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The Most Important Things Young Professionals Should Know About Personal Finance

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Man holding piggy bank

If you’re part of GenY, you know debt is a big issue. Two-thirds of college seniors who graduated in 2011 had student loan debt, and once graduates get into the workforce, this debt can cause financial stress.

Credit cards and auto financing cause more serious problems. After graduation, credit card balances can easily balloon as you struggle to get by on skimpy paychecks. Tack on a car loan or lease and you could be looking at big trouble.

With any luck, your post-college financial struggles will ease as you approach 30 and start getting decent salary increases. This is when you should be looking to buy your first home and start seriously saving for retirement.

Strategies for becoming financially fit

To reach your late 20s or early 30s in reasonable shape for your financial goals, you should:

Focus on your career

Your primary source of wealth will most likely be employment compensation. Continue to invest in your ability to earn more money.

Don’t expect to live like your parents

It took them 25 or 30 years in the workforce to achieve their current standard of living. If you’re eating out as often as they do or taking equally extravagant vacations, you’re probably spending too much. (Click here to Tweet this thought.)

Drive a basic, safe and reliable car

The money you’d spend on the high cost of financing, maintaining and insuring a fancy car — whose worth depreciates quickly — should be saved for a down payment on a home.

Handle credit cards with care

Use a debit card, partly because you can get cash back on purchases with some cards. Using a debit card also makes you a more careful spender, because you know the money is coming straight out of your checking account.

If you prefer to use a credit card because you earn frequent-flier miles, every time you use your card, subtract the sum from your checking account balance. That way, when the monthly credit card bill arrives, you know you’ll have enough to pay off the entire bill.

Don’t necessarily rush to pay off student loans

If the interest is low and tax-deductible, your money can work harder elsewhere. Increase the contributions to your employer’s retirement plan to get the full matching contribution and earmark the rest for a down payment on a house

It’s never too early to think retirement

Saving for retirement can be the biggest investment you’ll ever make with your earnings. Start by setting an intermediate-term goal of accumulating retirement savings equal to two times your annual compensation. Once you hit that milestone, the financial wind will be at your back, helping you reach your retirement savings goal.

Here’s an illustration:

Suppose you expect to eventually earn $80,000 a year. Looking ahead to retirement, you estimate that — in addition to Social Security — you’ll need $45,000 a year from your portfolio in today’s dollars. To generate that $45,000, you’ll need a $1 million nest egg, calculated in today’s dollars.

Once you reach a certain level of assets, most of your savings should come from investment returns. The breakthrough occurs at around two times your income. Let’s say your salary has reached $80,000, you’ve amassed $160,000 in savings, you’re saving 15 percent of your pretax income each month and your investments earn seven percent a year.

Over the next 12 months, your $160,000 portfolio would grow by $23,620. Your monthly savings would account for $12,000 of that growth. The other $11,620 would come from investment gains. In other words, you’ll have reached the crossover point where the biggest driver of your portfolio’s growth is now investment earnings, not the actual dollars you save.

But you’re not done yet…

You should keep saving money. That sacrifice will be handsomely rewarded as your portfolio starts to grow. Using the assumptions above, your portfolio would soar from $160,000 to more than $542,000 in 10 years. True, part of this gain would be lost to inflation. But your salary should also rise, allowing you to squirrel away more money.

That still leaves the initial goal of accumulating two times your income, which can take 12 to 15 years. The earlier you start the better. If you’re close to two times your pay by your early 40s, you’re in good shape.

As you strive to amass that sum, your top priority should be funding your employer’s 401(k) plan. In addition to the initial tax deduction and continuing tax deferral, you’ll likely receive a matching employer contribution, which will help speed your portfolio’s progress.

If you can, save outside your employer’s plan by funding a Roth individual retirement account. You won’t get an initial tax deduction, but you will enjoy tax-free growth. A Roth also offers flexibility; you can withdraw your contributions without a tax hit or penalty. Your Roth could double as an emergency reserve or as your house down payment fund.

What are your strategies for staying financially fit?

Mark F. Toledo, CFA is a partner with Chicago Partners Wealth Advisors. Mark has provided investment and wealth management advice to individual and institutional investors for more than 30 years. Mark works with clients to help them define and then achieve their goals through effective wealth management.

Brazen powers real-time, online events for leading organizations around the world. Our lifestyle and career blog, Brazen Life, offers fun and edgy ideas for ambitious professionals navigating the changing world of work.

  • jrandom421

    Basically, income should exceed outgo.,

  • Barbara Mckinney

    It’s very important to save your money. Stop spending huge amount to some stuff that don’t really matter or you don’t really need. And most importantly, don’t stop working hard to reach your goals.

