Being a young professional comes with new freedoms. You have your first full-time job, a diploma you worked hard for, and new responsibilities. One of these responsibilities is managing your money so you can live comfortably and within your means. Below, we’ll go over four financial planning tips for young professionals, so you can keep your finances in check.
1. Begin Retirement Planning Right Away
After decades of hard work, you’re going to be ready to retire. The last thing you want is to realize you didn’t set aside enough funds for your nest egg, which means you have to continue clocking in to your 9-5. To prevent this from happening, it’s essential you begin retirement planning right away.
Saving for retirement from the day you start your first job out of high school or college can save you hundreds of thousands of dollars in the long run. How is this possible? Thank compounding interest. Most retirement vessels, such as IRAs, 401(k)s, CDs, and high-interest savings accounts, have compounding interest, where you earn interest on your interest.
Using a retirement calculator, you can see just how much you will save if you begin saving at 25-years-old compared to 35-years-old. Let’s say you begin saving at 25-years-old, and place $100 into an IRA with an annual compound rate of 5 percent every month until you reach the age of 65. Once you reach retirement, you will have $162,000, assuming your salary and monthly contributions stay the same.
Now, let’s say you begin saving at 35-years-old, and place $100 into an IRA with an annual compound rate of 5 percent every month until you reach the age of 65. Once you reach retirement, you will have $89,000, assuming your salary and monthly contributions stay the same. You will have almost double the amount of money in your retirement plan by saving ten years earlier.
Fortunately, over the course of your career, you will most likely get raises and bonuses, which means your retirement savings can be much higher than this example.
2. Create an Emergency Fund
In college, surprises pop up all the time—an impromptu birthday celebration on a Tuesday night, a textbook you forgot to order, a parking ticket. While these expenses are often minimal, they can deal a serious blow on a college budget. But if there’s one thing to learn, monetary surprises like these will continue to pop up once you graduate. The only difference is that they often come with a higher price tag.
As a young professional, it’s essential to have an emergency fund. From medical expenses to car problems and home repairs to your child’s field trip to Washington, D.C., these are just some of the expenses you may forget to include in your budget. But with a robust rainy day fund, you can pay for a new transmission or a broken arm surgery without landing in financial trouble. With each paycheck, set aside any leftover money you may have, and make sure it’s in an accessible account, such as a traditional savings account, so you can access it whenever you need it.
3. Pay Off Debt
If you’re like most young professionals, you probably have student loans and other types of debt, such as credit card debt or car loans. These forms of debt all come with an interest rate, which costs you more money over time. To set yourself up for the future, do your best to pay off these debts as soon as possible. This way, you can save up for larger purchases down the road, such as a home, while securing a lower interest rate.
When paying off debt, you don’t have to go crazy. Your 20s and early 30s are when you most likely have the most time on your hands because you don’t have children to attend to. With this in mind, make sure you treat yourself occasionally to a weekend getaway or a relaxing vacation, as long as you live within your means.
4. Set Savings Goals
It’s hard to get anywhere in life without goals. As a young professional, you’re most likely earning your first big paychecks, which is a great feeling. However, it can be tempting to spend it all right away on items you might not need.
Once you start earning money, set some goals for yourself with a goal-setting app or planner. Think about what you want in life. Is it to pay off your student loans in 5 years instead of 10 years? Do you want to buy a new car? How about saving up for a hefty down payment on your first home? These are just some of the goals you may have in mind. Once they’re set, create your budget and make plans to achieve these goals to set yourself up for success!
Wrapping Up
As a young professional, you’re new to this whole “adulting” thing. Once you’re out of your parents’ house, you’ll begin to realize there are many things you need to pay for, such as rent, utilities, groceries, and transportation. That’s why it’s essential you have your finances in order. With these four financial planning tips, you’ll be able to navigate adulthood with ease.
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