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Ask the Experts: Money Management for Young Professionals

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You got your first real job – now don't blow it

The milestones of growing up are different for everyone, but they tend to share the same basic characteristics. Key parts of the transition from child to adult include moving out on your own, embarking on a career, paying for your first solo vacation and, certainly, managing your own budget and bills. Taking responsibility for yourself and making "adult" decisions are indicators of maturity. While the journey to full independence is a long and winding road, money management is a critical aspect of adult life and must not be taken lightly.

In today's highly unforgiving job market, recent grads know they're lucky if they land a full-time job with a nice salary. Huge congratulations are in order for anyone who is young and gainfully employed in his or her chosen field. When you receive those first few paychecks that are larger than any you've ever earned before, celebrate. But not too much. Be your own fierce advocate when it comes to protecting this new asset, and take the time now to plan and build a foundation for financial health that will – literally – last the rest of your life.

The challenges

The challenges young working people face are consistent nationwide.

Debt

For all U.S. households, the average revolving debt is $7,402. Since only half of U.S. households carry balances, the actual average indebtedness is closer to $15,000 per household for households in debt. The higher figure is supported by Experian, which reported that in March of this year, the average balance on credit cards that usually carry a balance was $8,220. This figure is an average per card, and many Americans carry balances on multiple cards.

Nothing keeps you bogged down financially like credit card debt. It is very expensive, and a cycle that for many people never ends.

One in five American households carries student loan debt. That number increases to 40% when we look at households headed by someone under age 35. The average debt is nearly $27,000, and 10% of indebted households have student loan balances of $62,000 or more.

Poor financial organization

The single most contributing factor for spiraling debt for millions of adults – 60%, in fact – is that they have no budget and no way to track their spending. Sadly, 61 million Americans fail to pay their bills on time.

Unexpected expenses

Insufficient savings is the biggest worry of most American adults right now.

The future

The elusive reality of retirement

We all know that one day we want to stop working and enjoy life while money magically appears in our bank accounts each month. But nearly 40% of American adults – not including students and retired people – lack confidence that they will have sufficient resources to stop working. Ever. In fact, three-quarters of workers today think they will need to continue working in retirement.  And more than half of those near retirement (aged 50-64) say they may delay retirement or continue working indefinitely.

Retirement income isn't magic. It's careful planning that makes that money appear as if on its own. Long term growth can be attributed to compounding; it is our best ally. It means that the earlier you invest, the more money you'll have. Even if you invest less money.

A 25-year old who invests $1,000 a year for ten years (for a total of $10,000) will have $169,000 at age 65 (assuming an 8% rate of return). But a 35-year old who invests $1,000 a year for 30 years (for a total of $30,000) will only have $125,000 at age 65, given the same rate of return.

The bottom line: The 35-year old invested three times the money but ended up with a smaller balance. It is critical to understand, internalize and take very seriously the concept of compounding. Invest as much as you can and don't touch it. Never cash out your retirement account, except as a last resort of absolute desperation.

The solutions

Being free of debt and building a nest egg with a view of the distant horizon is not magic. The solutions are just as straightforward as the challenges.

Money management for young professionals

To elaborate, we asked financial planning experts across the country and around the world what advice they'd offer young people starting out in the professional workforce. Here's what they said.

Be organized

Financial experts agree that having a clear budget and sticking to it is half the battle when it comes to good financial health.

"Create a realistic budget based on take home pay and any financial responsibilities before making any large purchases. It is usually quite a shock to get that first check and realize that it is nowhere close to 1/12 of the annual salary they were offered." Karla Fennell, Clarkson University

"Don't wait another day to create a budget. By doing so early on in your career, you will find it much easier to save for retirement, buy a home and reach your many other financial goals." Chris Bibey, Finance.info

"Create a budget first thing and attempt to follow it. Make sure to include an investment plan and a savings account to pay yourself first." Edna Grover-Bisker, Missouri University of Science and Technology

"Put together a plan of what you want to achieve, be realistic about the time and costs involved, and work out the steps that are needed for you to achieve it. It isn't enough just to come up with the plan, you must do something about it." Alex Turner, Ambitious Minds

"Always know what you earn, spend and save. Track your income, track your spending and track your saving. Have multiple accounts, including a rainy day fund for unexpected expenses. Set goals." Alana Golden, California Department of Business Oversight

"Prepare a budget! A budget will allow the person to understand fixed and variable costs, as well as determine how much money she will have for spending and saving. Without a budget it is easy to overspend and have no control of finances." Debra Wheatman, Careers Done Right

