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“Failing to plan is planning to fail.” We’ve all heard it a million times: from coaches, teachers, parents, and others. And, while our younger selves might have rolled our eyes at hearing this phrase, most would admit—even if grudgingly—that planning ahead is a key attribute of most successful people and enterprises. Certainly, financial success in life typically isn’t the result of an accident; it requires planning and execution.
But in the early days of launching a career, when you’re learning the ropes at a new employer or dealing with the stress of starting your own business, a personal financial plan may seem like a low-priority item. After all, when life starts to come at us with rapidly increasing speed—there are times when “financial planning” takes a back seat to “financial survival.”
On the other hand, there are some general principles of financial management and strategy that can help young professionals weather the inevitable storms that life brews up, from time to time. In this article, we’ll discuss some basics that can help you keep your finances on track and even formulate a plan for the future.
Paying Yourself First
One of the most important mindsets you can establish at this phase of life is the savings habit. Make it your goal to set aside a consistent percentage of your earnings in a savings account, with the goal of building toward setting up an investment program for long-term growth. Time and time again, when we dig into the stories of financially successful people, the principle that comes through loud and clear is the commitment to putting money away in savings. Make it a goal to save about 10% of your income each month. Admittedly, in the early days, you may have to start smaller than that, but even a smaller amount, set aside systematically, can help you toward your goal.
The fact is that truly dedicated savers are rare. While a majority of young professionals would say that having money in savings is a priority, only about 15% of Gen Zers ages 18–27 were actually putting money into savings on a regular basis, according to a recent Bank of America Survey. Clearly, then, making a commitment to saving and then following through will put you on the track you need to be on for future financial security.
The Supreme Value of Time
In fact, the chief benefit of forming the savings habit while you’re young is that you have so much more time for the assets to grow and compound, building a more secure financial foundation. Let’s take the example of a 30-year-old professional making $60,000 a year. That equates to a monthly income of about $5,000. If that person puts $500 per month into savings (10% of monthly income) and earns an average rate of return of just 5%, he would have over $500,000 at age 65. The key to results like these, of course, is a commitment to systematic saving over a span of time.
The Investment Mindset
Another important aspect of time, however, is the drag of inflation, the “silent thief.” Young professionals who expect to fund a secure retirement lifestyle should recognize that they need their funds to grow at a rate that outpaces inflation over time. That’s the only way that the purchasing power of savings can be expected to stand up to the steady upward creep of the various costs of living. This means that it’s important for young professionals to build an investment fund with assets that have proven the ability to outpace inflation over the long haul. Significantly, for the last 30 years, the average return on equities was 9%, which is almost 4% higher than the rate of inflation during the same period.
For most young professionals, then, investing in equities (stocks) can be a proven way to build a more inflation-resistant nest egg. Stock market mutual funds or ETFs can offer the convenience of diversification, professional management, and manageable purchase increments. However, only about 15% of adults aged 18–29 own stocks, and just 22% of those 30–44 do so. Clearly, more young professionals need to be taking advantage of the wealth generation potential offered by the financial markets.
Your Company Plan: An Easy Way to Get Started
For many who are starting out in their professional careers, a company-sponsored retirement plan like a 401(k) (or a 403(b) for nonprofits) can be a perfect way to begin building a more secure financial future. Allocating contributions to such a plan through payroll deduction can make saving “automatic,” and many company-sponsored plans offer a variety of investment options that can put your money to work more effectively. Regular, systematic deposits in a tax-advantaged retirement plan are a primary wealth-building tool. And even if you don’t have access to an employer-sponsored plan, you can make contributions to an individual retirement account (IRA) and begin building a foundation for a more secure retirement.
Get the Right Help
One of the best financial decisions anyone can make is securing the assistance of a professional, fiduciary financial advisor. The right advisor can be your financial coach, the architect for your financial plan, and a trusted guide through the various stages of life. At Aspen Wealth Management, we work with clients of all ages to develop plans that are designed specifically for their unique needs and resources. To learn more, please visit our website to read our article, “Solid Foundations: Building Good Financial Habits for Young Couples.”