Congratulations! You have graduated high school, and this is the decade where you may finish your education. Maybe you will finish your bachelors, maybe your masters. Maybe you go on to Med school and you will still be in school or residency at the end of your 20's. In any case, here are a few financial and life considerations for you.
Build your emergency fund: One of the first orders of business in your financial world is to make sure you have enough liquid cash to weather any short-term storm. This is typically seen as three to six months’ worth of your basic living expenses. Think in terms of three months if the job that you have is more stable with predictable revenue. If you are in an entrepreneurial role, like sales or small business ownership, think closer to six months.
Finish your education and pay off your debts: If you have finished your bachelor's or master's degree with any college debt, focus on paying this off. We have a phenomenal debt reduction calculator that we can send to you at your request, which can show you the most advantageous place to allocate any additional cash flow as you seek to reduce your debt as fast as possible. One potential exception to this is a home mortgage with extremely low interest rates. One can make the case that if a bank is loaning you money at 2 1/2 percent when money market funds are at 4%, you might be wise to keep additional cash close to the vest.
Learn all you can about your company benefits but enroll selectively: This is where you join a company, and their HR team shows you all the different benefits that you could qualify for. Word to the wise: don't sign up for everything. This is where talking with your parents or a trusted friend can be helpful. For example, if you have a pile of credit card debt, it might not be the most prudent time to put as much cash as possible into a company 401K plan that you cannot generally touch until you are close to 60 years old. Choose your employer benefits wisely and let us know if you have questions.
Get on a budget: Here again, we have a great calculator that can show you at a high level how much of your take-home pay should be allocated to which general categories: housing, utilities, food, etc. Whether you have a high-level understanding of where your funds go, or you track every penny every month, some understanding is essential here. This leads us to the next item…
Start saving 10% of your income and increase by 1% every year: Like many of the things on this list, this is a general rule of thumb and not a prescription for every individual. But suffice it to say, the sooner you build the habit of living on less than you make, the better off you will be down the road. One of the best ways of doing this is to pay yourself first in the form of savings. Depending on where you are at in your emergency fund growth, this savings might go there, or it might go to an intermediate investment, or it might go to your 401K or retirement accounts elsewhere. But the main point is that it doesn't go right back into your checking account and get spent on Starbucks.
Get life insurance and disability insurance: You would be surprised to see how many folks run into health issues so early on in life that they are not able to get these benefits later. This happened to me when I was 35 years old. This has happened to the kids or grandkids of several of our clients way sooner than this. And don't depend on the employer sponsored life insurance to replace your income if you pass away. This amount is usually equivalent to 1-1.5 times your salary. And no, it does not matter if you are not yet married. It doesn't matter if you don't yet have children. The fact is that you have a future income to protect, and people around you will eventually depend on that income. Life insurance companies understand this, and so while you can't get a gazillion dollars of coverage, you can get enough that your future spouse and future kids wouldn’t be left high and dry after you pass.
Strongly consider renting instead of owning a home: These are fighting words in some parts of the country. But the fact remains that when the water heater goes out in your rental, your landlord has a problem. When the water heater goes out in your house, you have a problem. (Don’t ask me how I know). And odds are in your 20s, you may not have yet decided where you want to live for the next 10 years. So many folks are fond of saying that your home is your biggest investment. We challenge you to do your own math on this, factoring in a potential move five years down the road and realtor commissions involved in selling and buying, and see if you are indeed better off owning. We remain skeptical.
Gather experiences and mentors and put fire extinguishers next to all the bridges you cross: You are familiar with the concept of burning bridges. Please don't make this a habit. Give every employer (and for that matter, professor, or teacher) your best efforts every time. Paraphrasing Jon Acuff, when you leave a company, the finger held high should be your thumb (as in “thanks for everything”), and nothing else. Build a list of people that would run through a brick wall for you, either on a job reference, or getting into a great school down the road, or when you go to look for investors for your small business. If you decide to come back to the family business, you should be welcomed with open arms, not only by your parents and grandparents, but also by their longtime key employees. You should have the reputation that makes them excited to work with you like they have with those who've gone before you. And remember, every older entrepreneur admires hustle when they see it in the rising generation. Use this to your advantage.
We hope this list has been helpful, and we look forward to the next topic in the series, what to focus on in your 30s. If you know of somebody who would benefit from reading this, would love for you to share it with them. Let us know what we missed in this post. After all, we are all lifetime learners.
Any opinions are those of Tim Weddle, Financial Advisor, and not necessarily those of Raymond James. Any information is not a complete summary or statement of all available data necessary for making a decision and does not constitute a recommendation. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company. Prior to making an investment decision, please consult with your financial advisor about your individual situation.