Planning Your Financial Future: It’s Never Too Early to Begin
Regardless of the path your life takes, money will play an important role at every turn. Certain events, especially graduating from college, entering the work world, getting married, having children, and retiring all require targeted financial strategies. Good habits developed now can go a long way toward helping you achieve your financial goals.
From Campus to the Workforce
If you are just starting your career, set some goals for making the most of your disposable income. Consider the following three rules: 1) budget your money; 2) keep an emergency fund to cover three to six months of living expenses; and 3) avoid unnecessary debt.
Of course, paying off any college loans is important. Also, try to avoid spending too much on housing. A good, general rule of thumb is to limit rent or mortgage-related expenses (principal, interest, insurance, property taxes, and/or condo fees) to 28%–30% of your gross monthly income. When other short-term debt, such as car payments, student loans, and credit card bills are included, the debt limit guideline may rise to 36% of your gross pay.
For younger workers, retirement is often last on the list of financial concerns. However, if your employer offers a retirement plan with tax benefits, such as a 401(k), you may want to make the most of the opportunity. Pre-tax payroll deductions make contributing relatively painless. Try to contribute the maximum amount allowed—especially if your employer matches some, or all, of your contribution. If you don’t have a retirement plan at work, consider opening an Individual Retirement Account (IRA) or establishing a Keogh plan (if you’re self-employed) that can provide for tax-deductible contributions and tax-deferred earnings.
If settling down means marriage, you now have two financial situations to reconcile. Keep in mind that marriage establishes a legal relationship, and your spouse may have his or her own debt. Ideally, attempt to begin your new life together with a clear balance sheet.
Whether single or married, financial goals take on greater importance as you assume adult responsibilities. You and your spouse may choose to name each other as beneficiaries of retirement accounts, annuities, or life insurance policies. Also consider the protection offered by disability income insurance. In the event you or your spouse is unable to work due to an accident or illness, disability income insurance can provide a certain level of replacement income.
Children Raise the Stakes
Although children present new and immediate demands on your time and financial resources, having dependents may motivate you to plan for the future. Two essentials include adequate life insurance and a will that names guardians for minor children.
You may also want to establish an education funding plan to help finance college. Many adults feel torn between saving for their children’s college education and saving for their own retirement. Starting early may allow you to do both.
For many people, a comfortable retirement may require 75% to 80% of their pre-retirement income. The “three-legged stool” of retirement income consists of Social Security, pensions, and personal savings. If you anticipate little or no income from Social Security or a traditional company pension, you will need to prepare early to make up the difference with savings and an employer-sponsored retirement plan.
A comprehensive estate plan, to minimize potential estate tax liabilities and to help ensure that your assets are transferred to your heirs according to your wishes, is also important.
It is never too early to begin building the foundation for your financial future. The sooner you get started, the better. Regardless of your stage in life, your financial professional can assist you in finding appropriate strategies to meet your needs.
No matter where life takes you, money will play an important role. Good habits developed now can go a long way toward helping you achieve your financial goals. For specific guidance, contact your financial professional.
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