A reader recently asked me to write an article for young people looking for a path to financial security.
The following advice is suitable for anyone between the ages of 20 and 30. Of course, the six tips can be helpful at any age.
Let’s say you’re 28 years old and work hard at a full-time job. Every paycheck seems to be used up instantly and there is nothing left to save. You are not alone! This is very common, but it is possible to stop this cycle.
Set up an emergency fund: Open a savings account with a bank and save enough to cover up to six months of your typical expenses. Do not keep this money in a checking account as you will have to resist the temptation to spend it. It’s there in an emergency. An emergency can arise when you (or a family member) get sick and unable to work, or when your car breaks down and you are left with a significant repair bill.
Educate yourself: If you want to learn more about investing, tax planning, retirement planning, estate planning, or even long term care insurance or term life insurance, there is a wealth of free information online. I have no affiliation with Vanguard, but I’ve always found their educational information to be of high quality. You can go online at www.investornews.vanguard and access articles.
Start Funding a Roth IRA: Once you’ve put your emergency fund aside, start funding a Roth IRA. My last few articles were about Roth IRAs, and they can be found at www.DonnaSkeelsCygan.com/insights/. A Roth IRA is a type of retirement account that is tax-free when you’re ready to withdraw the money. Old-fashioned pensions are rare now and social security benefits may decline in the future. It’s more important than ever that you save for retirement, and a Roth IRA has long-term tax benefits.
You can open and fund a Roth IRA with a brokerage firm and deposit up to $ 6,000 per year (in 2021 for those under the age of 50). You can also fund a Roth 401 (k) or Roth 403 (b) through your employer with up to $ 19,500 for 2021 if you are under 50. You can even finance both at the same time.
Put savings on autopilot: If you finance a Roth 401 (k) or Roth 403 (b) at work, the money will automatically flow into your retirement provision every time you pay out. It won’t appear on your paycheck. You can set up similar instructions for other accounts. If you are funding a Roth IRA ($ 6,000 per calendar year), you can provide instructions to have $ 500 per month transferred from your checking account to your Roth IRA. Brokerage firms and banks allow this. Once you’ve funded your emergency fund, your employer’s retirement plan, and a Roth IRA, open a taxable investment account and start funding. Taxable investment accounts are sometimes referred to as broker accounts. They are not retirement accounts and have favorable tax rates for long-term capital gains. Instead of just saving in a bank account, it is advisable to save in a taxable investment account.
Beware of credit cards and cars: Credit cards should always be paid off monthly. If you can’t pay them off, this should alert you that you are living beyond your means. The concept of the credit card (buy now, pay later) is detrimental to financial security. Make sure you can afford it if you use a credit card as soon as the bill arrives. Car purchases are also dangerous. New cars are often status symbols, and a large auto loan can ruin your best intentions.
Define and write down goals: Some say that if we write down our goals, our chances of achieving them increase tenfold. If you are 25, what would you like to have saved by 30 or 35? Your investments can grow fast if you save and invest at least half of every tax refund, raise, and bonus. If a relative gives you money, save and invest at least half of it.
If necessary, refine (and improve) your attitude towards money. Many people have negative attitudes based on never having enough or painful “money messages†that they learned as children. I recommend the book “The Psychology of Money” by Morgan Housel.
Finally, try to avoid the pressure to “keep up with the Joneses” and focus on a “well-lived” life with friends, family, pets, and the great outdoors. If you do, your paycheck will soon go on – and you will be well on your way to financial security!
Donna Skeels Cygan, CFP, MBA, is the author of The Joy of Financial Security. She has been an Albuquerque royalty-free financial planner for over 20 years and is the branch manager of Mercer Advisors’ New Mexico office. Contact them at dscygan@gmail.com.
