Tips for a secure financial future
Authors: Abby Kincaide, Maddie Griffith
As you graduate and start relocating, you can use the following as a guide as you enter the workforce.
Development of your budget
As a young professional, getting your first job and gaining independence is exciting. With this new landscape comes new responsibilities. Understanding your benefits and the pay for your work is the first step, then breaking down your expenses and formulating a budget is essential to starting a successful financial future.
Budgeting as shown is vital to your financial future, and prioritizing your monthly spending helps you maintain a savings mindset. As a general rule of thumb, its budget should generally be allocated as follows: 30% of pre-tax income spent on housing, 20% in savings, and 50% should remain for bills, groceries and other variable expenses. Funding for retirement (a component of savings) and healthcare (a part of your bills) are also based on pre-tax income, while spending and remaining savings are based on your income level. net (to be used to estimate your net income).
To dive in (if you’ve moved out of your parents’ house), accommodation should be a maximum of 30% of your budget, which includes utilities, rent, and mortgage. It is important to understand your various utility bills, as you will likely be paying for gas, electricity, water, and potentially Wi-Fi. For utilities such as water and electricity, these may vary from month to month, so it is necessary to be conscientious of the use. Next, tenant insurance protects your home and your physical assets, as well as protects you against liability. It costs an average of $ 120 to $ 200 per year. All in all, living alone can be a drastic change, so finding roommates is always a good way to save money.
Going forward, you should develop a savings plan and make sure that a portion of your paychecks is spent on future needs. Based on the allowance, around 20% of your budget should be spent on savings. It starts with an emergency fund that can cover expenses for 3 to 6 months. This helps to cover any unforeseen costs that might arise in the event of unemployment, unforeseen events, medical bills, etc. An allocated savings account is another step in ensuring your financial security. This can be used in the future for all large purchases such as a house or a car. The final aspect of saving is allocating money for retirement through vehicles such as the IRA or 401 (k). These plans are typically offered by employers, and you can set a specific pre-tax amount to deduct from each paycheck directly to your account. As a benchmark for 401 (k) contributions, you should at least contribute up to what your employers will match. If possible, you should try to double what they match and increase the allocated amount as much as possible (up to 15% of salary). Then with the IRA you should try to contribute up to the limit, which is currently $ 6,000 per year. With retirement savings, it’s important to set aside as much as possible, but you should also keep in mind that these are accounts that you can’t withdraw from early without receiving tax penalties.
The last section of your budget includes all other expenses, which besides health care are based on your net income. These expenses can include things like bills, groceries, entertainment, etc., and that part of your budget, as previously stated, should reach 50%. Limiting monthly grocery expenses should be the start. Then other bills come in, like travel expenses, entertainment (Spotify, Netflix, other subscriptions) and phone bills. It is important to reduce loans and credit card statements, starting with those with higher interest. When possible, making larger payments can reduce the loan principal, which in turn can help lower overall payments and allow you to pay off the loan faster.
Insurance costs, another necessary expense included in the 50%, can become a lengthy process when figuring out all your needs. First and foremost, health care has many variables. If you’re 26 or under, staying under your parents’ insurance (like yours truly will) may be your best bet. If this is not an option, it is recommended that you understand your employer’s options and obtain an HSA plan. With an HSA plan, you can put tax-free savings into an account that can be used for qualified health care expenses. These savings extend and accumulate over time. Having an HSA plan means higher deductibles leading to lower premiums, and this plan can be beneficial for younger people as you will likely have lower health costs. If an HSA plan is not right for you, due to a pre-existing condition or other needs, you can consult the health insurance market for other options where you may be eligible for more suitable plans depending on your needs. income levels. Auto insurance is another crucial expense if you own one. To insure your vehicle, it’s important to shop around and compare prices to make sure you’re getting a good deal. A few places to look are Geico, USAA, State Farm, Progressive, Liberty Mutual, and Allstate.
Disability insurance and life insurance are important to keep in mind because they provide income in case something should happen to you. For disability insurance, it covers if you are unable to work for an extended period. This can be obtained through your employer, a professional organization or by yourself. This insurance can be personalized according to your preferences. However, as a young professional likely to have low debt, no children, and no spouse, your financial obligations are minimal, so getting a disability isn’t as much of a concern. Likewise, life insurance is not the highest priority at this point in your life, but if you are married, in debt and / or have children then this is something to consider as they will depend on your income.
The last components of 50% of your budget to consider are leisure expenses, all other variable expenses, and extra money to spend on savings or investments. Once you’ve figured out all the factors affecting your budget, you set yourself up for financial success and move into a savings mindset. This can create peace of mind and then you can focus more on your investments and how you can use your retirement vehicles to your best advantage.
Once you’ve established a solid emergency fund, it’s time to start investing your money. Being a young investor, now is the time to take more risk with your investment portfolio. This is because your wallet has an extended payback time in the event of losses. Also, being young and not having as many expenses and obligations as when you are in your 30s and 40s, it is important to start stocking up and investing as much as you can. The first place to start investing is in an IRA if your employer doesn’t offer a 401 (k) plan. A 401 (k) plan allows you to start contributing to a long-term savings account primarily used for retirement. Most 401 (k) offer the same two types of accounts available to IRA investors, a traditional account and a Roth account. These two elements have many similarities, but the main difference is in the way they are imposed.
A Roth IRA is a long-term savings account which, when you contribute, does not benefit from a tax deduction. Therefore, you pay taxes on the money you use to fund that account, but the money then grows tax-free. The big advantage of this IRA is that when you are 59 and a half years old, you now have access to withdrawals that are not taxed. In addition to being able to withdraw at any time of his life for certain situations, such as a first real estate purchase. However, the Roth account available through 401 (k) does not offer this same withdrawal benefit. With these Roths, there is no RMD (minimum distribution required). It appeals to someone who plans to be in a high tax bracket later in life. The Roth has a phase-out for certain income levels, so make sure you qualify.
A Traditional IRA is an account that allows your money to grow tax-deferred. This means that when you contribute to this IRA, you get a tax deduction, but when you withdraw the money, it will be taxed as ordinary income. Another thing that is different with a traditional IRA is that you have to start receiving distributions when you turn 72. This option may be attractive to someone who is currently in a high income tax bracket.
Why it is so crucial that you start investing your money now is due to funding. Composition is such a valuable element in investing and growing your wealth. It is the ability of your money to earn interest and earn more money over an extended period of time.
To help you see the power of compounding in action, here’s the story of Jack and Blake, two guys who made the decision to seriously invest for their retirement. They chose good growth equity mutual funds that average an annual return of around 11.6%, just below the long-term growth rate of the S&P 500.
- Starts investing at age 21
- Invest $ 2,400 each year
- Stop contributing at 30
- Total amount paid: $ 21,600
- Starts investing at age 30
- Invest $ 2,400 each year
- Pay money up to age 67 (a total of 37!)
- Total amount paid: $ 91,200
At 67, Jack’s investment grew to $ 2,547,150 and Blake’s to $ 1,483,033! Nine years made a difference of over a million dollars.
As you embark on this new stage of life, we would be more than happy to help you navigate it. For more information or for questions, do not hesitate to contact us at www.lantzteam.com.
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