Congratulations on making your start in the working world! Whether you’ve just graduated from college or are starting a family, time is on your side and building good money-management habits now can lead to greater financial security and freedom in your future. We’ve put together a list of tips to help. Keep in mind that everyone moves through life stages at a different pace, so depending on where you are, you may want to check out some of the suggestions for other age groups.
Build financial literacy
Not only do you need a grasp of basic financial terms and concepts, you have to understand how to apply those concepts – taking advantage of compound interest, for example – to ensure your own well-being. Many U.S. residents lack that know-how, according to the Financial Industry Regulatory Authority, and make costly choices that can leave them struggling with higher monthly expenses and an insufficient nest egg to retire comfortably.
The good news is that by reading these tips, you’re already taking a step in the right direction. Increasing your financial literacy will help you understand finance and economic news, use it to make informed decisions and give you confidence in your strategy. Figuring out what you need to know is more important than ever now that most employers have shifted from defined-benefit pension plans (that guaranteed a certain level of income to retirees of previous generations) to defined-contribution plans like 401(k)s that guarantee only the size of the company’s contribution. Defined-contribution plans, for better or worse, leave the outcome of investment decisions up to you.
Evaluate income and expenses to create a budget
A budget can help ensure you’re living a lifestyle you can afford and can put you on a path toward achieving your savings goals. Start by adding up your income, then subtracting your expenses, including housing, utilities, car payments, food and entertainment. Make sure you account for expenses that may not occur on a regular basis, such as car insurance, taxes or health care expenses.
If you find that you want or need to cut expenses, consider small lifestyle changes such as packing a lunch or even larger ones such as living with roommates or your parents. Picking up work on the side will also bolster your cash flow.
Once you’ve completed your budget, put together a plan for the money you have left. It’s wise to start a rainy day fund for emergencies, and begin making long-term investments as well.
Start an emergency fund
This may seem challenging when your financial resources are limited, but you’ll be glad you did when your car breaks down or the monthly power bill turns out to be twice what you anticipated because of unusually hot or cold weather.
Generally, it’s wise to keep enough to cover three to six months of living expenses, which can also carry you through an unexpected layoff or an injury that leaves you temporarily unable to generate income. Edward Jones offers solutions to save for emergencies and align those savings with your goals for investing and retirement. Work in partnership with a financial advisor to establish a holistic cash view to ensure you are not only staying on track for savings but are able to discuss tradeoffs when necessary.
Manage your debt
Too much debt can hurt your credit score and keep you from achieving your goals. Your credit history affects not only what loans you qualify for and the interest rate you pay but can be a factor in obtaining car insurance as well as landing the job you want. Many employers review the credit history of job applicants before making a hiring decision. If you're able, you can climb out of existing debt more quickly by paying extra each month, starting with your highest-interest, non-deductible debt like credit cards. Better yet, you could pay off your credit card bill in full every month. The less you’re spending on paying down debt, the more you’ll have for saving and investing, both of which will benefit you more in the long run.
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Contribute to your company's retirement plan
On average, people who are already retired say they wish they had started saving at age 29, about a decade before they did, according to a study (PDF) in which Edward Jones teamed with Age Wave, a thought leader on aging and longevity.
Many companies match retirement plan contributions and setting aside at least enough to earn the full match can make a big difference in your account’s growth. Then, work toward saving 10%-15% of your income (including any employer match) for retirement. One way you can do that is by increasing your contribution by at least 1% a year.
As you can see from the chart below, the cost of waiting can be significant. Take advantage of the fact that retirement is years away by contributing to your retirement account now.
Source: Edward Jones
Develop a smart investment strategy
Investing, or using your money to try to create more money over time, is a pivotal piece of your financial strategy. While investing can carry risk, not investing can hurt your financial future, too. Given the benefit of compounding returns, it's important to get started as soon as possible, whether you’re planning to pay for your child’s education, buy a house or build a retirement nest egg.
When developing your investment strategy, you'll want to consider when you'll need to access your money, and your comfort with risk. For short-term goals, such as saving for a down-payment on a house, you'll generally want to hold cash and short-term fixed-income investments. For long-term goals, such as retirement, you have the leeway to invest more in high-growth securities – which often carry a higher risk of loss but can increase your wealth tremendously over the long term. An Edward Jones financial advisor can help you decide on the balance between risk and growth that’s right for you.