"A budget gives you control.  It helps you to make tradeoffs and pick what gives you the most value. Having a budget is likely to increase your chances of success with your goals in life." Heidi Davis, Columbia FInancial Planning

"Be honest and realistic with your money. Anyone can find plenty of financial experts with their advice and money management practices online, but each person needs to discover what works for him/her. Be honest on how much you need to spend monthly, be realistic about how much you're allowed to spend and find a saving technique that works best for you." Katie Robinson, Ask the Young Professional

"Setting a realistic goal, knowing what you have, what you expect to earn, and tracking your spending are the basics of money management that enable you to control your money and make wise budgeting choices in the future." Ryan Howell, Beyond the Purchase

"Pay attention. Sites like Mint.com make it very easy to track your spending if you really want to." Steven Adler, Young Adult Financial

"Sign up for Mint.com. It will help you track every penny you spend, remind you when you have to pay bills, and give you the ability to see all your account in one place. Set up automatic payments for everything you can. Interest and late charges will kill you." John Muscarello, Start Networking Today

"Write all of your purchases down, from rent to the morning coffee run. It doesn't matter where you do it. It could be in a book, a spreadsheet on a computer, a smart phone, wherever. After doing that for a couple months not only will you have a great set of data to show where your money is going and your personal spending habits, you'll also be more aware of your spending." Cassie, Tales and Trenches

Be frugal

People who spend all the money from their paychecks often find it very hard to cut back in order to save. Experts recommend that we resist the urge to dive into a nicer lifestyle immediately upon arrival in a higher income bracket.

"Start out on the frugal side until you know how much money you need to pay all obligations before any other expenses, like entertainment or new clothing." Andrea Gutierrez, Bowling Green State University

"Set a lifestyle an budget that allows you to live below your means. Automate expenses and investments and maintain a positive cash-flow each month." Belal, Leechon

“Spend less than you earn." Joe Downs, Reality Financial Planning

"Create a realistic budget to ensure you live within your means. Add into that budget your first student loan payment so you can be prepared for the repayment starting in 6 months. If at all possible, avoid paying the minimum payments." Brandi Keller, Truman State University

"A credit card is a short-term loan, not a tool to live beyond your means. Charge only what you can pay back in full each month when your statement arrives." Robyn, Money Care VT

"In salaried positions you begin the month with a pot of money. If your outgoings exceed this pot of money in that month, you start the next month with a deficit. If you continue spending more each month than you earn, this deficit grows, meaning you’re unable to satisfy your outgoings and every month your deficit grows. This is the debt cycle – it’s hard to get off this merry-go-round once you’re on it." Jamie Lawrence, HR Zone

"Do NOT buy a new car. Drive a modest car the first couple of years of working and use the difference to fund a Roth IRA." Jeff Rose, Good Financial Cents

"Resist the urge to buy a new car. Every recent grad thinks they deserve one, but until you are [stable] in your new career, make do with the car you used to get you back and forth to college." Carlos Costa, FPA Online

"Being credit card and student loan debt-free is way more impressive than having a nice car." Jeffrey Settle, District Financial Planning

”Live below your means and invest into something every month other than a checking or savings account. Then vow not to touch that money." Joseph Harowski, SmartChoiceFinancialPlanning.com

"Avoid lifestyle creep. Stay true to the lifestyle you were living while you were in school. This will afford you the opportunity to save money for things you really value." Stacy Ployhar, 2020 FinancialPlanning LLC

"Concentrate on reducing the few big expenses that drain the most cash flow (for example, housing). Free up cash flow and apply it to paying off debt. As debts begin to be paid off you can start applying your freed up cash to investments and other assets that create wealth." Keith Whelan, Cash Flow Navigator

"Live on half your earnings and use the other half to pay off student loans and invest for your future. This may be impossible without a roommate or two. If you have a partner, limit your standard of living to the higher salary and invest the other salary." Robert Friedland, Friedland Financial

"It might be tempting to spend a good chunk of your money living life to its fullest while you are young, but realistically, frugality leads to greater wealth. The more you save, the better your finances will be and the better off you’ll be if something unexpected happens (job loss, medical problems, etc.)." Kara Johnson ,Colorado State University

"Live within your means. Don't over-extend yourself by spending more than you can afford. Big purchases are coming your way in the next ten years like a car, house, maybe even a wedding. Rather than spend everything that you've got right now, put a little away each month." Maura Hume, College of the Holy Cross

Handle your credit cards wisely

Responsible credit card use can easily fit into several of the other categories of advice, but many experts make a point to call it out separately.

