Editors Note: Over the next few months, Stacie Rhodes will be sharing strategies for financial readiness for each decade of our lives.
As soon as I started my career, my dad insisted I attend an eight-week financial workshop. While I had never taken a personal finance class, my parents had modeled, discussed, and taught me how to manage money. I thought, “Why do I need a course? I’m young with not much money to work with!” Little did I know how impactful that series would be. Allow me to share with you a few money strategies I learned as a young professional:
Build an emergency savings fund – high-yield savings accounts and auto-draft. According to studies following the impact of COVID-19, three out of five Americans (61%) say that they have already run out of their emergency savings fund or will run out of funds by the end of the year. As you launch your career, do not minimize the importance of establishing a savings fund that is only utilized in an emergency. Take advantage of high-yield savings accounts that offer a higher interest rate while your money sits and accumulates. Ask your current bank what they offer, but explore other banks. Online banks typically offer a higher interest rate, making their high-yield savings accounts the most attractive. Once established, set up an auto-draft from the account your paycheck hits to your emergency savings fund. Remember – what you prioritize last will be funded last. Make saving a priority by automatically sending the money to your savings account when the paycheck hits. You never know when your family’s well-being will depend on it.
Start saving for your retirement. The longer-term your perspective is, the better your decision today. While retirement feels so far away, you are missing opportunities for your money to make money if you don’t take advantage of compound interest. If your employer offers a retirement contribution match, contribute up to the percentage they match – that’s “free” retirement money they offer contingent on your contribution! Then, watch the power of compound interest (see below):
Contribute $200 per month, every month from age 20 to 65, assuming 8% annual interest: $1,069,135
Contribute $200 per month, every month from age 30 to 65, assuming 8% annual interest: $463,305
Notice that the difference is only ten years. The contribution didn’t change – only time. Prioritize your company retirement fund and contribute up to the amount they match if you can afford to do so. If your employer doesn’t offer a retirement fund or if you want to contribute more than the match, consider an Individual Retirement Account (IRA) or the ROTH Individual Retirement Account (ROTH IRA). The difference between the two is how your contributions and future withdrawals are taxed. The 2023 contribution limit to either of these accounts is $6,500. The important concept is that you start contributing early and often.
Apply for life insurance. While you may be young and in the best shape of your life, you won’t think you need life insurance – but by the time you need it, you won’t be able to get it. Keep in mind that life insurance companies are taking a bet on your life expectancy as they must pay the policy amount if you die while the policy is active. Therefore, companies are evaluating your life expectancy, health, and other factors to determine your eligibility for life insurance and the amount of the premium they need to charge. The younger and healthier you are, the lower your premiums will be. Therefore, the rule of thumb is to buy young and only buy the coverage you need. There are two main categories of life insurance – term and permanent. Term life insurance will cover you for a period (ex. 30 years) and typically have lower premiums. Permanent life insurance is for the entirety of your life and has a cash value feature, making it a more expensive option. I encourage you to estimate how much insurance you need and consider term insurance for a period that would cover the years your dependents would need a replacement for your income.
Prioritize a money conversation with your prospective partner. Money is one of the leading causes of divorce in America. A new survey says that 65% of couples are financially incompatible as they have different philosophies around spending, saving, and investing. While it can be difficult and vulnerable to start this conversation, the strength of your marriage depends on it. Ladies, you are young with a lot of life stretched out before you (I hope!). These money conversations can often be dismissed during these pivotal years – but today’s decisions can dramatically change your future reality. Let your money work for you as you are working so hard to earn it.