Just Starting Out

Here are some top financial priorities for young people getting started in their career:

1. CAPTURE THE COMPANY MATCH

Contribute to your company's 401(k) (and/or other savings plans) only up to the amount that is matched by your employer. A match of fifty cents on the dollar is equivalent to an investment with an instant 50% rate of return! (Note: some employers require you to remain employed for up to six years before you can take all of this matching money with you. It's called "vesting" and your HR department can tell you if it applies at your company. Also, given the choice, it's probably best for a young person to choose "Roth" contributions into their retirement plan, if it's offered (more on that later). If you have questions about which investments to select, you can email me and I'll help.

2. CREATE A RAINY DAY FUND

Save up 3 months worth of living expenses and keep that money in a savings account or CD with your bank. If you are married and your spouse does not work, consider saving up 6 months of living expenses instead of 3.

3. PROTECT YOUR KIDS

For any young parents out there, purchase a modest term life insurance policy to protect your children and/or spouse in the event of your death. 5-10 times your annual income is generally recommended, depending on the specifics of your situation. (Health insurance is also critical, but it's not up for debate anymore. You are legally required to have it!)

4. PAY OFF THOSE CREDIT CARDS

It may seem like this should be #1, given that credit cards have interest rates around 15% or more, but forfeiting a matching 401(k) contribution from your employer is like turning away free money, a rainy day fund can save you from homelessness, and at least some life insurance is critical if you are a parent. After these essentials, use every spare cent to make large payments until your balance is paid off, then make sure to pay off your balance in full every month. If you have a supportive and financially stable family support group, you could talk to them about bearing the risks of #2 and #3, so that you can work on paying off credit card debt right away. If not, don't chance it and just make the largest payments that you can at this point.

5. OPEN A ROTH IRA

Money that you save for retirement at this young age has the most time to grow and compound. Typically, younger people benefit from paying taxes on their money up front, then letting the account grow tax free. This is the "Roth" option. If you are already taking full advantage of your employers matching schedule, and they offer a Roth option, you could either increase the amount of your Roth deferrals from your paycheck, or if you prefer not to involve your employer in everything, consider opening your own Roth IRA and contributing up to $5500 in 2015. (Income limits apply is some cases: http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2015). Another benefit of opening your own Roth IRA is that you can take contributions back out (but not earnings), without penalty. This is often helpful for young first-time home buyers.

Open a ROTH IRA ONLINE Now

6. SAVE MORE TOWARDS THAT DOWN PAYMENT

In addition to your ROTH IRA, many workplace retirement plans will allow you to spend up to $10,000 from your account for the purposes of buying your first primary residence. Alternatively, some plans may allow you to take a loan from your own account, paying interest to yourself instead of a bank, to make a down payment. If this applies to you then it makes sense to start contributing more into the plan for this purpose. If not, you can still start your own individual savings account or, if the purchase is more than five years in the future, an individual investment account. Saving up enough to own a home can take years of diligent saving.

For some people, renting might make sense for decades, or even their entire life. If you want to buy, keep this in mind: a 20% down payment can help you get a lower interest rate and avoid paying mortgage insurance. Also, it's usually best to get a fixed rate mortgage over 15-30 years.

Open an investment ACCOUNT ONLINE NOW 

7. SAVE FOR COLLEGE FOR YOUR KIDS

If you don't have kids, but you know you want to eventually, you can actually start savings for their college before they exist. Simply open an account listing yourself as the beneficiary, then change the beneficiary to your child after they are born. If you have kids already, it's important to start saving immediately. It's critical to save money early, so there is enough time for investing in the stock market to be appropriate. If you wait too long, it would not be prudent to take much risk and your contributions won't grow very much before they are needed to pay tuition. Each state offers it's own 529 college savings plan, so you should be able to search the web to find yours and setup automated monthly contributions. It's also a good idea to investigate how your 529 assets may impact financial aid eligibility.

8. PAY DOWN STUDENT LOANS AND OTHER DEBTS

Once #1-7 are taken care of and you own a home (should you choose to be a homeowner), you can focus on accelerating payments to reduce your student loan debt and car loans. If your loans have interest rates below ~5%, you might actually do better to stick to the standard payment plan and invest any excess cash you were going to use for accelerated payment. This is typically true of fixed rate home mortgages as well.

9. SAVE AND PLAN

If you reach this point in the priorities list, than congrats! You are no longer a newbie. It might make sense to schedule time with a financial planner to review your long term plan and ensure that your investment portfolio and savings schedules will meet your goals, your insurance policies are adequate, and you have a basic estate plan in place. It also might make sense to rollover any old retirement plans that you had with previous employers.


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Middleton Advisory LLC is a Maryland Registered Investment Advisor. No part of this page is meant as tax or legal advice.
Investments which are not FDIC insured involve the risk of losing principle.