Smart Financial Tips for MilennialsSeptember 16th, 2020 by Jim Allen
When it comes to your finances, it is never too early to start planning. By developing good financial habits early and using the magic of compounding, even small amounts of money invested can grow to a significant nest egg over time. This article offers some smart financial tips for those under the age of 40.
Start a systematic savings plan as early as possible: Consistent savings is easy if you “systemize” the process. Setting up a monthly transfer from your bank account to a savings or investment account is a great way to “set it & forget it”. You should also strive to have 401(k) contributions made from each paycheck to start saving for your retirement. Ideally, try to save about 10% of your income into a combination of both savings and retirement accounts.
Take advantage of your employer matching contribution: While it is smart to save for retirement as early as possible, you likely will also have shorter-term goals like buying a home, getting married or starting a family. So, it does not make sense to tie up all your savings in a retirement plan. Try to fund your short-term savings goals as well. But it is smart to put enough into your 401(k) to take full advantage of your employer matching contribution.
Use Roth IRA & Roth 401(k) options: If you are going to save for retirement during your early working years, consider contributing to a Roth option, if available. While the funds going into either a Roth IRA or Roth 401(k) aren’t tax deductible, the money will grow tax deferred and can be pulled out tax-free after age 59-½. Plus, you can always pull out your contributions tax-free even before 59-½. It is likely that you may be in a lower tax bracket early in your career, and the loss of the tax deduction isn’t as critical as it may be later when you are more established. To contribute to a Roth IRA, you need to be below certain income levels, but that rule doesn’t apply to Roth 401(k) options.
Invest early and let compounding grow your nest egg: Albert Einstein once famously said “The greatest invention in the world is compound interest.” He also said: “he who understands it earns it, but he who doesn’t pays it.” Compound interest means earning money on your money, and the sooner you start this effect, the more you will earn.
For example, let us look at two people who start with a $1,000 investment account.
• Jane adds $100 to her account every month for 10 years and then stops.
• John starts with the same $1,000 but does not contribute anything else for 10 years. He then starts contributing $100 per month for the next 10 years.
• They both earn the same 7% rate of return on their accounts. So, both John & Jane have contributed $13,000 to their investment account.
• But at the end of 20 years, Jane has accumulated $39,678 while John has only $21,362. Why? Jane let her monthly contributions compound for 10 years longer than John.
Ignore market volatility for your retirement plans: If you are under age 40, you have 20-plus years before you will be tapping into your retirement accounts. You should use your long-time horizon to maximize growth and take advantage of compounding. Because this is long-term money, it does not matter what the markets are doing right now, and you should ignore current market volatility. Do not let noise about what the markets are doing to today cause you to get off the path to financial success.
Take a comprehensive look at your financial plan: Aside from trying to save as much as you can, there are other financial related items that you must address as you get older.
• You need a will and other estate documents like a health care directive as an adult
• If you are married and/or have children you need to look at your life insurance needs
• And, you need to get a handle on your debt.
By taking these small steps now, you will be putting your financial future on secure footing and will be more successful at achieving your financial goals. At Anchor Bay Capital, we can help you by offering financial planning, coaching, and counseling on an hourly basis, using a monthly subscription service, or for a flat planning fee. If you would like some help with your finances, please contact our office for a complementary initial consultation.
Jim Allen, CFP, ChFC is the Director of Financial Planning and a Principal at Anchor Bay Capital. In addition to his 30 years of financial planning experience and his professional credentials, he holds a Master’s Degree in Financial Planning and is a former instructor in the CFP program at the University of California Irvine. He is also the co-author of the book “The Tools & Techniques of Charitable Planning.” Jim can be reached at [email protected]