Contributed by: Josh Golden
Edited by: Kelsey Arvai, CFP®, MBA
The Emerging Wealth Series
Iris Hayes and Josh Golden join The Center for the summer. This series is a summer intern-led exploration of the values, behaviors, and trends shaping the future of wealth.
As a young professional (YP) emerging in the financial planning industry, this topic is top of mind for many, including myself and my peers. By being aware of your current finances, YPs have a tremendous opportunity to start investing in their future. It’s as simple as creating a budget for all sources of income and expenses. By acting early, you can build healthy money habits starting with an emergency fund (typically 3 to 6 months of liquid cash on hand). Before you can think about putting money aside to fund your financial future with investment vehicles, such as a Roth IRA, you first need to figure out your budget. Proper budgeting, forward-thinking, and starting to plan for retirement are all the main aspects that YPs should be thinking about.
When thinking of financial stability, a budget is the most efficient way to identify your sources of cash flow, money coming in, and money going out. This is crucial because the plan helps you accurately interpret your finances, enabling you to spend within your means. A trusted model to base your budget on is the 50/30/20 rule. This model is based on your total gross income. Ideally, 50% of the income would be earmarked for life expenses, 30% for lifestyle expenses, and 20% for savings (short-term and intermediate) and investments (intermediate and long-term). One thing that has worked wonders for me is thinking about the opportunity cost of the things I want to purchase. This means that I might ask myself, would I be better off in the long run with a new pair of jeans or $60 earning interest in my savings account? You could go further and equate $60 to three hours of work (assuming you make $19/hour). This puts into perspective the importance of intentional spending and weighing your options before buying those new pair of Abercrombie & Fitch Jeans.
Another important topic to discuss is credit. Credit is the ability to pay for things without having the money immediately and with the promise of repayment in the future. Credit scores are used by landlords, employers, and loan companies to assess your credit health. Therefore, it is essential that you systematically monitor your score to optimize your opportunities. The primary consideration when managing credit cards and credit scores is making timely payments, maintaining a zero balance, and keeping your spending at or below 30% of your credit limit. Keeping all of these in mind is what can trouble people the most. This goes with what has been discussed so far in the importance of creating a budget. That plan will ensure everything in your financial life goes as smoothly as possible. A great way to maintain a good credit score is to use less of your available credit limit. A good rule of thumb is 30% or less of your total credit limit. In an ideal world, you carry a $0 balance and completely pay off your card each month. By doing this, you never run the risk of spending more than you can afford. Another strategy for credit building is putting your gas and phone bills on your credit card. This system helps build positive saving behavior, a good payment history, and a good credit record.
For young investors, I believe a Brokerage Account, Roth IRA, or IRA is a great place to start your investment journey. Before doing so, it’s important to establish emergency savings. Emergency savings are often overlooked due to the pressure to keep up with the narrative that investing early, and often, is the most important. Yes, this is true, but there is a balance between taking care of your current self and future self.
The younger you expose yourself to the market, the higher the investments will compound and help you fund your current needs, future goals, and overall financial independence (retirement). Think of investing like planting a tree; you start with a seed, which represents your initial investment, and you monitor it over time and see how it grows. The growth over time from the tree is like your investments compounding. I feel it is best to be exposed in the market as early as possible because it is all about your time in the market, not timing the market. Better returns, consistency, and less worry are all factors of long-term investing. When comparing this to short-term speculation, you deal with heavy fee and tax ramifications as well as the highest form of volatility. The “get rich quick” mentality is flawed and often results in investors being burned by trying to time the market perfectly. Results and studies prove that investing for the long term is the most effective way to let your money work for you.
Overall, YPs have a lot to think about when it comes to their financial future. Allocating current expenses, building prominent credit, and starting to save for retirement. By spending time on each of these aspects, they will have a healthy financial future. Your future self will thank you for starting your investment journey now because making informed decisions that consider both your current and future needs helps you live your dream life, not just in retirement. Think of yourself when you turn 70 years old; what do you want to think back on when you look back on your life? You have the chance now to set your future self up for success; what are you waiting for?
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.