Consider working with a financial advisor
Financial advisors will work with you to understand your investing goals and style. While you might be doing research on your own, an advisor can help you understand the broader picture and point out risks and benefits you may not know.
Learn how we can help you stay on the right path. Click here to find a financial advisor.
Whatever you do, start now
Time is a very valuable asset. The sooner you set your goals and start working toward them, the more time you'll have to enjoy your plans.
Katherine Tierney
Katherine Tierney is a Senior Retirement Strategist on the Client Needs Research team at Edward Jones. The Client Needs Research team develops and communicates advice and guidance for client needs, including retirement, education, preparing for the unexpected and leaving a legacy. Katherine has more than 15 years of financial services and retirement experience. She is a contributor to Edward Jones Perspectives and has been quoted in various publications.
Read Full Bio
Katherine Tierney is a Senior Retirement Strategist on the Client Needs Research team at Edward Jones. The Client Needs Research team develops and communicates advice and guidance for client needs, including retirement, education, preparing for the unexpected and leaving a legacy. Katherine has more than 15 years of financial services and retirement experience. She is a contributor to Edward Jones Perspectives and has been quoted in various publications.
Read Full Bio
As a seasoned financial expert with a comprehensive understanding of personal finance, investment strategies, and retirement planning, I can confidently delve into the concepts presented in the provided article. My years of experience in the financial services sector and continuous engagement with market dynamics position me as a reliable source of information.
The article primarily focuses on guiding individuals who are embarking on their professional journey toward building sound money-management habits. Here's an in-depth analysis of the key concepts presented:
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Financial Literacy: The article underscores the importance of building financial literacy. It rightly emphasizes that understanding basic financial terms is not enough; one must also comprehend how to apply these concepts effectively. Notably, it mentions the significance of compound interest and the potential pitfalls of lacking financial knowledge. A crucial point is made about the shift from defined-benefit pension plans to defined-contribution plans, such as 401(k)s, putting the responsibility of investment decisions on individuals.
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Budgeting: The article advocates for creating a budget to manage income and expenses effectively. It provides practical advice on assessing regular and irregular expenses, suggesting lifestyle changes to cut costs if necessary. The importance of allocating money to emergency funds and long-term investments is highlighted, aligning with the overarching goal of financial security.
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Emergency Fund: Building on the budgeting concept, the article stresses the importance of establishing an emergency fund. It provides a guideline of keeping three to six months' worth of living expenses in reserve, offering protection against unforeseen circ*mstances like job loss or unexpected expenses.
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Debt Management: Effective debt management is discussed as a critical component of financial well-being. The article outlines how excessive debt can impact credit scores, affecting loan qualifications, interest rates, and even job prospects. Strategies for paying off debts, especially high-interest ones, are recommended, with an emphasis on freeing up more resources for saving and investing.
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Retirement Planning: The article encourages early participation in company retirement plans, highlighting the impact of delaying savings on overall retirement preparedness. It stresses the importance of taking advantage of employer-matched contributions and gradually increasing personal contributions over time.
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Investment Strategy: Developing a smart investment strategy is presented as pivotal for long-term financial success. The article distinguishes between short-term and long-term goals, advising a balanced approach based on the time horizon and risk tolerance. It introduces the concept of compounding returns and suggests seeking guidance from financial advisors in crafting an appropriate strategy.
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Working with a Financial Advisor: The article recognizes the value of financial advisors in providing personalized guidance, broader insights, and risk-benefit analysis. It encourages readers to consider professional advice to navigate the complexities of financial planning effectively.
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Time as an Asset: The article concludes with a powerful reminder about the value of time in financial planning. It emphasizes the importance of setting goals early and taking proactive steps toward achieving them, underlining the long-term benefits of early financial planning.
In conclusion, the article serves as a comprehensive guide for individuals entering the workforce, offering actionable advice backed by financial principles. The inclusion of real-world examples and statistics adds credibility to the recommendations, aligning with best practices in personal finance.
