Regarding student loans, the ideal would be to not have any at all – and although this is possible for some people, it’s not for all. Working while in college and attending community colleges for general education requirements can greatly reduce the cost of education, and make any student loans that need to be taken out more manageable. There are a plethora of student loan repayment plans, most commonly the 10-year standard repayment plan, which may not be suitable for all re-payers. For those entering public services, income-based repayment plans can greatly reduce the total amount of loans paid, forgiving entire loan balances over 10 years of qualifying service. In addition, simple things like setting up your student loans for automatic withdrawal can earn you a slight savings percentage of your total balance. Student loan planning varies from person to person, and the complexity of the many different repayment options available can be intimidating – finding professional help, such as rebel Financial’s student loan repayment service, can be crucial.
One of the hardest things for us to do is exhibit self-control – we’re being advertised today more than ever before and taught a “spend more” mentality. A major reason for this is credit cards: the trillion dollar credit card industry is growing each day and more people, especially younger, are wanting to borrow more money. It’s better to spend money that we do have, rather than what we don’t. Having one credit card and paying it off every month can be an excellent way to increase your credit while simultaneously keeping your debt-to-income ratio low.
Pay Your Bills – On Time
It’s also important to stay current with dues. For current bills, utilizing features such as auto-pay can ensure that you don’t miss a bill payment, and even simple things like putting reminders on your phone can ensure you pay dues that may not have an auto-pay. Reminders can also help ensure you don’t miss timings for important financial events, such as filing tax returns. Lastly, it’s your responsibility to do everything in your power to prevent identity theft – scammers like to target a younger audience because of perceived susceptibility. It’s important that you carefully research any financial products offered to you for both legitimacy and necessity. Insurance agents, as an example, may try to take advantage of you and sell you products that you may not necessarily need – if you’re going to get financial advice, it’s important to find a financial planner that is a fiduciary all of the time.
Pay Yourself First
Do you have an emergency fund? Financial experts suggest saving 3-6 months of expenses in an emergency fund, for various reasons such as a job loss or an unexpected major expense (car breaking down, etc). One of the best strategies to build an emergency fund and also save for retirement is to pay yourself first: take the same amount every month and before everything else, put that into your savings. Consistency is key to building your emergency fund efficiently, as well as putting the funds into the right account. High-interest savings and money market accounts – slightly less liquid accounts that yield a higher rate of return – are best, because you shouldn’t be withdrawing from your emergency fund often, but still need the funds available should a major emergency occur.
Start Retirement Savings Early
In addition to emergency savings, retirement savings are one of the most important things we save for in our working lives, and starting early can have a significant impact. For example, investing the maximum $6,000/year in a Roth IRA from age 25 to 65 with a 7% rate of return yields $1,197,811, while waiting just 5 years until age 30 and investing the same amount yields $829,421 – a difference of $368,390! The reason the difference is so significant is because of the compound interest being accumulated. With “traditional” interest, only your principal amount would earn interest; but with compound interest, both your principal amount and your interest would earn interest (hence the term “compounding”). This is also why credit card balances can increase so quickly: compound interest is accumulating on the balance you owe. Additionally, the above example is just for a Roth IRA account and not including any additional employer plans, which have much higher contribution limits. Maxing out your work retirement accounts up to the employer match (if applicable), then funding traditional and Roth IRAs after is one of the most important things you can do for your financial future. Roth accounts are also especially useful for younger individuals because you pay the taxes upfront, and withdrawals are tax-free, meaning you pay taxes when you’re in a lower tax bracket now and don’t when you’re in a higher tax bracket later.
Insure Your Health
Even if you do everything mentioned here, all the wealth in the world won’t matter if you don’t have the health to enjoy it – this is where insurance comes into play. Most young adults will be covered under their parents’ health insurance until age 26, as long as their parents are working. If this is not the case, ACA health insurance (also known as Obamacare) is still an affordable option for many, and can give tax breaks for younger individuals who don’t earn as much income. Another option can be short-term health insurance, which covers shorter interims than traditional health insurance, making it more affordable. Those attending graduate school and becoming ineligible for the parents’ health insurance, but not needing a permanent insurance solution just yet would be good candidates for short-term health insurance. If you’re not covered under your parents’ plan, this is not something to be overlooked, as one wrong accident can be devastating financially. Lastly, renter’s insurance is also important (and mandated by many apartment complexes) in case of a theft or burglary. Being prepared for the unexpected and having an appropriate amount of coverage can be crucial should you ever become a victim.
To summarize, paying off student loans and credit cards is the most efficient way to reduce debt and boost credit, while saving for emergencies and retirement can be vital to ensuring financial longevity. Ensuring you have the proper insurance coverage, and avoiding sales pressure for insurance products you don’t need, can keep you protected without overpaying. By managing your money well, and helping other young adults do the same, you can impact not only your own generation, but future generations to come.[/vc_column_text][vc_empty_space][vc_column_text]
This article was written for information purposes only and its content should not be construed by any consumer and/or prospective client as rebel Financial’s solicitation to affect, or attempt to affect transactions in securities, or the rendering of personalized investment advice for compensation. No client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from rebel Financial, or from any other investment professional. See our disclosures page for more information.
Phil Ratcliff, President of rebel Financial, is a senior financial advisor that holds an AIF®, CFP®, ChFC®, and CLU® certifications. He started his career at American Express Financial Advisors in 2003, then moved to AXA Advisors for 7 years before founding rebel Financial LLC in 2013.