Personal Finances - Getting Off To A Good Start
Personal Finances - Getting Off To A Good Start
Vincent A. Schiavi, CFP®, CPA/PFS
The hurdles faced by today’s young adults to provide for their own financial security, and in some cases the financial security of their young families, are considerable. Technology is chipping away at more and more jobs, making career choices far more uncertain. Job hopping and career switching are trends that are accelerating. Against this backdrop, individuals have more of a responsibility for getting their financial house in order. They can no longer rely on working for one employer for thirty years, collecting a pension and social security and riding off into retirement bliss.
Let’s go over some building blocks to building your financial security.
Long-term Disability Insurance - The young and employed need this coverage. Confirm the existence or non-existence and the extent of any coverage through your employer. Even if your employer offers coverage, it’s probably not portable once you leave the employer. Therefore, having some private long-term disability insurance is recommended. Yes, social security does provide some disability benefits for covered individuals, but its availability has been inconsistently awarded.
Life Insurance – If someone depends on you for financial support and you have not built up the savings and investments to provide that support, life insurance can fill the gap. Get the most coverage for your premium. That means term life with a guarantee of reasonable premiums until any children are independent. Don’t mix savings and insurance. Types of policies with a savings element include whole life, universal life, variable life, and variable universal life. A 30-year-old male in excellent health can buy $1 million of term coverage (no savings element) for 20 years at a cost of about $36 a month. Policies with a savings feature can cost several times that amount. Your surviving beneficiaries will only care about the extent of the death benefit, not whether you paid more than necessary to build savings in the policy. I repeat, maximize the death benefit and minimize the premium.
Student Loans – Attack them. Pay off the highest interest rate loans first. Look to consolidate to a lower rate whenever possible. This is fast becoming the biggest hurdle for young adults in establishing financially secure households. You have colleges, Congress, and uniformed consumers to thank for this mess.
Housing – Don’t rush into buying a home. Renting is not throwing your money away. There is a time to rent and a time to buy. Build up your down payment savings to get your loan to value percentage below 80%. This should avoid the need to pay for Private Mortgage Insurance (PMI), which only benefits the lender, not you. Buy a home you could live in for ten years, even raise a family in, if that is your goal. Owning a home can help build financial security, just understand that maintaining a home is more expensive than you think.
Credit – Pay all bills on time and in full. If you want something that you can’t pay cash for now, wait until you can. The exceptions are autos, a home, and reasonable student loans.
Savings – Spend less than you make. Establish a lifestyle that is below your means. Build an emergency savings fund to meet unexpected, but likely, expenses such as auto replacement, and vehicle and appliance breakdowns. You want trouble? Establish a lifestyle that not only can’t be fueled by your current earnings, but that requires adding debt to the fire. At a minimum, save 10% for retirement and 10% for other needs. Some young people can and should save even more. When I was young I saved half my net pay to save for a house and career flexibility. What are your priorities?
Retirement Savings – Start now. If your employer has a 401(k) plan, enroll in it. Take full advantage of employer matching – no excuses. If you are in a low tax bracket and a Roth 401(k) option is offered, make contributions to it. While no tax savings will be immediate, future growth will not be taxed. If your tax bracket is high, make contributions to the traditional 401(k) account and defer current income taxes.
Investments – Allocate your long-term savings to global equities (stocks). Build savings for down payments and an emergency fund using an online savings account (yield ~1%), and link it to your personal checking account.
The above recommendations are general in nature and should naturally be tweaked to coincide with your personal circumstances and goals. Understand that your future financial security is more a function of a disciplined approach to personal finance than it is to fate. Yes, you will be thrown some difficult to hit curve balls, and you may even strike out a few times with jobs, relationships, and underperforming investments, but ultimately your financial success will be a result of your own actions - make them count. The bottom line: Your future you is counting on you to secure your future.
About the author: Vincent A. Schiavi has been practicing financial planning and investment management on a Fee-Only, fiduciary basis since 1983. He has been recognized locally and nationally for his commitment to client-centered, objective advice.