Financial Planning Early in Life

finance, money, spending, financial planning, financial advice, retirement

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The early years of establishing personal independence are a perfect time to form good spending and saving habits. From budgeting apps to debt counselors, there are all sorts of resources to help. It may seem early to start thinking about retirement, but it’s not: Putting even small amounts aside from your first paychecks will reap dividends down the road.


Spending Smarter: Creating a budget—and sticking to it

Knowing where you stand with your finances and controlling your expenses allows for sensible splurging. Here’s how to make the most with what you have. 

Create A spending plan
Sophia Bera, owner of Gen Y Planning, a financial planning firm that caters to Millennials, suggests creating a list of monthly financial priorities that consistently recur, from rent to a Netflix account, and subtracting that from what you’ve allocated for the month’s overall spending budget. Then, plan on how you’d like to use your discretionary spending money: Do you want to put a little extra towards your investments, save for an upcoming vacation, or allow yourself to splurge a little right now—guilt free? Bera advises clients to plan yearly budgets, but to break down spending weekly, rather than monthly, which is easier to follow because of the shorter time increments. “You can go out to dinner with friends and spend $50 because you did a great job during the week,” she says. 

Know your credit card limits
Your personal credit “limit” should be much lower than the one your card allows. To maintain a good or excellent credit score, Bera says to stay conscious of your credit utilization rate, which is the percentage of debt on total credit available. She advises clients to avoid spending more than 30 percent of the credit limit on a credit card each month (with a $1,000 limit, you would not want to spend more than $300). Some credit scoring models will penalize for going over 30 percent, and though it’s not a hard rule, it’s always a best practice to pay off credit cards sooner than later, which will only help your credit score. While it’s okay to have multiple cards—the average American has three to four—keep in mind that there can be negative aspects to owning too many.

Don’t spend it all
Charles Buck, founder of Buck Financial Advisors in Woodbury and a former financial planning teacher at Minnesota State University Mankato, urges young clients to prepare for unforeseen expenses by creating an emergency fund. This helps build a sense of security in case extra funds are needed for things like a cellphone replacement, car repair, or medical bill. Buck notes most financial planners recommend saving enough to cover three to six months of expenses, but even $1,000 in an emergency fund will cover a lot of unanticipated issues.


Tools for Tracking Spending

From digitizing those piles of bills and scattered receipts to meeting with a credit counselor, these resources can help with managing your finances.

THE MINIMALIST
Excel Spreadsheets
First, get an overall impression of your financial state by creating a personal balance statement. It’s as simple as making an Excel spreadsheet with two columns: one listing your assets (the value of your home, car, and other valuable possessions, savings and retirement accounts, etc.), and one listing liabilities (debts, including mortgage and student loan payments, etc.). The difference between assets and liabilities is your net worth.

THE OBSESSIVE 
Mint.com
This free website and mobile app pulls together all of a user’s financial information—from credit card statements to checking account activity—to easily categorize income and expenditures. Best of all, most updates are automatic, so individual transactions don’t need to be entered manually. When all the data is updated, it’s simple to see how much you’ve spent in various areas during different time periods.

THE SPENDTHRIFT
You Need a Budget 
For those struggling to control their spending, You Need a Budget provides simple, no-nonsense help. “YNAB can be really helpful for people who have no freaking clue where their money is going,” says Bera. This personal home budget software company also provides classes, blogs, and podcasts to help with budgeting—accented with friendly emojis to make the process more fun.

THE DEBTOR 
Consumer Credit of MN 
This non-profit organization offers free, confidential credit counseling for anyone in financial trouble. Counselors are available by phone or in person to help analyze your personal financial situation and create a workable budget. They also offer impartial guidance on debt consolidation and repayment.

THE INVESTOR 
Betterment
This online investment adviser has been called the “Apple of finance” for making investing as easy as possible. It’s among the largest of a new wave of robo-advisors that use algorithms to balance portfolios automatically, thus keeping fees extremely low. “They make it so simple and there is no minimum—you can literally start an account with $50,” says Bera.


Photo by Tj Turner


Dealing with Debt: Student loans, credit cards, mortgages, and more

Students attending a university in Minnesota leave school with an average of $31,579 in debt, the fifth highest in the country. Monthly student loan payments can cost more than rent, burdening students as soon as they enter the workforce. Responsible spending and being proactive about managing debt will help you reach final repayment sooner.  

Limit borrowing in the first place
Managing student debt starts even before the first day of class. Buck advises clients to take a hard look at the cost of tuition and living expenses as compared to scholarships and financial aid when considering schools. He suggests that the student loan debt incurred shouldn’t amount to more than one year’s salary after graduating college. “I always say if you can’t afford a Cadillac, maybe you should drive a Chevy,” Buck says. 

Conquer credit card debt first
Even when student loans come due, recent graduates should pay off any credit card debt first because it usually carries a higher interest rate. “I consider credit card debt to be what doctors consider cancer,” says Buck. “It will eat you alive if you let it.” Bera recommends that those with credit card debt start by calling the company and asking for a better interest rate. “It’s really important to ask, as you might be surprised that sometimes you can,” she says. 

