When you’re young, getting your financial footing can be challenging. It becomes all the more difficult when you have student loans and mortgages to worry about, and it’s easy to feel financially overwhelmed. That is where financial planning comes into the picture. You’re never too young to create a budget, improve your financial literacy, and understand investments. This way, you will be better equipped to set yourself up for success right at the start of your career.
Here are ten essential financial tips for young adults at the cusp of their careers.
Equip Yourself with Financial Literacy
Financial literacy is all about understanding how to make good decisions with your money. Understanding the basics of finance provides the ideal foundation for you to work on your financial goals and habits. Moreover, sound financial knowledge will also allow you to understand the time value of money, the power of compounding, and return on investment. This lets you utilize your knowledge to reap the best returns for your future.
Don’t Put Yourself through Debt
One of the critical components of finances is knowing how to manage debt. It’s easy for student loans and credit cards to stack up, pushing you behind on your financial goals. So, it would be best to create a debt repayment plan instead of allowing interest to eat up your cash. You can try doing this in two approaches. Firstly, you can opt for the debt snowball strategy, which is about paying off your small debts first and gradually gaining momentum with each payment. Secondly, you can take the avalanche approach, where you first attack the debt with the highest interest rate and get rid of the most expensive debt. No matter the system you choose, it’s imperative to understand that your debt has to be under control at all times.
Save & Invest
It’s never too early to start saving money! Many youngsters make the mistake of waiting for a few more years before they start saving, but when you focus on saving, you can compound your returns over the years to increase your wealth. For example, if you save $100 with every paycheck since the age of 25, by the time you’ve hit 50, you will have a considerable amount of savings stashed away!
But it’s not all about saving money; the journey of finance will only make an impact when your savings are channeled into methods that allow you to make money out of money. When your savings are in a locker, you’re depriving yourself of the potential returns you could be earning instead. On the other hand, when you make wise investment choices for your money, you’re setting your future up for success.
Know How to Budget
Budgeting is seemingly simple, but it takes work to keep track of. However, when you consciously decide where your money goes throughout the month, you have the most empowering facet of financial literacy in your power. Review your expenses every month, address unnecessary expenditures, and put that money into more savings and investments. You can take advantage of budgeting tools and apps to help you with this task.
Know the Difference between Needs & Wants
At the start of your career, you will feel like you want to spend all your money. We get it – it’s exciting to have your own money that you can spend on a whim! But understanding the subtle difference between your needs and wants can take you a long way. Make sure that you invest only in necessary things, those which you cannot do without. While it’s tempting to jump on the bandwagon and waste money on something that looks good, it’s not a smart thing to do.
Start an Emergency Fund
Sometimes, even when you have the best spending plans, expenses can suddenly crop up. For instance, you might require an urgent $500 car repair, and your investment contributions aren’t immediately accessible. To tackle this situation, start an emergency fund along with your investment fund. Have three to six months of expenses in an emergency fund, so when an unexpected expense crops up, it will just be a small bump and not a financial crisis.
Insurance to Combat Risk
Life is full of uncertainties, which is why investing in a good insurance plan is a safe idea. It offers securities against risks, which is exceptionally important, particularly when starting your career. Life insurance and health insurance are good places to start.
Focus On Your Health
Healthcare is among the highest expenses in the US, and the most effective way to reduce healthcare bills is to maintain good health. It’s easy to feel burnt out and stressed when you’re just starting your career. That is why it’s imperative to focus on maintaining a healthy and consistent diet, exercising regularly, and having annual health checkups.
Understand Taxes
Whether you’re having financial successes or difficulties, taxes are always constant. Since you’ll be paying taxes for the entirety of your career and retirement, it’s a good idea to get well acquainted with it and figure out ways to reduce your tax burden. Your income and salary place you in a tax bracket, which tells what percentage of federal taxes you must pay. Retirement accounts have tax implications too. For instance, the traditional 401(k) uses pre-tax dollars, and this lowers the tax burden while you are working. But you must pay income taxes when you withdraw money from your account during retirement. On the flip side, a Roth IRA uses money that the government has taxed already, and you don’t have to pay taxes on income from this account once you have retired. That is why tax planning from a young age can go a long way in optimizing your finances.
Get the Help of a Financial Planner
Taking control of your finances is a huge undertaking, and it’s overwhelming, to say the least. Thankfully, there are professionals who can assist you in developing a financial plan that is customized to your circumstances. This comes with a cost, though, so make sure to look for a financial advisor whose fees are affordable to you.