March 6, 2017
As a wealth management firm, Balentine is committed to providing peace of mind and simplicity to clients of all ages. In this new series, we tackle some of the most common issues faced in each decade. Please talk to a Balentine Relationship Manager if you have additional questions about financial planning—regardless of age.
After two decades of relying almost exclusively on your parents to foot your bills, you may either embrace your 20s as a time for welcomed financial independence, or live in fear knowing that the buck truly does stop with you. Regardless of on which side you find yourself, there are a number of steps that you can proactively take to help set yourself up for financial success, both now and in the future.
- Establish—and stick to—a budget. A budget is a plan for how you will allocate your income to meet your monthly expenses. It’s easier than ever to create a budget and track spending using one of dozens of free or inexpensive online programs and/or phone apps. If you’re currently spending more money than you make, it’s time for some changes. Once you know where your money is going each month it’s much easier—although not necessarily more fun—to trim spending on nonessentials such as fast food or concert tickets. It can take some time to adjust to living on a budget, and it may be frustrating. Rather than getting discouraged, set aside time at least once a month to review your progress and make adjustments, when necessary.
- Start saving for retirement. Remember the mantra “pay yourself first.” Don’t think of retirement contributions as taking money away from each of your hard-earned paychecks. Rather, approach them in a positive light as payments to your future self. If your employer offers a 401(k) plan take advantage of it by investing as much as you can. If you begin by saving aggressively you will get accustomed to living on less, a mindset that is much more difficult to develop later in life. At a minimum, you should invest enough to maximize your employer’s matching contribution, in which case you’re receiving an immediate 100% return on your investment. In your early 20s, there’s something you have that even Warren Buffett doesn’t: time. Even small contributions now can make an enormous difference thanks to the power of compound interest. Resist invading your retirement savings by cashing out accounts when changing jobs or borrowing against those accounts.
- Pay Down Debt. “People who understand interest, earn it. People who don’t, pay it,” quipped Carl Richards. Just as compound interest can work in your favor if you save, it can be detrimental with debt. Eighty percent of American households have some kind of debt, and 41% of millennials have unpaid student loans. Taking those figures together, chances are you owe some form of debt. Not all debt is created equal, and it’s important to know what kind you have. Debt that is an investment in the future— buying a home, investing in a business, or paying for grad school—can be a good thing. “Bad debt,” however, is described by Debt.org as “that which does not increase wealth and/or is used to purchase goods or services that have no lasting value.” It may be tempting to simply make minimum payments. Instead, develop a plan to pay down your debt, beginning with higher-rate debt, such as credit cards, which have an average interest rate of 15%. Additionally, debt levels account for 30% of your credit score, meaning large amounts of so-called “bad debt” can significantly affect your ability to get future loans for major purchases, such as cars and homes.
- Build an emergency fund. At some point, you’re going to face an unexpected emergency, whether it be a medical crisis, lost job, or blown engine. A study by Pew Charitable Trusts found that 60% of households had experienced a financial shock in the previous 12 months, and the median cost was $2,000. Emergencies are stressful enough without also worrying about how you’re going to afford the unexpected expenses—that’s where emergency funds come in. We recommend setting aside at least six months’ worth of expenses, as determined from your budget calculations in step one. To avoid temptation (a last-minute trip to Vegas is not an emergency!), consider opening an account separate from your regular savings. Make a plan for funding the account, such as direct deposit from your paycheck or automatic bi-weekly or monthly contributions. Once established, you’ll have peace of mind knowing that the next time an emergency occurs money won’t be a barrier to overcoming the problem. Plus, being able to cover six months of expenses may afford you the ability to take a chance on your dream job without making a decision solely based on the paycheck.
- Set long-term financial goals. While “settling down” may seem light years away, there’s no time like the present to start setting long-term financial goals. Whether it’s marriage, kids, or a home, preparing now may allow you to avoid scrambling for money when you decide that you’re ready for those things. For each long-term financial goal you set, answer the following: 1) How much money do I need to save? and 2) How long do I have to save? The answers to those questions will help you determine the rate of return you need to achieve in order to reach that goal.
Ultimately, the key to successful financial planning at any age is to set goals; however, a budget is not set in stone. No one can predict the future, and it can be hard—especially in your unpredictable 20s—to know where you’ll be in a few months, let alone years. As Carl Richards, author of The One Page Financial Plan writes, “Don’t be committed to the guess, be committed to the process of guessing.” Creating this process will not only help you now, but it will help you develop healthy financial habits for the rest of your life.