Three Smart Moves for Young Adults......and the rest of us
Clients often ask me for advice on how to help their kids get off to a great start and many of my younger clients ask for guidance about getting their own lives on a solid financial path.
What are a few smart moves that younger adults can make? Especially considering the fact that many graduate with significant student loans or may turn to living at home with their parents or other family members at some point (or points) in their early earning years.
Times are indeed different.
If you're not a parent and not a young adult, I encourage you to read on; the following tips can serve as solid financial reminders for us all.
Living within your means
Living within (or even below) your means is one of the best things that you can do to create a solid financial foundation. Living within your means having a little bit of discipline and controlling things that are within your control.
Your 'means' is simply the net income that you have coming in. Keeping living expenses from creeping (or surging) beyond the amount of income earned can be especially difficult for young adults with the new-found freedom (and higher income) that (hopefully) comes about when they graduate and become gainfully employed. Temptations are everywhere…tech gadgets, gym memberships, free shipping, amazing credit card offers, etc. Unfortunately, a lot of people struggle to move beyond these temptations and find themselves quickly far outspending the income they are bringing in.
The key to mastering temptations and keeping your lifestyle within your means is to know the difference between your needs and your wants. You need shelter, you need food….but you might want the latest cell phone or a newer car. If your wants are causing problems for you, you need to cut back on the wants. The key is keeping a careful record of all expenses as well as all income so that you can honestly monitor and manage your cash flow on a monthly basis. Continue this financial record keeping habit and use it to build a realistic, livable budget plan. Many CFP®'s are happy to help guide you in this process and coach you to keep up your new healthier financial habits.
Save! (OR Pay Yourself First!)
You need to do more than simply 'break-even' each month. Of course you need to be prepared to deal with future emergencies, but saving is the way to add much more comfort to your future self and perhaps even to allow for a few of those wants you wisely cut out of your expenses.
There are many ways to build a savings plan. I have written about several different options …… Regardless of what savings option you decide on, I recommend making your plan as automated as possible. I would also recommend working with a CFP® to construct a plan that is specific to your own individual situation. A well-built plan should give you the opportunity to seriously snowball your savings over time.
For example, a 22 year old who saves $200 per month and earns a conservative 4% annual return would have approximately $274,000 by age 65. By comparison, a 32 year old who saves (and earns) the same amount will have only about $164,000 by age 65. And a 42 year old, following the same process, with the same assumptions, would have only about $90,000 by age 65. The point being, starting young is key…and if you're not 'young', get started or boost your plan anyway.
If You Must Borrow, Be Sure to Borrow Wisely
Looking to buy a car, a house, or finance your tuition? This type of situation usually means that you will have to bring on some debt….which basically robs your future self. Limiting debt and keeping in reined in is the crucial key. Be sure to have a budget in place so that you don't overextend yourself and consult with your CFP® to make sure that you're on the right track in your thinking. I wrote previously about deciding when to pay off debt or invest. Finally, make sure that you also explore all of the various repayment options…especially when it comes to student loans.
Managing Student Loans (Or Any Debt)
Managing student debt effectively is crucial; determining how much student debt is reasonable to take on, how aggressively to repay student loans, and what priority to place on repayment of student loans can leave even the best students confounded. Many student loans have relatively low interest rates, but not all do. Accelerated repayment of student loans, taking advantage of refinancing when possible, and consolidation of loans are all options that may be available, but may or may not make solid sense for your financial health.
You can read more about managing large amounts of debt, and investing while doing so, by clicking here.