At every point in someone’s career they can use some financial guidance from starting their first job to preparing to leave the workforce for good. As we get closer to reaching our financial goal the more important the planning process becomes. The focus of this article is to address the financial considerations people in their 20’s-40’s should be addressing. For a typical Family, financial decisions in your 20’s-40’s are very important, but they don’t need to be particularly complicated, to put yourself on good footing for the long run. This list certainly doesn’t cover everything, but it covers many of the big ones!
- Build up an Emergency Savings Account. A balance to cover at least 4-5 months of living expenses. I know the interest on a savings account is not exciting, but it can help to avoid a lot of other problems, such as putting large, unexpected costs on a credit card at high interest rates.
- Protect your loved ones. As you begin to acquire assets and make financial commitment of some kind, whether it is student loans, car loan, marriage, kids, or a mortgage, you need to protect your income. The foundation of a financial plan is Life Insurance. Sometimes this can be purchased through your employer, if you’re in good health purchasing term insurance on an individual basis is usually more cost effective. A good guideline is to have a death benefit of 7-10 times your annual income. If your employer offers disability insurance, be sure to sign up. It is important to protect your income if you are hurt and cannot work.
- Save to buy a home. If you have plans to buy a home in the future, start saving now. Don’t get in over your head with the cost of the home. People often only look at the costs associated with the home purchase and mortgage. They forget about other expenses such as moving costs, window blinds, and utility hook-up fees.
- Start saving for retirement. When you become eligible to contribute to a retirement program at work, a good guide to go by on how much to contribute is 10% of your gross income. If they offer a feature that automatically increases your contribution rate annually use that but be sure to set a maximum rate otherwise it just keeps increasing. Many plan providers also have retirement calculators on their websites that can be good tools to use. One of the best and easiest investment choices are Target Date Funds. They are designed to automatically reduce risk for you, typically every 5 years as you get closer to retirement. They will have a date in their name that coordinates with the approximate year you plan to start taking money out of the account.
- Debt-what’s ok, and what’s not. Debt is something most people have in one form or another. It just needs to be done wisely. A good rule of thumb is that it is OK to have debt on appreciating assets like a business investment or a house. But avoid debt on things that depreciate over time, like snowmobiles and jet skis for example! Avoid credit card debt at all costs because of their higher interest rates. Cars are a bit of an exception, because for most people it is more of a necessity. When it comes to car loans, try to limit your debt as much as possible because for the most part, the value of your car only goes down over time. It can be easy to get caught up in the moment but set a budget and stick to it. If you are buying a house, be sure not to make yourself mortgage poor. By this I mean having such a big mortgage payment you can’t afford other expenses. This is a 30-year commitment and other expenses will come up.
- College Savings.[1] When children become part of your life, it may be time to consider starting a college savings plan. This is typically done using a 529 account. These plans are different state to state, and your state may provide certain tax advantages. Details of tax advantages can be found on your state’s 529 website. You should be able to set up a 529 account directly on the state sponsored plan website which helps keep account fees down.
- You’ve checked all those boxes, now what? Once you have addressed the above items and you have a surplus cash flow, it may be a good time to check in with a Financial Advisor about next steps.
- As you enter your 50’s things get quite a bit more complex. You are now on a much shorter timeline to your retirement date. It is important to make sure you understand what your lifetime of savings will do for you. It may be a good idea to meet with a financial advisor to evaluate what type of financial plan is most appropriate for you.
If you have additional questions on these or other topics, please reach out to our team here at Independence Financial at 920-236-6587. We are here and happy to be of service!
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Registered Representative of, and Securities and Investment Advisory services are offered through Hornor, Townsend & Kent, LLC, (HTK), Registered Investment Advisor, Member FINRA/SIPC, 8501 W Higgins Road, Suite 410, Chicago, IL 60631, (847) 518-0040. Independence Financial and other listed entities are unaffiliated with HTK. HTK does not provide legal and tax advice.
The foregoing information is for informational purposes only. This article was prepared from sources believed to be reliable but is not guaranteed as to accuracy and is not a complete summary or statement of all available data. Please consult a professional advisor prior to implementing any of the strategies discussed
[1] Investing in college savings plans do come with some risk. There is the risk, as with most college savings plan investment options, that you may lose money, and your account value may fluctuate with market conditions or it may not grow enough to pay for college. Consequently, there is no guarantee that the money in the plan will be sufficient to cover the higher education expenses of the beneficiary.