  • Karly K

    A lot of the advice in this column, while great, mentions saving up for a down payment on a house. I’m 24 and already own a house. So I would think my next big goal would be to get rid of my student loan debt. With some interest rates at 6.5%, they’re not exactly ‘low-interest.’ Am I wrong to try to pay them off in the next 2 yrs? (I have approx $45K in loans and 2 yrs is reasonable to do so)

    • eyeRollz

      Karly, do you have an emergency fund established to deal with unexpected financial hits? It is suggested to have at least 3 months worth of expenses saved up.

  • Rob

    This advice is OUTDATED and written by someone over 40 years old. Sorry, but this is NON-ADVICE. Wealth is not derived solely from a J-O-B or “career” as you would call it. It is derived from having one or many streams of passive income. What idiot would waist 20-30 years of their precious time making someone ELSE wealthy, meanwhile you get OLDER and unable to enjoy the money you accrued.

  • ep

    “This is when you should be looking to buy your first home and start seriously saving for retirement.” Wow. Fuck you.

  • Chelsea Watkins

    Yeah, I’m with Rob. Also, 401K’s are taxed upon withdrawal, so you’re assuming the tax rates stay the same. And that the market doesn’t crash again. I agree with diverting income to savings/investments. As a financial planner, I recommend 30% (10% long, 10% medium, 10% short), then you can decide what to do with the money – start your own company, invest in the market, buy cash flow positive real estate, etc.

  • Ruben

    I do appreciate the advice. But this was clearly done by
    someone making a decent amount of money. The reality is that there is a
    cap on the total amount of money that is available…only a few % of people have
    it and have used it to “rig” our democracy in their favor. Until we accept this
    and do something to correct it, no amount of financial planning is going to
    help save money that is not available.

    I will turn 30 years old in 2014. I make $80,000 a year,
    same number this author used as an example for the “suppose you expect to
    eventually earn $80,000…” In order for me to have gotten a decent job to make
    $80,000 a year, I needed to go to school…that means I had to spend money to
    train my skills. I don’t think I would have gotten such a good job by going to
    a community college so I went to a private school and now I have debt of over
    $120,000. I have not gone on a trip or vacation in over 7 years. I don’t spend
    on luxuries and I cook at home almost every day.

    Let me break it down:

    I pay $1200 for a crappy one bedroom (San Francisco)

    $1300 in student loans

    Already it’s a $2500 absolutely necessary expense, per month.
    Mind you, I have tried to lower my student payments as low as it can go. Oh
    btw, Sallie Mae loans in the beginning were at a 3.2% apr and then changed to 11.2%
    apr.(how fair is that?) All my credit cards are below that amount…Must have a
    cell phone for work, must have high speed internet for work, food expenses in
    San Francisco is outrageous (even at the farmers market), electricity (Can’t
    qualify for a discount cause I make “too much money”). On top of that, here in California we have
    Federal Taxes, State Taxes, Sales Taxes, Social Security…basically any kind of
    tax, we have it deducted from our paycheck. ($641.42 per month gone).

    Yes I have been looking for apartments that are cheaper, If
    anyone tells you that the average rent in San Francisco is below $1000, they
    are absolutely incorrect. Been here for 4 years, constantly looking for a
    cheaper apartment and I’m still looking.

    Yes I lived in the surrounding areas, like Oakland and San
    Mateo. The rent was not as cheap and by the end of the month the daily travel expenses
    added up to even more than my current rent. Plus it was incredible inconvenient
    when both Bart and CalTrain decided to increase their fare.

    No I will not move to another State. 1) I don’t think
    someone would appreciate me telling them where to live. 2) Other states would
    not be able to pay me what I get pay here in San Francisco. 3) At my current
    income, if I can’t even take a vacation, where would I get the money to move to
    another state? 4) I’m happy around my family, it would be really shitty if I
    had to move from them just because it’s economically sound. Nobody should have
    to move and leave their family to make money.

    No, I can’t live with my parents. My father lives in South America and is
    unemployed and my mother makes even less money than me, is a single parent and
    has financial difficulties of her own. Plus I would never want to burden them
    with my issues… If your parents paid for your school you are very, very lucky.

    Meanwhile, there are people making $350,000 a year. What
    kind of position pays that much money? I can tell you right now, it’s not a career
    in science, or math, or Biology, or anything that benefits the advancement of
    our society. And what pisses me off the most, is that their taxes are
    significantly less than people who make less than that.

    There is a huge income gap and those making big money are
    chocking the rest of the people. You are kidding yourself if you think saving a
    couple of bucks is going to make a difference. We, as a society, need to
    rethink our priorities and begin to make changes to the way our democracy is
    being run.

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