Starting Early With Financial Planning
By Glenn Curtis
Young people have it made. They have their whole lives ahead of them, and ample time to plan for retirement. The trouble is that few actually plan. Even those that save a decent percentage of their take-home pay rarely plan for the future and fund tax advantaged accounts like they should. But the good news is that you can achieve your financial goals if you start early enough.
To that end, below are some tips that will help you have a comfortable retirement.
How much should you save? There is no perfect answer to this question. However, you should save as much as you can without adversely impacting the quality of your life. In other words, it is OK to indulge in a night out once in a while, or a latte from Starbucks - as long as it doesn't become such a regular occurrence that you aren't left with money to save. (To read more, see Enjoy Life Now And Still Save For Later and The Beauty Of Budgeting.)
Ideally everyone should strive to save at least 10% of their salaries each year. That may not always be possible - after all, nearly everyone has months where they can't save a dime. Perhaps you have to shell out for a new washing machine, or for new tires and brakes for the car. When you do have one of those months, however, you should really try to tighten your belt the following month.
Also, consider your spending habits. Do you really need the super sports cable television package, the magazine subscription, the big minute cell phone plan, or the high-end brand name clothes? Sure, when you are young, this might seem extreme, but in the long run, you're building good habits - and saving money in the process.
For example, by implementing a few of the following expenses, you can set yourself on a path to financial success, even if you don't have a big salary.
Reducing cable TV expenses: $15
Coupon savings for both food and consumer goods: $25
Buying generic brand items: $30 (-10% is conservative, assuming monthly food/toiletries cost of $300).
Initiating a cheaper cell phone plan or, better yet, eliminating your home line and just maintaining your cell phone: $30
Buying regular gas instead of premium: $10 to $20
As you can see, a few small savings opportunities can really add up, especially if you put the money you've saved into a retirement account. (To learn more about the benefits of starting young, see Why is retirement easier to afford if you start early?)
Many people live above their means; they lay out big money for that high-end apartment, or build a big house and take on a mortgage that is way over their heads. This is a mistake. Live comfortably but not above your means - no matter what the Joneses next door are doing. If you do otherwise, you are unlikely to have anything left to save at the end of the month and you may even rack up a pile of debt. (To learn more, see Downsize Your Home To Downsize Expenses.)
So many financial advisors recommend using a low-rate loan to consolidate debts and reduce annual interest expenses. This is usually a great idea. But it's even better if you avoid racking up any debt to begin with. Home equity loans range anywhere from 8% and up, while credit card rates are around 20% per annum; running a monthly balance will run you big money. Don't put anything on your credit card you won't be able to pay for at the end of the month. Don't take out a home equity loan unless absolutely necessary, and don't finance appliances or home improvements. In other words, wait until you have the money in your pocket before you spend it. (To learn more, see Digging Out Of Personal Debt.)
Funding Retirement Vehicles
When you get your first full-time job, consider setting up a 401(k) plan. This will allow you to put about 15% of your gross income into the plan. The money will come out of your check pretax, and you won't have to pay capital gains year to year, but rather upon distribution when you are 59.5.
Also, consider funding a Roth IRA. With a Roth IRA you take after tax money, put it into an account, which can be invested in a mutual fund (or stocks or bonds). The advantages to this type of account: You don't have to lay out any money on capital gains each year, nor do you have to pay tax upon distribution. The catch: There are, like the 401(k), some income limitations (consult your advisor as these are based upon tax brackets), however, each individual can currently deposit up to $4,000 each year in their account. That's huge! And over time you can build up a tremendous savings with this vehicle. (To find out more, see Roth Or Traditional IRA...Which Is The Better Choice? and How do I go about opening up a Roth IRA?)
Young people often don't think about taxes, but they should. Before buying a home or living in a certain area, consider checking what the property tax rate is. Perhaps it makes more sense to live in the next town over.
If you are in a job as a consultant, or start up your own business, or have other expenses that are not reimbursed by the company you are working for, those expenses may be deductible.
As for income tax, be sure to apply for any deductions for which you may be eligible.
In many cases, it may be wise to avoid doing your own taxes And to visit a certified public accountant (CPA). Spend the $175 they'll probably charge you, because the odds are they'll be able to identify deductible expenses, or recommend tax advantaged ideas better than you ever could. When all is said and done, paying up for this type of expertise is usually worth it.
Planning for a Family
Whether you are getting married, buying a house, having a child, or making some significant change in your life, you should always re-evaluate your financial situation. Are you saving enough? Will you have enough money to retire, pay for the kids' college or buy that sports car you always wanted when you retire? (To read more on how to plan for these events, see Revealing The Hidden Costs Of Weddings, Get Your Finances In Order and Retirement Savings Tips For 18- To 24-Year-Olds.)
And don't forget to consider life insurance and/or disability insurance. You need to make sure that your family will be taken care of, if, for some reason you are unable to work.
(To read more, check out How Much Life Insurance Should You Carry? and Five Insurance Policies Everyone Should Have.)
Your actions now will have a huge impact in determining how you live in your retirement years. So plan and save now. Enjoy your life, but live within your means. You'll be happy you did!
By Glenn Curtis
Glenn Curtis started his career as an equity analyst at Cantone Research, a New Jersey-based regional brokerage firm. He has since worked as an equity analyst and a financial writer at a number of print/web publications and brokerage firms including Registered Representative Magazine, Advanced Trading Magazine, Worldlyinvestor.com, RealMoney.com, TheStreet.com and Prudential Securities. Curtis has also held Series 6,7,24 and 63 securities licenses.