One of the things I enjoy sharing with young professionals are steps to consider to help them start their financial journey to reach a successful end result. Each person has a definition of success, so any plan must match the end goal for the unique circumstances we each possess.
The positive factor on the side of young professionals would be the emphasis on the word young. There is expected to be years of planning available to build, manage and advance the stated goals. Starting early is the biggest factor in building wealth. Initial steps would include establishing an emergency fund for the “what ifs” of life.
This balance needs to be anywhere from six months to a year of annual expenses according to the annual budget. It may have to be built slowly over time until the proper amount is established. Another important early in life step would be participation in the retirement plan(s) of the employer.
This simple step can build a strong foundation for future wealth. Each company offers various plans, and the more the better. Starting small is a first step and provides the discipline of saving and accumulation. Increasing the contributions to the plan are highly recommended, especially when raises or events occur that provide extra cash flow.
As we’ve heard, we don’t miss it if we don’t see it, and the payroll deduction of retirement plans fits the bill. The tax deferral benefits and the potential company matching contributions of these plans add up over a long career. Don’t leave money on the table!
Decisions can be made regarding each person’s circumstances in regard to using the traditional retirement plan or, if offered, the Roth retirement savings feature. If your employer doesn’t offer a plan or you are self-employed, establishing a personal retirement savings plan is available and should be explored. Keep in mind these are retirement funds that are to be looked at as long-term savings vehicles and will include important tax rules to follow.
Personal savings outside of a retirement plan could be the next step to building wealth. Dollar cost averaging is the term used to put aside a specific amount of money over a time period to build more funds for the future and, while doing so, reduce potential market volatility with the purchases.
Since the emergency fund is established, this account could be more growth-oriented. The longer this savings process, the better.
Young professionals should also make sure proper amounts of life, health and disability insurance are in place to handle the risks of life as managing risk is also a part of building wealth. Smart use of credit is very important. Young professionals may have debts from student loans, consumer debt or home mortgage payments. These payments should be planned in accordance with the budget and in conjunction with the savings plans already mentioned.
Building equity in a home or other properties can provide unique benefits that should be explored. Young professionals may have charitable intentions, so build gifting into the budget. Benefiting organizations or causes that are important to us should be a priority, and I would argue giving before saving for our own future is an excellent step.
When I have conversations with successful retirees, I like to ask them how they arrived at where they are today. Usually, the words “time,” “a consistent plan,” “saving/giving more” and “awareness of what’s important” are mentioned.
For the young professional, time is money. Take steps early and often for your financial future. You’ll be glad you did.
Jim Ed Summers is a senior vice president at SWK Financial Planning Advisors of Raymond James in Fayetteville. He can be reached at 479-435-9955. The opinions expressed are those of the author.