money
management
for young professionals
®
HandsOnAdvice.com
money management for
young professionals
As a young professional, you are confronted every day with new experiences.
Managing your personal finances is just one of these many challenges.
What exactly is a 401(k)? What’s the smart way to pay off college loans?
How can I start to save? What is my credit score, and why does it matter?
In this booklet you’ll find a collection of our favorite money
management articles for young professionals from the Hands On
Financial Advice website. These simple and actionable articles are
designed to help you make more informed decision about your finances.
Happy reading!
Hands On Financial Advice Team
HandsOnAdvice.com
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money management for young professionals
table of contents
Understanding financial terminology
3-5
How to request and review your credit report
6
6 basic rules to financial freedom
7
Getting into the habit of saving
8
7 tips to managing your debt
9
What is a 401(k) and how does it work?
10
Do you know where your money is going?
5 tips to track your money
11
3 money management rules every college grad should know
How to tackle college debt
12 - 13
14
Take advantage of the power of compound interest15
HandsOnAdvice.com
money management for young professionals
understanding f inancial terminology
Financial terminology can be confusing and intimidating
– especially if you’re just entering the world of finances and
investments.
To help you get a grip on some of the most common words
and phrases, we’ve put together a little cheat sheet for common
financial terminology.
Accrued Interest – Interest that accumulates over time on a
debt that you owe or on the savings that you have.
Annual Percentage Rate (APR) – The rate of interest (in terms
of a percent, such as 9.4%) being charged for a loan over a year’s
time. The APR includes interest, transaction fees and service
fees. Look for APRs on such things as credit cards, student loans
and car loans.
Appreciate – To grow in value. Usually a term used in relation to
investments (stocks) or collectibles (old stamps, baseball cards,
rare coins, etc.) that are now worth more than you originally
paid for them.
Asset – Any item of value that you own: house, car, property,
jewelry, stocks, bonds, money in savings, etc.
Balance – 1) In reference to loans, the balance is the difference
between the original amount owed and the amount paid on the
loan to date. In other words, the money you still have to pay.
2) In reference to checkbooks, balancing means to account for
all money that came into and went out of your account. 3) In
reference to savings, your balance is what is left in your savings
account after you deposit or withdraw money.
Bankruptcy – A legal procedure governed by federal law that
helps consumers who have too much debt. There are two
bankruptcy options for consumers – Chapter 13 reorganization
and Chapter 11 liquidation.
Blue Chip Stock – A name given to the stocks of major
corporations. The name comes from the most highly-valued
poker chip, the blue chip.
Bond – A kind of investment in which you lend money to a
corporation or government for a certain amount of time and
at a certain interest rate. You receive regular interest payments,
also known as a coupon. At the end of the bond’s term, the
corporation or government returns to you the amount you
originally lent, also known as the bond’s face value.
Budget – A plan you create for controlling spending and
encouraging saving.
Certificate of Deposit – A type of investment that requires you
to invest money for a certain length of time and guarantees the
same rate of return (interest) for that entire period. CDs usually
require a minimum deposit.
Checking Account (or Share Draft Account) – An account
where you deposit money to fund the purchases you make on
your debit card or checks you write. A credit union checking
account is called a share draft account.
Collateral – Assets pledged as security for a secured debt. If you
do not pay a debt that you have collateralized, the creditor can
take ownership of the collateral.
Collection Agency – A business that collects past due debts for
other businesses, as well as individuals. Most collection agencies
get paid for their services by taking a percentage of what they
collect for their clients.
Compound Interest – Interest on an investment that is
calculated not only on the amount originally invested, but also
on any interest the investment has already earned. For example,
if you invest $100 dollars in a savings account and get 5%
interest, after one period you will have $105. During the next
period, you will earn interest on the $105 (not just on the $100
originally invested) and end up with $110.25.
Credit – A loan that enables people to buy something now and
pay for it in the future.
Credit Agreement – A contract between a borrower and a
creditor that details the amount borrowed, the applicable
interest rate and all other terms of the credit.
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money management for young professionals
Credit Limit – The highest amount you may charge on a credit
card. Your limit is set by your credit card company’s opinion of
your ability to handle debt.
Credit History – A record of your borrowing and paying habits.
Credit reporting companies track your history and supply this
information to credit card companies, financial institutions and
other lenders.
Credit Rating – A “score” that a credit agency assigns you based
on your ability to manage credit responsibility. Your credit
rating depends upon factors such as on-time payments, age and
amount of debt accumulated.
Creditor – A person or business to whom you owe money.
Debt – Money or goods you owe.
Debt Consolidation – The process of taking out a larger loan to
pay off one or more smaller loans.
Finance Charge – Another term for the amount of interest
you pay a company when you do not pay your debt in full
each month, as well as the amount of interest you pay on your
outstanding debt. The finance charge is expressed as a percentage.
Fixed Expenses – Expenses that stay basically the same from
month to month, such as rent, transportation and tuition.
Foreclosure – The process whereby a mortgage lender or another
creditor with a lien on your home or on some other piece of real
estate that you own takes that asset because the terms of your
agreement with your creditor were broken.
Grace Period – The time in which you can pay your account
balance in full without incurring finance charges.
Income Tax – Money that wage earners pay the government
each year. The amount of the tax depends upon how much
income you earn.
Debit Card (or Checking Card) – A card like a credit card
that you can use to pay for things directly from your checking
account without paying interest. You have to have the funds in
your account in order to spend them with your debit card.
Insufficient Funds – Insufficient funds means you did not have
enough money to cover an expense. Usually checks that bounce
are returned stamped with the phrase “insufficient funds.” The
amount of the check was larger than the balance in the checking
account.
Deposit – To put money into a checking, savings or other
investment account.
Interest – The amount paid by a borrower to a lender for the
privilege of borrowing the money.
Dividend – A payment made by a company to a stockholder to
share in the company’s profits. In a credit union, a dividend is
the interest paid on your savings or share account.
Interest Rate – The price paid for borrowing money, expressed
as an annual percentage rate, such as 10.5%.
Discount – To reduce from an original price or an item’s full worth.
Earned Income – Wages paid in exchange for work.
Effective Annual Rate (EAR) – The compound interest rate
plus fees calculated across a year.
Entrepreneur – A person who assumes the risk to start a business
with the idea of making a profit.
Invest – To put your money into CDs, money market accounts,
mutual funds, savings accounts, bonds, stocks or objects that
you hope will grow in value and earn a profit.
Loan – Money or an object that is lent with the understanding
that the loan will be paid back, usually with interest.
Minimum Payment – The smallest payment you are required to
make each month on a debt.
Expenses – Things you pay money for – both needs and wants.
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money management for young professionals
Mutual Fund – A savings fund that uses money from a group
of savers to buy a wide range of securities, like stocks, bonds and
real estate. This allows you to diversify your investments because
you own small units of each of the fund’s investments.
Opportunity Cost – The next best alternative that is given up
when a choice is made.
Penny Stock – A nickname for extremely low-priced stock,
usually only a few dollars a share. These stocks are considered
quite risky. They are priced low because they have not yet proven
themselves in the market.
Periodic Rate – An interest rate that charges periodically. The
terms of the change are spelled out in your credit agreement.
Principal – The amount of money you borrow. Principal does
not include interest.
Profit – The money you’ve earned after you subtract a) any
money you had to spend to make the product or perform the
service, or b) any taxes that had to be paid on your earnings.
Rate of Compounding – When an account compounds interest
it does so in regular intervals. Compounding can take place
annually, semi-annually, quarterly, monthly or daily. The more
often interest is compounded the faster your money will grow.
Return – The amount of money you receive from a savings
account or fund. The return is usually expressed as a percentage,
such as “this account returns 6.3%.”
Share – A unit of ownership in an investment or a company.
Shareholder – Someone who owns stock in a company.
Stock – A certificate representing a share of ownership in a company.
Stock Market – An organized way for 1) people to buy and
sell stocks and 2) corporations to raise money. There are stock
exchanges all around the world, but perhaps the best known
are the New York Stock Exchange (NYSE), the American Stock
Exchange (AYSE) and the National Association of Securities
Dealers Automated Quotation System (NASDAQ).
Unearned Income – Income that is not the result of your
labor, such as interest from a savings account or another kind
of investment.
Unsecured Debt – A debt for which no assets are pledged to
guarantee payment. The most common type of unsecured debt
is credit card debt.
Variable Expenses – Spending that changes from month to
month. For example, entertainment can be a variable expense.
Depending on your preferences, the amount you spend on
movies, CDs, video games and eating out will be different each
month. With variable expenses, you have choices.
Withdraw – To take money out of an account.
Risk – The likelihood that you will lose money on an investment.
Save – Holding onto your money for a future goal instead of
spending it now. Saving is the opposite of spending.
Savings Account – A bank account that pays you interest for
keeping your money in it.
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money management for young professionals
how to request and review
your credit report
Although your credit score only consists of three digits, it’s a
complicated and often times exasperating part of your financial
life. While it can be challenging to understand exactly how your
credit score comes to be, it’s much simpler to request and review
your credit report.
A credit report is essentially a file on you, your accounts and your
payment history. It’s the information used to determine your
actual credit score. This collection of data usually begins when
you first apply for a credit card, loan, insurance, lease or job.
It’s important to establish and maintain good credit because:
• A credit report is a record of where you work and live, how
you pay your bills and whether you’ve been sued, arrested or
have filed for bankruptcy.
• Employers can legally look at your credit report if you sign
an authorization form when you apply for the job. Employers
can look at your credit report to gauge your personal integrity
and financial honesty. You can refuse to sign the form,
but consequently, a company may assume that you have
something to hide. This means your application and chance
of employment could be dismissed.
• Banks, insurance companies and landlords look at your credit
report for similar reasons. They’re looking at your ability to
pay off debt and paying your debts on time.
How to Request Your Credit Report
The Fair and Accurate Credit Transaction (FACT) Act allows
you to get one free copy of your credit report every 12 months
from each of the three nationwide credit reporting agencies –
that’s three free reports each year!
The national credit reporting agencies – Equifax, Experian and
Trans Union – must provide a single point of contact so you
can get reports from all three national credit reporting agencies
with a single Internet request, telephone call or mail form. Free
annual credit reports are available to all consumers through the
Federal Trade Commission (FTC).
You have the option to order all three free credit reports at the
same time, which allows you to compare the information in each
report, or you can choose to order your free reports at different
times throughout a 12-month period.
To get your free annual credit report, go through the FTC’s website
at www.annualcreditreport.com, call (877) 322-8228 or write:
Annual Credit Report Request Service, PO Box 105281, Atlanta,
GA, 30348-5281. Keep in mind that www.annualcreditreport.
com is the only authorized source to get your free annual credit
report under federal law, while sites like freecreditreport.com
charge membership fees to view your credit report.
Reviewing Your Credit Report:
A Checklist
When you receive your credit report, take some time to closely
review the information it contains:
• Check all accounts and account numbers to make sure all
accounts listed are yours.
• Make sure all outstanding balances are accurate.
• Make sure all past due amounts are correct.
• Make sure all dates showing the last activity on each account
are correct.
• Make sure no entries appear more than once.
• Make sure all court and public records, if any, are accurate.
• Make sure all personal information (name, address, Social
Security number, etc.) is correct.
If you find an error, the credit reporting agency or the creditor
reporting the information must investigate and respond, generally
within 30 to 45 days. Use the following contact information to
report errors directly to the credit reporting agency:
• Equifax: (800) 685-1111, www.equifax.com
• Experian: (800) 397-3742, www.experian.com
• TransUnion: (800) 888-4213, www.transunion.com
If you suspect identity theft, you may need to place a fraud
alert on your credit report, close compromised accounts, file
a complaint with the FTC or file a police report. For more
information, visit the FTC’s identity theft website.
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money management for young professionals
6 basic rules to f inancial freedom
Managing your finances can be a confusing and daunting process.
But the reality is that mastering money isn’t that difficult. If you
stick to a few basic rules and principles you’ll set yourself up for a
life of financial freedom.
Keep in mind that most of these rules are behavioral in nature,
and changing your habits is never easy. Commit yourself to these
rules and consciously try to change your behavior. Before you
know it, they’ll become second nature.
Rule #1: Provide a 20% down payment
on large purchases.
When it comes to big ticket items, such as cars, homes, furniture,
boats, etc., save up so you’ll be able to put down a minimum 20%
down payment. This will instantly give you equity in the item
and will protect you in case of an emergency. A down payment of
about 20% also means you will likely receive lower interest rates,
which will help you save in the long run.
Rule #2: Establish a structured
savings program.
Develop an automated system to help you save. Work with
your bank, employer or financial advisor to set up bi-weekly
or monthly automatic deposits into a savings account. By
automating this process you will not be tempted to spend the
money instead of saving it. If you are planning to purchase a large
item allocate a certain amount of your monthly savings toward
that purchase. If, for example, you are saving to buy a new car,
and you automatically transfer $100 into your saving account
every two weeks, allocate $20 towards your car fund.
Rule #3: Maximize your
retirement contributions.
If you are not contributing the maximum amount towards your
retirement savings plan, then you are missing out on a lot of
money. Many Americans are not stretching to maximize their
contributions when they can. What’s worse, they tend to rely
on “guesswork” when setting contribution levels, and don’t
fully understand the importance and long-term impact of small
increases in contribution rates. Educate yourself about your
401(k) or IRA, and make sure you are reaping all the benefits.
Rule #4: Pay off your credit card debt
within 90 days.
Most people have at least one, if not two, credit cards that are
used on an ongoing basis. While this is ok, it’s important to stay
on top of the debt and not allow it to get out of control. To avoid
interest payments it’s best to pay off your card immediately. If
this isn’t feasible, establish a program that will allow you to pay
off all the debt within 90 days. If you are not able to do this, you
are likely living beyond your means and should re-examine your
spending habits.
Rule #5: Be smart when it comes to
taking out loans.
It’s inevitable that at some point in your life you will have to take
out a loan. When you do take out a loan, keep in mind that the
more you borrow, the more interest you will be charged. You
should only borrow the minimum you need in order to keep
the interest charges down. In addition, the longer the repayment
period, the larger your interest bill, so try to keep the term of your
loan as short as possible, while keeping your monthly payments
affordable. Most importantly, match your loan terms with the
item you are purchasing. For example, don’t take out a six-year
loan on a used car with more than 50,000 miles on it. That’s
when many people get in trouble, since the chances are high that
the car won’t be working for 6 more years.
Rule #6: Set a monthly budget
and stick to it.
One of the most important things you can do when it comes to
your personal finances is to set a monthly budget. By consistently
tracking your income and expenditures you will become astutely
aware of your spending habits, making it much easier to manage
your money. While this takes some discipline in the beginning,
it will be well worth it. Consider using online tools such as Mint
to help you.
The road to financial freedom isn’t as difficult as you may think.
However, the willingness to put in the effort and do something
is vital.
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money management for young professionals
getting into the habit of saving
Like many things in life, setting money aside as savings is a habit
that needs to be developed.
It doesn’t take a miracle to save money. But if you want to see
your nest egg grow, you need to do what you can to encourage a
habit of saving – especially as a young adult!
We’ve put together some simple tips to help you start saving, and
stick to it.
1. Determine exactly where your money is going. For the
next 30-60 days keep track of every single dime you spend.
Use a little pocket journal to jot down notes as you go, as if
you were keeping track of expenses on a business trip. This
will give you an exact snapshot of where your money is going
and make you astutely aware of what you are spending.
2. Create a budget. Use the insight you gained from your
money-tracking experience to create a budget. Determine
what your income is and what your short and long-term
expenses are. Based on this information you’ll be able to
determine how much you can reasonably save on a monthly
basis. (For more information about setting up a budget,
check out our article How to set up a budget for your family
and stick to it.)
3. Establish an emergency fund. If you haven’t already, start
setting aside money for an emergency fund. Financial
emergencies can come in the form of a job loss, significant
medical expenses, home or auto repairs or something you’ve
never dreamed of. Having an emergency fund will help you
weather these challenges. Make it a goal to build up cash
reserves to cover between 3 and 6 months worth of living
expenses for your emergency fund.
5. Pay yourself first. The first bill you pay each month should
be to yourself. Before you pay your monthly expenses, go
shopping or use your income for anything else, automatically
set aside a portion of your income to save. This habit,
developed early, can help you build a tremendous nest egg
over the years.
6. Participate in your employer’s retirement plan. Start
contributing money to your company’s employer-sponsored
retirement plan immediately. Whether it’s a 401(k) or an
IRA, starting to save for your retirement early will have a
dramatic impact down the road. If you can’t participate at
the maximum limit, start where you can and commit to
increasing your investment 1 percent each year until you
reach the maximum.
7. Take time to understand your benefits. It’s astonishing
how little people understand about their benefits package.
Make sure you fully understand your retirement plan,
flex spending accounts and other benefits. These things
add up when you use them over time to save on taxes and
opportunity costs.
Don’t give yourself a choice when it comes to savings. Commit
to these simple savings tactics and you’ll hardly notice that you’re
saving for your future.
4. Automate your savings. Work with your bank to set up
automatic transfers on a bi-weekly or monthly basis into
your savings account. Automating this process will ensure
that you save on a consistent basis and aren’t tempted to
spend the money on something else.
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money management for young professionals
7 tips to managing your debt
Managing debt is an important skill to master – especially when
you’re just starting off on your own. After all, as a young adult you’re
laying the foundation for your future financial life. By following
these simple tips, you will soon become a pro at debt management.
1. Always make your payments on time.
The consequences of late payments are significant. Not only will
you be penalized with a late fee, many credit cards also jack up
interest rates significantly when a payment is delayed. Consider
signing up for automatic bill pay to ensure you are never late.
2. Go beyond your minimum payment.
If you only pay the monthly minimum payment on your credit
card bill you are not whittling away at the principal debt. It’s best
to pay off your credit in its entirety; however, if that’s not possible
make sure you at least pay more than the monthly minimum.
Otherwise debt can quickly get out of hand. Also, if you have
more than one credit card and are carrying debt on each card,
be strategic about which one you pay off first. Pay the card with
highest rate first and then focus on the others.
3. Avoid department store credit cards.
5. Understand the terms of
your credit card.
Take the time to read through the terms and conditions on your
line of credit so that you fully understand the consequences.
It’s really important to understand your interest rate and how it
works. If you aren’t satisfied with the terms, don’t hesitate to shop
around for another card.
6. Continue to make payments on your
student loan.
There is a high default rate on student loans, which can be a costly
mistake for young adults and can have a dramatic impact on
future purchases. Don’t blow off your payments. Also, consider
sitting down and evaluating your consolidation options.
7. Become aware of the debt you
are carrying.
It’s frightening how some people have no idea how much debt they
are accumulating. Make sure you are aware of your debt so that it
doesn’t get out of hand. Sit down on a regular basis and review your
spending and expenses, and try to adjust your habits accordingly.
It can be easy to fall for the initial savings associated with opening
department store lines of credit. However, many of these credit
cards have huge interest rates associated with them that can
quickly result in a large amount of debt. If you do have these
types of cards, make sure you fully understand the terms.
4. Evaluate your spending habits.
Take some time to track your monthly spending to get a better
sense of where your money is going. Train yourself to distinguish
between a “want” and a “need,” and don’t purchase things on
a whim. It can be hard to become this disciplined with your
spending, but it will be well worth it in the long run.
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money management for young professionals
what is a 401(k) and how does it work?
When you’re starting out, one of the most important things you
can do for your financial future is to start investing in a 401(k)
retirement plan.
It may seem counterintuitive to start saving for your retirement
when you’re at the beginning of your professional life. Nonetheless,
if you opt out of this savings opportunity you may be leaving
thousands of dollars on the table. Signing up for your 401(k) as
soon as possible will give you an incredible head start and may
just be one of the smartest money moves you make. You’ll look
back when you’re older and feel great about your decision!
What is a 401(k)?
A 401(k) is an employer-sponsored retirement plan that allows
you to take a portion of your earnings – either a set dollar
amount or a percentage of your salary – and move it to a taxdeferred
investment account.
The money is invested at your direction into money market
funds, growth funds and indexes, which will accumulate value
over time. The actual work of administration and monitoring
of accounts is usually outsourced to independent banks, mutual
fund companies, financial service enterprises and more.
Once enrolled, your 401(k) contributions are automatically
deducted from your paycheck each pay period.
What should you invest in?
Your employer will let you select your own 401(k) investments
from a list of mutual funds.
Target-date or life-cycle funds are popular. With these types of
funds, you fill in the year you plan to retire – for example 2045.
Professional fund managers handle the rest, gradually shifting
your funds from an aggressive stock-heavy portfolio early on to
a conservative bond-heavy mix as you near retirement.
Benefits of a 401(k)
401(k) plans are a powerful investment tool. Some of the
benefits include:
• Matching contributions – When an employer offers a 401(k)
to employees, the company often matches a portion of the
money that goes into your account. Sometimes it can be as
much as 50 percent. This is essentially free money or extra pay
for you. Always make sure you’re contributing enough to your
401(k) account so that you are taking advantage of these
matching contributions.
• Customization and flexibility – 401(k) plans give you the
power to decide how to invest your assets. If you know you
don’t have a high tolerance for risk you could opt for a higher
asset allocation in low-risk investments such as short-term
bonds; likewise, a young professional interested in building
long-term wealth could place a heavier emphasis on equities.
• Tax advantages – Dividend, interest and capital gains are
not taxed until they are disbursed, which means you can
rack up substantial savings. Plus, your account’s investment
earnings will grow tax free until you withdraw. (Withdrawal
restrictions may apply.)
• Portability – One of the biggest benefits of a 401(k) account
is that you can take the funds with you when you switch
jobs. You’ll have the choice of either rolling over the money
into your new employer’s 401(k) plan, or allocating into an
Individual Retirement Account (IRA).
Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information and the investment company.
You can obtain a prospectus from your financial representative. Read carefully before investing. Investing in mutual funds involves risk, including possible loss of principle. Bonds are subject to market and interest rate risk if
sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Stock investing involves risk including loss of principle. The opinions voiced in this material are
for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate to you, consult your financial advisor prior to investing.
Securities and Insurance products offered through LPL Financial and its affiliates member FINRA/SIPC. MidWestOne Bank is not a registered broker/dealer and is not affiliated with LPL Financial.
Not FDIC Insured
No Bank Guarantee
Not a Deposit
Not Insured by any Federal Government Agency
May Lose Value
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money management for young professionals
do you know where your money is going?
5 tips to track your money
Most people underestimate the amount of money they are
spending. That’s why it’s so important to monitor your expenses
on a consistent basis. After all – if you want to save money, you
need to know how much you’re spending.
The concept of tracking money is pretty straightforward – write
down how much money you are spending and what you’re
spending it on. Break it down into categories like mortgage,
groceries, entertainment, etc. At the end of the month, add up
the categories and you’ll get a true picture of where your money
is actually going.
While the actual task is relatively simple, it’s the motivation
that’s difficult. Many people start out with the best intentions,
but then lose focus and give up. We’ve put together some simple
tips that will help you track your money and remain dedicated
to the task.
1. Create a simple system.
This will take some effort in the beginning. However, once
you’ve made it part of your regular routine it will soon become
a habit.
4. Have a place for your receipts and bills.
Identify a spot to collect your receipts and bills. This could be an
accordion folder in your office, a wicker basket in the kitchen, a
simple manila envelope or anything else that you can think of.
5. Partner up.
Make sure your partner is on board with tracking expenses as
well. In order for you to effectively track expenses you will both
need to dedicate yourself to the task.
While it will take some extra time and effort to track your
expenditures on an ongoing basis, it is well worth the effort.
And if you need extra help along the way, don’t hesitate to meet
with a financial advisor or your banker to get some assistance.
Tracking your money doesn’t have to be an elaborate process
that involves software programs and difficult formulas. Come
up with a simple system that will work for you. This will be
different for everyone. Some people prefer to track things by
writing expenditures in a daily journal; others prefer an Excel
spreadsheet or online tools like Mint or You Need a Budget.
The most important thing is to find a system that you’ll stick to
and follow.
2. Create customized categories.
Don’t feel like you have to fit your expenditures into the standard
budgeting categories. Personalize them to better fit your lifestyle
so you can group expenditures and track where your money is
going each month.
3. Develop a routine.
Make it a habit to track your expenses – whether it is on a daily
or weekly basis. Just remember – the longer you wait, the more
transactions you will have to process.
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money management for young professionals
3 money management rules every
college grad should know
When it comes to managing your money there are a seemingly
endless number of tips and mantras people will throw your way:
“pay yourself first,” “don’t ignore your money troubles,” “pay off
your credit card in full,” “save at least 6-months’ worth of living
expense,” “always max out your 401(k) contributions,” “don’t
live beyond your means,” etc.
That’s why it’s so important you start saving for retirement as
soon as possible. Compounding will definitely work in your
favor and help you achieve some exponential gains. Start
contributing to your 401(k). Max out your employer’s match.
And if your employer doesn’t offer a retirement package, look
into Roth IRAs and other investment tools.
And while these are valid tips, they can quickly become
overwhelming – especially if you recently graduated college and
are still relatively new at managing your own money. That’s why
we’ve pulled together three key money management rules that
every college graduate should know.
Rule #2: Create a budget and stick to it.
We’re not saying all those individual financial planning tips won’t
help (because more than likely they will); these are simply the 3
key rules we feel you should stick to for a sound financial future.
Quite simply, a budget is a realistic financial plan, which you put
together based on your income, expenses and goals. Here’s how
you set one up:
• Determine your income.
• Determine your fixed expenses.
• Determine your variable expenses.
• Compare your income to your expenses.
• Track your expenses.
• Adjust as needed.
• Evaluate your budget.
Rule #1: Never stop thinking
about your retirement.
When you’re launching your career it will seem completely
counterintuitive to think about how you will pay for your
retirement. Trust us – starting to save for your retirement early
can make a huge difference. Why? The answer is simple –
compound interest. To explain how compound interest works,
let’s take a look at the two types of interest:
• Simple interest – simple interest only charges based on
principle value. Say, for example, you lend someone $100
on a 5% per year simple interest rate. That person would
owe you $5 each year until he or she pay you back.
• Compound interest – this type of interest rate charges
on the principle value as well as the value of any interest
accrued. So if you charged your friend 5% compounding
interest, the person would owe $5 the first year, and then
5% of $105 the second year – $5.25 – and so on.
Knowing how much money you have coming in, and how much
money you have going out is critical to successfully managing
your money.
Keep in mind that creating a budget doesn’t mean that all of your
problems are going to be solved. Nonetheless, it is an important
step to determining your financial health and creating financial
stability. It won’t be too difficult to create a budget, but you may
find it difficult to stick with one. Just remember, you can do it!
Rule #3: Establish an emergency fund.
You never know when life is going to throw you a curve ball.
It’s impossible to predict when you may get laid off, get in a
car accident or face other financial troubles. That’s why it’s so
important to establish an emergency fund.
As you can see, this is great for a young investor because you
essentially earn interest on your interest!
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money management for young professionals
An emergency fund is an easily accessible chunk of money
you can fall back on when you are faced with an unexpected
expenditure. Most financial experts recommend 3-6 months’
worth of living expenses. In most cases this will give you enough
money to address the issue and develop a new long-term
financial plan.
Since you will need to access your emergency fund on short
notice, it’s important you allocate the money where you are able
to withdraw it without facing any penalties. Many people will
set up a separate savings or higher-earning checking account for
their emergency fund. With some added planning you could
also allocate it in a series of 3-, 6-, 9- and 12-month CDs. This
would likely give you a higher interest rate and allow you to have
access to the funds every three months.
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money management for young professionals
how to tackle college debt
In the U.S., most college students these days carry more than a
heavy class load – they also carry a significant amount of debt.
It’s undeniable that a college education in the United States
has become increasingly more costly for families and students.
The numbers are staggering. The average college student is now
around $22,900 in debt at graduation. In fact, according to the
Wall Street Journal, the class of 2011 graduated with a dubious
distinction: the most indebted ever.
Couple this with a challenging job market and it’s not surprising
that many recent graduates are overwhelmed at the mere thought
of paying off student loans while trying to launch their careers.
To help, we’ve put together 9 tips to help you tackle college debt:
1.Complete exit counseling upon graduation. Use the time
wisely and work with your financial aid advisor on fully
understanding your payments and your debt load.
2.Utilize repayment calculators to determine what your
monthly payments on your loans will be. This will help you
establish a budget that will allow you to make those payments
and keep the debt in perspective.
3.After you graduate you will typically have a six-month grace
period before you will need to begin paying off your loans.
During this time period you will likely be inundated with mail
from your student loan providers. Don’t make the mistake of
simply ignoring the letters because you are overwhelmed. Take
the time to read them and seek out help if you don’t understand.
4.Explore the options of consolidating your loans. You will likely
have more than one loan when you graduate. Combining
these loans into one consolidated payment is not only
simpler but often leads to lower monthly payments. Some of
the lenders who offer consolidation are Chase, Direct Loans,
Next Student, Student Loan Network and Wells Fargo. Look
into these options, but shop smart. Study the terms and fees
and then make an educated decision about whether loan
consolidation is right for you.
5.When your grace period is over, make it a priority to begin
paying off your loan. If you fail to repay your loan you will
soon be faced with a number of negative consequences, such
as garnished wages, offset federal and/or state income tax
refunds and other payments.
6.If you are unable to find a job and are not financially able
to begin making payments on your loans you have options.
One such option is deferment or forbearance, which allow
for postponement of payment under select circumstances.
Most people know federal student loans can be deferred if
you enroll in graduate school or the military. But you can also
get a deferment for unemployment or economic hardship.
While this will result in some repercussions, they will likely
not be as damaging as if you consistently make late payments
or go into default. Talk to a financial advisor and work with
your student loan provider to determine if this is the right
move for you.
7.As you become more established in your career, consider
making more frequent payments on your loans. Even a small
amount can make a difference.
8.If you are carrying other debt in addition to your student
loans, focus on the higher-interest debt first. It is crucial,
however that you continue making your payments on student
loans, too. (See #5)
9.If you find yourself in a situation where you are unable to
make your payments, address the situation immediately.
Reach out to your lenders to see if they are willing to work
with you. Avoiding the problem will only cause more troubles
in the future. The key is to communicate with your lender.
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money management for young professionals
take advantage of the
power of compound interest
You’ve probably heard it before: “It’s never too early to start
saving for retirement.” In the back of your mind you know
it’s important to save for the future, yet it probably seems
counterintuitive to start saving for retirement at the beginning
of your career.
Maybe you are waiting another year or two, for your next raise,
until you find a new job or until you pay down your debts – but
you should know that the longer you wait to start saving, the
more you are missing out on the power of compound interest.
What is compound interest?
Compound interest refers to interest you earn not only on the
money you originally invested, but also on any interest the
investment has already earned. Let’s take a closer look at the
power of compound interest and how it can help boost your
retirement savings:
Time is money – literally.
To take full advantage of compound interest, you’ll want to start
early. Waiting one year (or five years) to start saving will be
costly. When it comes to compound interest, time is incredibly
valuable. Consider this:
• If you save $100 per month starting at age 20 (with an
interest rate of 8 percent) your savings will total nearly
$530,000 at age 65.
• What if you waited 10 years? If you save $100 per month
starting at age 30 (assuming the same interest rate of 8
percent) your savings will total nearly $230,000 at age 65.
That is a difference of $300,000!
• And if you waited another 10 years and started saving
$100 per month at age 40, your savings will only grow to
approximately $95,000.
As you can see, the power of compound interest – and the value
of time – is astonishing!
Decide how much to save.
When it comes to compound interest, time is the most critical
factor. But it’s also important to save regularly. In the examples
above, you saved $100 per month. In reality, the amount that you
should save per month is based on your income, your spending
habits, your retirement goals and what your budget will allow.
The amount of money you’ll need in retirement is also impacted
by inflation, your life expectancy and your lifestyle.
If saving is not a part of your monthly budget, start by making
it a priority. Starting to save even a little money today is better
than waiting until next month (or not saving at all).
Decide where to save your money.
When you’ve figured out how much to save, you’ll need to
decide where to save your money. The sample calculations above
assumed that you earned an interest rate of 8 percent each year.
You may save your money in a tax-sheltered savings plan, such as
a 401(k) or 403(b). Other options that may be available include
the traditional individual retirement account (IRA) and the
newer Roth IRA. Each type of retirement account has different
tax implications and eligibility requirements, so you’ll want to
consult a tax advisor to discuss what is best for you.
Get in the habit of saving each month.
Automatic deductions make saving easy. Your employer may
be able to automatically deduct a portion of your paycheck to
contribute to a tax-sheltered savings plan. Your bank can also
help you set up an automatic transfer to automatically move
money from your checking account to your savings account
each month so you don’t have to think twice about it!
Be patient and watch your money grow!
Keep in mind that all of the calculations provided above are
based on the fact that you did not touch your money while it
was growing. You may be penalized for dipping into some types
of retirement savings early. Plan to sit back, be patient and
watch your money grow – 15, 20, 30 and 40 years down the
road, you’ll be glad you did!
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