"Always choose to pay off your credit card statement balance. If you choose to pay the minimum payment only, your balance will be charged daily compounding interest expenses." Bing Yu, Meredith College

"Every time you get paid, make it a pay day for your credit card too. Don't wait for the once a month due date. You'll get the card paid off earlier, with less interest expense." Sharon Weaver, Mission Financial Planning

"Never, ever carry a credit card balance. Think three times before buying it, if you can’t pay for it with cash, except for a house." Farnoosh Brock, Prolific Living

Protect your credit

Financial doors open to those with great credit. Those with lower scores pay much more and have fewer financing opportunities. Following the other advice should lead to a high score, but consumers should not take their credit scores for granted. Instead, monitor and nurture your credit score as part of your overall financial plan.

"Treat your credit score like the Mona Lisa, a priceless work of art that must not be disturbed. So many 'milestone' purchases like a new car or house depend on a strong credit score. Take care of your personal finances now, and it will pay dividends later." Danny, News To Live By

"Know the power of credit. Banks look at your credit history as an indication of your future financial behavior. By using credit wisely, you can build a good credit history. A good credit history makes it easier to get loans with low interest rates, rent an apartment, purchase a car or home, and may even help you get a job." Lorene, The Mindset Matters

Chase passion, not money

Countless studies prove that we are more satisfied in life and experience less stress when we spend the day doing something we enjoy, even if it brings in less money than we could earn doing something else.

"Get a forbearance on your loan payments so you can take the best job for you instead of the job that pays highest." Penelope Trunk, Penelope Trunk

"Don't chase the money. Do something that interests and/or inspires you. Chasing the money inhibits you. Pursuing something you enjoy or something that inspires you frees you up, and the money will follow because you're more likely to be successful if you're happy and motivated!" Malcolm at Money-Wise

"Resolve and plan to live significantly below your income and do not get overextended with financial commitments. The reason - you do not want to get in the position where the only factor in driving future career moves is additional money over fulfilling work, following a passion, or changing directions. One of the worst things you can do is be completely miserable in a job solely because it offers higher pay. It is good to have some financial flexibility to grow into and find your ideal career calling." Stan Kimer, Total Engagement Consulting

Learn how to save – and practice regularly

Young professional saving moneyThe vast majority of our expert panel recommended early and diligent savings before all else.

"The combination of time and savings can do wonders for you. Start saving for retirement right away. That may mean an IRA, a Roth IRA or a 401(k). Contribute regularly. Make it a habit and it will serve you well." Steve Weisman, Bentley University

"Pay down high cost debt as soon as possible and, if available, invest in your company’s 401K program as soon as that debt is paid down." Terri, TheNewCareerist.com

"Put aside a certain amount of your pay every week/fortnight before you even see the money. Stash it away in a high interest savings account and 'forget' about it." William, WealthForTeens.com

"Save 10% of your salary until you retire." Sal Miceli, SalMiceli.com

"Contribute 10% of your gross income to your 401k each pay period throughout your career and do not touch it until retirement." Marge Dussich, Georgia Institute of Technology

"Start saving 10% for retirement. I have a daughter that is a recent college graduate. When she balked at my suggestion of 10%, I asked her if she would have taken the job at a salary that was 90% of what she was offered. She said yes, so I told her, pretend that is your salary, and you will never miss the 10%." Lisa Hatcher, HatcherByles.com

"Contribute to your company's 401/k plan." Raúl Gonzalez Gonzalez, FinancialPlanningInfoGuide.com

"It's not what you make, it's what you keep investing for the future so that you can retire while you're still alive. Time is on your side!" Candi Sparks, SparksFly.org

"In your early years, the fact THAT you save is more important than HOW you invest that savings." Michael Kitces, Kitces.com

"Start early. The earlier you start saving the better off you will be. [In addition the benefit of compounding,] (A), it's much harder to cut back on spending once you're accustomed to a certain lifestyle, and (B), you start to form a good habit of saving. The clients I see who are prepared for retirement are the ones who understood the importance of saving at a young age." Michael Solari, SolariFinancial.com

"Start saving as soon as you get your first paycheck. If you have a retirement plan offered through work, contribute something to it. Try 10%. If you do not have a plan through work, contribute to either a traditional or Roth IRA every year." Katy Song, KatySong.com

"Take full advantage of the 401k employer match, if one is offered. It’s free money!" Andy Kerns, AccountableFP.com

"Save up 3-6 months' worth of living expenses as a cash reserve, then start saving 10% toward retirement." Amy Jo Lauber, LauberFinancialPlanning.com

"Set up a direct deposit so that 10% of your paycheck goes straight into your savings account each month. Sign up for your 401(k) right away and contribute at least enough to earn your full company match. If your company doesn't offer a company match, start a Roth IRA at a discount brokerage firm. If you contribute $100 a week for 40 years and earn a 7% rate of return, you could have over $1,000,000 when you retire." Sophia Bera, GenYPlanning.com

"Start saving from day one. Build your lifestyle around saving and you will find financial success much more easily over your whole life." Jean Keener, KeenerFinancial.com

"Save 20% of the net (after tax amount) of your first and every wage that you receive for the next 20 years." Nigel Barker-Smith, NBSFinancialPlanning.co.uk

"Make it your first goal to save $1,000 as an emergency fund to have at all times (and prevent having to use a credit card). Don't buy a house until you have saved 20% down." David Adams, RaymondJames.com

"Start putting some of each paycheck away toward a home – the sooner you start, the easier it will be." Michael Vesper, AustralianUnity.com.au

"Do not underestimate the importance of creating an emergency fund. Having such a fund can prove critical to helping you stay on track with other financial goals." Tuesday Strong, TuesdayStrong.com

"One must have an emergency savings fund. These funds are to be used only for true emergencies. This will ensure that you don't build up credit card debt."John Lopez, University of Houston Bauer College of Business

“It’s hard to think about it now, but it’s incredibly important to start saving for retirement. Make sure you’re putting a chunk (even a small one!) of your paycheck towards your 401K or other retirement plan. You’ll love how those small chunks grow over time!” Kim Brown, Syracuse University

Never underestimate the importance of insurance

Experts agree, we all need insurance. If your employer offers to pay for all or part of your health insurance, sign up. If you are not eligible for an employer-sponsored plan, get your own. It's no secret that under the Affordable Care Act, the penalty for not having health insurance will cost less than a low-end health plan. But the flip side of the coin is that medical expenses have been and continue to be the number one reason for personal bankruptcy among American adults. Even if you're young and healthy, accidents and illnesses happen. Not if, but when. Here are a few more opinions on the importance of insurance.

"Always shop for insurance - there are plenty of good insurance companies out there and many will provide you with valuable discounts and competitive prices. No matter what, make sure you have health and car insurance, regardless of whether you are employed or not." David Ginchansky, University of Southern California

"Talk to HR about your employer’s insurance options. Understand how insurance you can get through work protects your paychecks. September and October is when most employer’s host their benefits enrollment. Don’t miss the chance to protect your ability to stay on track with your financial goals if something were to happen. [Learn about] disability insurance and how it can help you receive a paycheck if you are unable to work due to an off-the-job injury or illness." Lindsey, LindseyPollak.com

"It is imperative to have a backup plan in place to protect your income in the event you are unable to work due to ill health. Income protection premiums for young people are often far cheaper than you would imagine." Joe Farrell, FFPGroup.co.uk

"Protect your most important asset – you – through proper disability insurance. Make sure you have group insurance, or individual if you are self employed, that covers roughly 2/3 of your pretax income. Your human capital or earning potential needs to be protected through at least age 65." Laura Scharr-Bykowsky, AscendFinancialPlanning.com

Other good advice

While it's common knowledge that we should minimize debt and maximize savings, here are a couple of surprising tips worth considering.

"Learn how to invest your money. Use your college years to watch the market. Track things you think you ought to invest in. One of the biggest challenges in this country is that people are scared to death to invest." Dr. Jerry Basford, University of Utah

"A recent study found that the compounding effect of successful salary negotiation can actually be quite significant. For example, someone who negotiates an additional $5,000 to an initial offer of $50,000 can earn an additional $600k or more over the course of a 40-year career, assuming an average annual pay increase of five percent." Samar Birwadker, Good.co

"Fresh graduates may find it hard to find jobs here. Yet if they can look outside the U.S., they may be able to find jobs that pay well. And the living expenses in those places are often much lower than those in the U.S. Lower tax in some countries is another plus." Kathy Shultz, Shultz Financial Planning

"Be very aware of fees. There’s no justification anymore for purchasing investment products with big commissions. Some fees may not look like much, but they will take a massive chunk out of a young investor’s wealth over the course of a lifetime." Sam Swift, ASPIRE by TCI Wealth

Be prepared for life's curve balls

The smartest financial advice in the world can't lead you to a perfect life. As you climb the career ladder, remember the human side of things. Be kind and considerate, and get along with people. It'll reflect well on you, and you never know when you might cross paths in the future with someone you worked with in the past. It happens more often than you'd think.

