By Tony Collins, CFP®, AIF®, Associate Wealth Advisor
This is part one of a multi-part series on specific financial planning challenges and considerations that many people face over the decades of their adult lives. We hope you’ll find these perspectives valuable.
There’s no sugarcoating it – entering adulthood and being independent is a big step. We go from adolescence, having every decision made for us. Then on to high school, learning that the mitochondrion is the powerhouse of the cell (and not much practical financial knowledge), to college, mostly worried about how we’ll make that 10:00 am class on time. Suddenly, upon being independent, a lot of things become crystal clear. First, fruits and vegetables that you buy with your own money go bad way faster than they did at home.
Life becomes a lot more complex with bills, debt payoff schedules, and retirement plan decisions – and without a mentor or reliable source of guidance it can be hard to manage it all. Here are some of our top tips to set yourself up for success!
Set aside funds to cover the unexpected
First, this is something we advise every client: Build an emergency fund. After leaving college and getting your first “real” job, it can be easy to justify an expensive car loan, apartment lease, and high-cost lifestyle. What happens if you lose your job or face an unexpected expense?
Here’s a scenario that happens to newly minted working adults all the time. You purchase your first car, which appears to be a good deal on the surface. But a number of deferred maintenance items arise. That’s one of the many payoffs of having an emergency fund. Rather than pull from investments, you can utilize the cash in your fund to pay for the repairs. This is a perfect example of how valuable an emergency fund can be to avoid needing to use invested assets or even taking on unnecessary debt.
Our recommendation is that clients keep between 3-6 months of expenses in a separate but accessible account. These funds should not be invested, as a down market could reduce the value of these set-aside funds right at the time they’re needed. We recommend looking for an online high-yield savings account that will earn you more than a typical bank account.
Create – and adhere to – a discipline to reduce current debt
Next, make a plan to pay off debt and stick to it. If you’ve graduated from college with student loan debt or a vehicle loan, lingering liabilities can push back your ability to save for a house, future child expenses, or other things you want for your future.
We’re not suggesting that you drop everything to pay off the debt. The point is to understand what interest rates you’re paying and make a strategy to efficiently pay everything down. Quite often we see clients who graduated college 10+ years ago still making minimum payments on their student loan balances. In an unfavorable interest rate environment, these minimum payments may not do much to reduce the principal amount due.
Tackle that advanced degree sooner rather than later
If you’re considering pursuing a graduate degree or further education, there’s no time like the present. Why not get started before life gets more complicated? For many college grads, adjusting to a full-time work schedule is tough. Sometimes the thought of going back to school can seem daunting. However, a few years of graduate school now should pay off in the future. Check to see if your employer has a tuition reimbursement benefit. They are incentivized to have a well-educated workforce and it’s smart to take advantage of any benefits they offer. Halbert Hargrove offers this benefit and I am deeply appreciative of their commitment.
I speak from personal experience: I’m in the middle of the University of Southern California MBA program. After work each day I’m able to jump right in to put all my focus into school. I feel that if I waited another 5-10 years, I’d be less able to put all that focus into school each day. It’s also worth mentioning: This blog post is targeted towards people in their 20s, but it’s never too late to go back to school for advanced degrees. We believe in lifelong learning!
Automatic savings can make a big difference in the long run
Finally, it’s important to build good habits such as setting up automatic contribution plans to your 401(k) and other savings accounts. When the money goes directly into your savings and is allowed to grow, your future will be the beneficiary. Online access makes it really easy to check online balances frequently, but that may not be ideal. A bad market could cause a nervous investor to go to cash at the wrong time, or overreact to a temporary market move.
Given that someone in their 20s typically has an investment horizon well north of 50 years, any savings now will compound and be magnified in the years to come.
We hope this advice is valuable and that you’ll be able to implement some of the strategies discussed. For our readers who are no longer in their 20s, please stay tuned for the next installment of our series, Targeted financial planning for each decade of your life: Your 30s. If you’d like more guidance or information on any of our recommendations, please connect with your advisor.
How do you balance having the life you want to enjoy today with what you’re going to need in the future? Are you doing what it takes to enter your dream retirement? TAKE OUR QUIZ to find out.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice.