Five financial-planning tips for young investors
By Richard W. Paul
Being a young adult can be exciting — enjoying the early stages of a career, having your own place, making new friends — but it can also be confusing and stressful. One of the reasons is money and learning how to manage it.
In a financial literacy survey of more than 5,500 young adults, the National Endowment for Financial Education and George Washington University found that only 8 percent of those ages 23 to 35 showed a high level of financial knowledge.
For those just starting their careers or beginning to save for their retirement, the financial planning world can be quite daunting. One flaw of our education system is the lack of preparedness it provides for younger investors just starting off. When it comes to stocks, bonds, 401(k)s, and debt, the task of planning is overwhelming to most.
I offer five financial-planning tips for young investors.
Automate your contributions
The easiest way to invest is to automatically direct a portion of each paycheck into your investment accounts. You’ll quickly get used to having less money to spend each month, and your savings will grow automatically. And if your employer offers a match into your retirement account, be sure to take advantage of that. That’s free money.
Take control of your health
You might think your health doesn’t fit into a discussion of financial planning, but being proactive when it comes to health, whether it’s getting your annual physical or daily exercise, will pay dividends in the future. A retiree today is expected to spend $275,000 over their retirement on health care. By investing in your health when you’re young, you can reduce your potential for future health care costs.
Get out of debt
Paying down your debt reduces the amount of interest expense you pay each year. And often, people are paying more in interest than they are likely to earn by investing. Studies show the average American under the age of 35 has between $23,000 and $30,000 of debt in the form of credit cards, student loans, auto loans, and other forms of personal debt. According to a NerdWallet 2017 study, the average U.S. household that’s carrying credit card debt has a balance of $15,654.
Build and protect your credit
Your credit score is an indicator of your financial health. The list of people who have an interest in your credit score seems to keep growing every year. Damaged credit can be costly over time. Pay all bills on time by setting up payment reminders or enrolling in auto pay. Pay down balances on credit cards; high balances relative to total available credit affect your credit score.
Buy into panic, not excitement
If the stock market sells off by 5 to 10 percent over any given month or week, take your excess cash and buy the dip. Only use excess cash, not any cash that is needed to pay bills. On the flip side, when the market is going up significantly, wait for a correction if you’re sitting on the sidelines.
Young people need to know how to plan financially. There’s a tendency to put it off, but that’s risky. There’s too much to lose. You’re not young forever and without a plan, you’re unprotected for your future.
Richard W. Paul is the president of Richard Paul & Associates, LLC and the author of “The Baby Boomers’ Retirement Survival Guide: How to Navigate Through the Turbulent Times Ahead.” He is a certified financial planner professional, registered financial consultant, investment adviser representative and an insurance professional holding life and health insurance licenses in Michigan and Florida.
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