Does the thought of financial planning strikes fear and anxiety into your heart? Feel like you have no idea where to start when it comes to saving, investing or paying down debt? You’re not alone.
When you’re just starting out, it can be difficult to project far into your future and think about what you’ll need to survive on later in life. In Capital One’s most recent Financial Freedom Survey, it was discovered that although 61 percent percent of millennials are confident they’re saving enough, 29 percent of working millennials are saving 5 percent or less for retirement.
We turned to some of the finest financial experts we could find to compile a comprehensive set of things to think about when it comes to your money, all in the hopes of building the most stable financial future possible. They all agree: It’s never too early to start planning.
Know that even if your current finances don’t reflect the framework below, it’s never too late. “Many people will wait to plan their financial futures until they feel comfortable with their month-to-month finances, but by waiting to pay down debt, save or invest until you are in a ‘good place,’ you miss out on opportunities to better optimize your finances in the early stages,” says Jenna Rogers, a certified financial planner in Santa Barbara.
By the time you’re 22, aim to have a weekly and monthly budget in place to set yourself up for success. “A good rule of thumb is to allocate 50 percent of your monthly income to fixed costs, like rent, utilities, insurance and standard groceries,” Rogers told us. “Thirty percent can be allocated to discretionary expenses, like dining out and entertainment, while the remaining 20 percent should go into savings.”
She recommends putting your savings account on autopilot and directly transferring funds from every paycheck. If you don’t see it come into your checking account, you won’t miss it. “Aim to pad your savings account with at least three to six times your monthly expenses by contributing monthly to it until you have this size of a cushion set aside,” advises Genti Cici, lead advisor at InvestED. “Although interest rates on standard savings accounts are very low, this safety net can be a lifesaver for the unexpected.”
Looking for the best savings account? “Check bankrate.com for interest comparisons across institutions, and look for no-fee and bonus-awarding accounts,” recommends Rachel Jimenez of TalkRaw.org.
By 25, paying down debt from student loans and credit cards should be a priority.
Assess what kinds of debt you’ve accumulated. Good debt is associated with an asset that will grow in value over time. “This includes student loans,” says Genti. “Taken on in moderation, they may provide value in future job prospects. A business loan could also be considered good debt if it’s used to invest in a profitable venture.”
When it comes to paying down student debt, Rogers recommends giving priority to any loan with an interest rate higher than 6 percent. (If your interest rate is lower, you may wish to prioritize saving for retirement over paying down the student loan, but still make sure you make payments on time. Some federal student loans offer forgiveness after 10-25 years as long as you haven’t missed any deadlines.) It can also be worth exploring if your private loans could be refinanced through a bank to secure a more favorable interest rate.
“Bad debt,” on the other hand, includes things like 15 to 20 percent interest rate credit cards used to buy things that don’t have long-term value, Genti says. “The goods you’ve spent money on, like a dinner, disappear, but the debt remains if not paid off.” While credit cards may be necessary to help build your credit, it’s important they be taken seriously—and used only as needed—to avoid damaging your rating, particularly if you’re also starting to think about the possibility of purchasing a home.
Rogers suggests paying these off these balances aggressively. “Making only the minimum payments, on top of paying 10 to 20 percent interest, is a losing game,” she says. “Use any additional income or savings, when available, to tackle credit balances, starting with the highest interest rate cards first.”
With the great credit you maintain, you may start to entertain the idea of home ownership, which is easier with a higher credit score. But do the math before you buy. The monthly costs—including mortgage payments, property taxes, insurance and any HOA fees—should be less than 28 percent of your monthly pre-tax gross household income, says Genti. And, he advises, don’t forget the up-front costs of Realtors, closing costs and interest. “Set yourself up for the best interest rates by applying with a down payment of at least 20 percent,” he says. “This will help you avoid the cost of private mortgage insurance (PMI), which is added when your down payment is less than 20 percent.”
If you haven’t done so already, start thinking about saving for retirement and exploring investments. “Even just $25 a month, when contributed wisely, can add up,” Rogers says.
If your employer offers a retirement plan, such as a 401(k), it’s wise to contribute up to the employer match. “Think of it this way,” says Genti, “if your employer contributes 3 percent and you contribute 3 percent, that’s a 100 percent return on your contribution. Take advantage of this.”
If you’re not enrolled in a 401(k), or you’re already contributing the maximum, Rogers suggests considering opening an IRA. Although you’ll pay taxes when you withdraw later on, an IRA will allow you to set aside funds for retirement and offer state and federal tax deductions when you deposit into it. ROTH IRAs are also great for anyone earning less than $115,000. They don’t offer tax breaks for contributing, but they’re tax-free when you withdraw in retirement.
If you’re exploring building an investment portfolio, your options may be active investing, where a mutual fund manager handles your investments by selecting where and when to move your money, and passive or index investing, where funds are exchange-traded with less interaction.
“Index funds are lower cost—often 1/10 of the price of active funds—and provide for wider diversification and higher tax efficiency. Research shows that over time, indexing does better than 80-90 percent of fund managers, after fees,” Genti explains. “One of the worst things you can do, especially as a new or independent investor, is to trade and sell too often to try to beat the market. It usually doesn’t end well.”
By 30, you may be at a place to negotiate a raise to help further your financial goals.
Jimenez suggests checking out payscale.com before broaching the topic with your superiors. The site administers a short quiz to estimate your market value based on your job history and industry. Prior to performance reviews, ensure you’ve asked for feedback and have demonstrated significant professional growth to increase the likelihood you’ll get what you ask for.
Now may also be the time to craft a long-term financial plan to help you succeed. Consider hiring a financial planner to help with this next big step.
The most important questions to ask when beginning your search? “Look for someone with the certified financial planner (CFP) mark,” Rogers says. “This means they have taken rigorous courses and exams on financial planning and investment management. If they are a registered investment advisor (RIA), even better, as this means they have a fiduciary duty to act in your best interest.”
Genti recommends finding out how your planner is paid: Is it directly by you, the client, or by the funds they recommend? If they are paid by the mutual funds via commissions, the advisor may be influenced by things other than your best interest. Instead, seek out planners who will work on a percentage of your assets, say 1 percent, or a $2,000 flat fee for a financial plan, to ensure they’re putting your interests first.
Finally, ensure their service schedule and method— in person, by phone, or email—meet your needs. Make sure they have a proactive system in place to ensure your financial goals are regularly updated.
The big takeaway
Planning for your financial future is particularly tricky for generations that have come of age since the Great Depression (yes, even now). “Uncertainty about the world economy makes planning more difficult,” explains Lori Sackler, senior vice president and senior investment management consultant at Morgan Stanley Wealth Management and author of The M Word: The Money Talk Every Family Needs to Have About Wealth and Their Financial Future and, most recently, The M Word Journal. “Plans may need to be adjusted to include additional years in the workforce to generate earnings and investing choices may need to be adjusted to account for the need for greater growth.”
Sooner than later, start having conversations with family, your partner and a financial planner if you desire. Discussions about money may be challenging, but avoiding them will only create bigger problems down the road. “Regardless of the level of wealth, size or cultural background, every family struggles with successfully handling money issues and the money talks that are essential to avoid failure,” says Sackler. In other words, a little planning today will go a long way toward all the days to come.