000 at age 65. Easy options to get you started include a Roth IRA or a 401(k), if your employer offers one.
- A Roth IRA* is a good starter investment vehicle because the earnings on your investments will be tax-free, and it could offer greater flexibility than an employer-based 401(k) plan. However, you should find out if your employer offers a full or partial match to 401(k) contributions; a match is a benefit you shouldn’t pass up.
- Establish credit. A good credit rating can help you obtain better loans to buy a car (something you may need to get a job), or a house. You can establish credit by getting a secured credit card, which uses a savings account with the issuer as collateral.
- Sharpen those marketable skills – and network. Acquire the skills you need to advance your career now. Your 20s is a great time to start building your network. The contacts you make will be valuable in the future for personal and professional advancement.
- Become self-reliant. If you rely on your parents for help, make an effort to become financially independent. Learn how to do your taxes, stop borrowing from Mom and Dad, and get your own place if you’re still living at home. Take responsibility for every area of your life.
- Choose a good partner. This one decision will greatly affect your happiness or misery. Determine if the person you’ll spend your life with has similar financial goals. Money problems can split up even the most devoted couples. Before making a commitment, make sure your partner is willing to openly, and regularly, discuss financial issues.
To summarize, start by getting to know yourself, focus on your career, learn to live on a budget, get out of debt, start saving, set short and long-term goals for the future, and pay your bills on time. Think of it as laying the foundation for a house. Poor planning may first show up only as a crack in the wall but can lead to the collapse of an entire structure. The consequences of today’s substandard workmanship will materialize later. Plan properly from the start while you’re young and reap the rewards in the future. Stay focused and invest accordingly.
Investing involves risk and investors may incur a profit or loss. There is no guarantee any particular investment strategy will be successful. Opinions expressed herein are those of the author and subject to change at any time.
*IRS Publication 590 (www.irs.gov/pub/irs-pdf/p590.pdf) can explain more about IRAs. Unless you meet certain criteria, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted.
This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email email@example.com Website: www.raymondjames.com/Darcie.