Be kind to yourself, too. If you don't know much about money and finance, learn. Ask people whose finances are in good order to share their strategies. Consult with your parents before making big decisions. Got a favorite finance teacher at school? Don't be afraid to make friends and stay in touch after graduation. Involving more experienced people in your financial life isn't a sign of immaturity. It's a clear indication that you're smart enough to want to do it right the first time and avoid repeating others' mistakes.

~

Sources:

Thank you to all of the financial experts who contributed to this article.

http://www.census.gov/popest/data/national/totals/2012/index.html

http://quickfacts.census.gov/qfd/states/00000.html

http://www.federalreserve.gov/releases/g19/Current/

http://www.statisticbrain.com/u-s-household-statistics/

http://money.cnn.com/retirement/guide/investing_basics.moneymag/index.htm

http://www.nfcc.org/newsroom/FinancialLiteracy/files2013/NFCC_NBPCA_2013%20FinancialLiteracy_survey_datasheet_key%20findings_032913.pdf

http://www.pewsocialtrends.org/2009/05/28/most-middle-aged-adults-are-rethinking-retirement-plans/

http://www.pewsocialtrends.org/2006/09/21/working-after-retirement-the-gap-between-expectations-and-reality/

http://www.pewsocialtrends.org/2012/10/22/more-americans-worry-about-financing-retirement/

http://www.pewresearch.org/fact-tank/2013/07/01/248455/

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  • http://fightingfluorescents.wordpress.com/ Christine Presto

    Hi! This is a great article. I am 25, and want to start saving and investing in my future, but my current company does not offer a 401k or any similar type of plan. I would love to know options that I may have!

    Thanks!

    • Kimberly Rotter

      That’s a great question. It’s very easy to open an IRA, which stands for Individual Retirement Account. You open it like any other bank account, and then you contribute to it regularly, just as you would to an employer-sponsored retirement plan. Some banks require a minimum deposit to open the account, but others waive that requirement if you set up an automatic monthly contribution.

      There are different kinds of IRAs. A traditional IRA uses money that isn’t taxed now, but rather will be taxed later when you start taking the money out (“distributions”). In a Roth IRA, you’ll pay the taxes now and then receive the distributions tax-free in retirement.

      If you are single and your employer has no retirement plan, your contributions to a traditional IRA are 100% tax deductible no matter how much you earn. The rules change once you have access to an employer-sponsored plan and earn more than $59,000.

      Take a look at the IRS’s FAQ page. It’s written in very plain language and should answer some of your questions. http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs

      Here is another helpful FAQ page https://www.fidelity.com/retirement-ira/ira/ira-rules-faq

      When it comes time to open the account, feel free to shop around. Until you’re more familiar with investing (which for some of us is never), feel free to stick with your bank or a big name financial services company like Fidelity or Vanguard. In any case, investment professionals are available at the institution of your choosing to talk about options, clear up confusion, and help you learn how to plan for retirement.

    • Kimberly Rotter

      Hi Christine,
      That’s a great question.

      It’s very easy to set up and contribute to an IRA (individual retirement account). You open the account just like a bank account, at the institution of your choice. IRAs are available banks, financial services companies, and even some online-only financial institutions. Stick with a big name company (Fidelity, Vanguard, Wells Fargo, USAA) until you are more comfortable with investing. Let their financial advisers help you create a plan and set up the account. Some require a minimum deposit (often around $1,000), but others will waive that requirement if you set up an automatic contribution to it from your bank account.

      You’ll come across different types of IRAs. In a regular IRA, the money is tax-free now, but you’ll pay regular income taxes on it when you start taking it out in retirement. In a Roth IRA, you pay the income taxes now, but the withdrawals are tax-free in retirement.

      The IRS puts limits on how much you can contribute to an IRA, but if you don’t have access to an employer-sponsored retirement plan, the limits generally will not apply to you. A good benchmark is 10% of your pre-tax income. So if you earn $15/hour, put about $260/month into the account. If you get paid every two weeks, it works out to $120 per paycheck. Remember, this money is taken out before taxes, so at the end of the year you will get a federal tax refund to make up for some of the contribution because your taxable income will be much lower than what the paychecks calculated. In any case, any contribution is better than nothing.

      As the article states, once you start saving, the most important thing is to leave it alone and let it compound over time.

      Here are some helpful websites.
      http://www.irs.gov/Retirement-Plans/Traditional-IRAs
      https://personal.vanguard.com/us/help/FAQRetirementIRAContent.jsp
      https://www.fidelity.com/retirement-ira/ira/overview