Knock out small debts
While debtors should typically try to pay off loans with highest interest rates first, getting rid of smaller debts is highly motivating. Bera often tells clients to start with any small loans first, as they can be repaid quickly, to build confidence for tackling larger debts. “If you have a couple of small debts with less than $1,000, knock those out,” she says. “It’s pretty easy and motivating before working on paying off bigger debts, like student loans.”

Consolidate or refinance loans wisely
If you only have a few thousand dollars in student loans or can pay them off in a short amount of time, there’s no need to consolidate (combine loans) or refinance (create a new loan). Consolidating applies to most federal student loans and can simplify debt management by combining multiple payments into one bill. Borrowers may also have the option to lengthen their repayment period and switch from a variable-interest rate to a fixed rate—though this can increase your rate, which is the weighted average of the combined loans, rounded up. Refinancing is essentially taking out a new loan, with new terms, which can potentially reduce your interest rate.


Career Choices: Professions with Highest Growth in Minnesota

SOURCE: MINNESOTA DEPARTMENT OF EMPLOYMENT AND ECONOMIC DEVELOPMENT,  LAST UPDATED: JUNE 2016

GROWTH RATE: A MEASURE OF HOW FAST AN OCCUPATION IS EXPECTED TO CREATE JOBS OVER THE MOST RECENT 10-YEAR PROJECTION PERIOD.


Savvy Saving: Invest in your future today

From IRAs to 401(k)s, picking the right investment fund will pay dividends in retirement. The sooner you start, the better: If you save $1,000 a year with a 7 percent return starting at age 25 instead of 35, you’ll have twice as much money at age 65.

Start with your company’s 401(k)
Money in employer-sponsored 401(k) retirement plans moves directly from your paycheck to your fund, and you don’t have to pay federal tax on the income you invest (up to $18,000 a year for 2017). The money is then taxed as ordinary income when it is withdrawn. If your employer-sponsored 401(k) plan will match employee contributions—some directly match contributions and others match a percentage of an
employee’s contribution—this match, which is typically 3-6 percent of an employee’s salary, is bonus money that shouldn’t be passed up. “If an employer has a match of any kind, I always say get the free money,” says Buck. 

Think about a Roth IRA
If you don’t have access to a 401(k) with employer matching, the next best choice is to put retirement savings in a Roth IRA. Unlike the 401(k) or a Traditional IRA, contributions (2017’s annual maximum is $5,500) are taxed, but the money can then be withdrawn tax-free upon retirement. This is a major advantage for young people starting their careers, Buck explains, since they are typically in a much lower tax bracket than when they are nearing retirement age. You’ll save money by paying taxes on the small contributions you make when you are young rather than the withdrawals you’ll make after many years when the account has increased in value. 

Consider a target date retirement fund
Buck recommends his younger clients set up a target date retirement fund closest to the year they will turn 65. Target-date portfolios are rebalanced automatically as the investor ages. Asset allocation starts off riskier but with a potential for a large return (Buck says that this is usually 90 percent stock and 10 percent bonds), as the investor has time to recover from potential losses. As the retirement date nears, the balance shifts and asset allocation becomes more conservative, with more bonds and cash.


Financial Confidential: To pay off my student loans and start saving money, I’m working multiple jobs and limiting spending

“After college, in addition to my full-time communications job, I found an opportunity on Craigslist to canvas for a new charter school, which involved going to parks to talk to families and get kids to join the school. I now work on weekends at a farmers market and the past two years I’ve worked serving mead at the Renaissance Festival. This year, I started driving for Amazon Flex, which is kind of like the Uber of package delivery—it’s easy to log on and pick up a two, four, or eight-hour shift.”

“Multiple streams of income can be stressful at times with balancing schedules, but it is also very freeing. I know that if the economy collapses and I lose my main job, I would have something to keep living on. It’s good to have those skills and know how to balance a variety of workplaces and personalities. If you are just doing these things to make an extra income or save money, you will burn out really quickly if there’s not a greater purpose behind it or you are not enjoying it. Even though my shift starts at 5:15 in the morning, I love working at the farmers market on the weekend, and it’s something that’s important to me.”

“When I graduated, all of my income from my side jobs went toward student loans, which allowed me to pay them off on a much more accelerated schedule, and I saved thousands of dollars by not having to pay extra interest. I was able to fully pay off my student loans just over two years after graduating. Also, up until recently, my boyfriend and I lived with another roommate in a two-bedroom apartment to keep costs down. Right now I’m saving a lot of money, both in short-term savings accounts and for long term through my workplace’s retirement savings account. Having those savings allows me a certain amount of freedom and flexibility in the future. If I decided I found job I love that pays less or wanted to travel or make a purchase like a house, having those savings can allow me to make any of those decisions.”

“When it comes to savings, I think more about the flexibility and freedom it gives me than the material things. I also enjoy learning skills over buying things so I take a lot of community education classes, which are super cheap and fun to do. You could easily spend that money at the mall, but spending that on an experience that will last several weeks is so much more fulfilling to me. I also try to keep my entertainment budget low while still being super active around the Cities.” –As told to Hannah Johnson


Read more:
Financial Planning for Middle Age
Financial Planning for Later in Life

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