The pandemic impacted everyone and the ensuing economic fallout has been widespread. Consequences from broad-based shutdowns and significant financial blows across a variety of market sectors hit young professionals especially hard. This group, often in the first few years of their career or just entering the workforce, were already vulnerable when compared to previous generations. A key takeaway from this past year: The importance for young professionals of focusing on financial management.
This past year demonstrated the vital nature of planning ahead and doing whatever you can to be financially prudent. Having savings to fall back on can make all the difference during tough times.
The good news for young adults is that they’ve got time on their side.
Whether you’re a young professional, your employees include young professionals, or your children are young professionals, take note or share these four financial management lessons:
Become Financially Literate
It’s easy to assume that most people understand the basics of financial planning and management, but the truth is much different. A 2019 USA Today story highlights this disconnect and reported that only 57 percent of adults in the U.S. are considered financially literate. Other studies have shown that only about half of college-educated young adults between 25-34 years of age correctly answered questions to test basic financial literacy. These findings highlight the lack of financial planning education taught during school years.
It’s difficult to create a successful roadmap for your financial future if you don’t know the basics. What does it mean to be financially literate?
For young professionals, educate yourself to ensure at least a surface-level understanding of common financial issues, such as budgeting, interest rates, loans, taxes, financial priorities, and debt. Financial advisors and others can help, but you need to have that foundational knowledge.
Start Saving and Don’t Stop
There’s a reason that Albert Einstein is credited with saying that compound interest is humanity’s greatest invention and the eighth wonder of the world. It’s incredibly powerful and young professionals are in the best position to use compound interest to benefit their financial goals.
It’s easy to start as well. Start saving a little bit from your very first paycheck and keep adding to that account. Add a little more every time you get a bonus or raise and keep that savings or retirement account locked. Don’t touch it and watch your money grow.
How do you know if you’re saving the proper amount? A good rule of thumb is to save enough so it hurts just a little (i.e., skip eating out one night per week). The earlier you start saving, the more power compound interest will have and the less you’ll need to save later in life.
As you consider how much to save, think about your goals and risk tolerance. A generic savings account at a bank is a start but won’t do the trick for high returns. Research low-cost accounts with higher yields, such as money market accounts.
A final note on savings. If you get a surprise cash influx – stimulus check, tax refund, bonus, etc. – treat yourself with a small portion and put the vast majority into savings. You’ll want that on hand in case there’s ever a financial emergency. A good rule of thumb is to have two savings accounts. One account should be an emergency fund with six-to-eight months’ worth of regular expenses and the second account should be used to save for your future retirement or bigger expenses, such as your first house.
Think About Retirement Now
Saving is important so you have a cushion as you age and so you’re set for retirement. For young professionals, retirement is decades away, but if you want a lifestyle you can truly enjoy when you retire, you need to start working at it now.
Here’s an easy strategy that young professionals can implement early in their career (although it’s really applicable to anyone at any stage): Max out your 401(k) savings option through your employer. This money will be automatically deducted from your paycheck and placed in your 401(k). It’s like you never had the money in your pocket to begin with, so you won’t miss it (but you will appreciate it later in life). This move helps you maximize your company match as well, resulting in even more money directed to your retirement account. Similar to other types of saving, the earlier you start the less work you have to do in the end.
Remember, if you start saving when your career is in its early stages, you can even become a 401(k) millionaire. I shared additional tips on 401(k) millionaire strategies last year as well.
Plan for the Future
Looking ahead is more than just planning for retirement. Retirement planning is certainly crucial for all young professionals, but you shouldn’t stop there. Some other common financial planning considerations to keep in mind include:
- Life Insurance: It’s cheaper and easier to get when you’re younger.
- Long Term Disability Insurance: Same as life insurance, easier to qualify for and less expensive the younger you are. Fun fact: More people need disability insurance than need life insurance.
- Tax Planning: Review withholdings annually so you don’t overpay. Getting a refund check is essentially giving the U.S. government an interest-free loan.
- Employee Benefits: Take advantage of programs, insurance policies, and incentives your employer offers because it’s usually cheaper (or free) when packaged through your company.
The right preparation and planning can put young professionals on a financial path that will reward them for decades to come. It just takes getting started.
Read more: business2community.com