If you’re a Millennial, know this about financial planning: Time is still on your side, but it won’t be for much longer.
Building the resources you need to help you accomplish what you want in life isn’t complicated, but the sooner you start, the better off you’ll be. If you wait too long, until you are in your 40s or 50s, you’ll have to save and invest a much larger portion of your income.
Here are nine tips to help give you the confidence to shed whatever doubts may be holding you back. The most important rule of financial planning is: Start now and start somewhere.
1. If you are living paycheck-to-paycheck, before you do anything else, stop that. Figure out where you can cut costs, even if it is by a few dollars a week. The best way to do this is to start tracking where you are spending your money. That way you can make changes and set goals around your spending. That will enable you to begin saving right away without having to make more money.
2. Save at least three months’ pay, so that you have a cushion to tap in an emergency. (You’ll soon work on saving more, but start there.) Think about saving your emergency funds in a high-yield savings account where you can earn a higher interest rate than most traditional bank savings accounts offer.
3. Save the maximum you can in retirement accounts, up to the amount matched by your company, or up to the amount you can put aside tax-free in an Individual Retirement Account. Every $500 you save now will be worth more than $6,000 in 45 years at a fairly conservative annual 6 percent rate of return. If you wait until you are 45 to save that same $500, it will be worth only a little more than $2,000 when you retire at age 70.
4. Diversify your investments. Nobel Prize-winning science suggests that diversifying your investments into broad-based stock mutual funds will help reduce your risk. When the market drops, as it is bound to, you may minimize your losses if you are diversified. (Keep in mind that the chief advantage you have when you are young is that your investments have time to recover from a drop in the market. Don’t panic and sell when the market falls.)
5. Invest in low-cost funds. When you are buying mutual funds, keep in mind that the best predictor of a good return is how low the fees are. Remember that $500 that turns into $6,000 by the time you retire? If you invest in a fund that charges 1 percent annually, your $500 will be worth $4,500 at age 70. Aim for low-cost funds that charge less than 1 percent annually to add to your investment portfolio.
6. As you meet your other savings goals and as your income increases, add to your savings outside your retirement account. Having a larger pool of money to invest in something bigger when the time is right is invaluable. That something could be a house, a business or your children’s education. You can use the 50/30/20 rule: 50 percent of your income should go to necessities, like your house and taxes, 30 percent toward discretionary items, like vacations and meals out, and 20 percent toward savings.
7. Take care of the basics for your family. You probably don’t have enough money saved yet to take care of your family if something happens to you. Term life insurance is inexpensive when you’re young. Likewise, your estate plan doesn’t need to be complicated, but you need one.
8. Don’t get fancy. You’ll hear a lot of people brag about the killing they made in the market or the latest hot investment, like cryptocurrencies. Keep in mind that for every successful bet they made, there are a few duds they’ve forgotten or don’t mention. If you want to dabble in risky investments, make sure that you don’t bet more than you can afford to lose. Figure out what level of risk you are willing to take on for your own lifestyle and match investments to that level of risk.
9. Establish a relationship with a CFP® professional. At some point in this journey, you’ll want the benefit of a professional’s advice. Perhaps it’s when you have a child, once you’ve accumulated a small pool of assets, or when you are ready to buy a house. When the time is right, find the right planner for some of the financial complexities of your life.