Over the last ten years, I’ve witnessed the substantial opportunities young professionals have when they take time to consider and review a few financial planning issues early on. Although these five examples sound simple, the percentage of young professionals who don’t formalize a plan, that includes these considerations, far outweigh those who do.
- Create a Budget
Sounds simple, right? However, you’d be surprised at how many young professionals have not put pen to paper and actually created an accurate budget. There is a reason this is number one on the list – the budget is at the foundation for all things financial, and without it, the most important financial decisions cannot be made. The very first thing we work on with a young professional client is the establishment of a budget, including a detailed cash flow analysis to show the relationship of income vs. actual expenses, a glimpse into their financial “wellness”.
- Establish an Emergency fund
Another indication of a person’s financial wellness is whether or not they have established an emergency fund, and actually funded it accordingly. Usually six months-worth of normal expenses is a good starting point for most young professionals, and establishing it first is priority. Too many times the occurrence of a financial hardship with no emergency fund available creates a snowball effect, compounding one hardship into future hardships (credit card debt, unpaid bills, poor credit score, etc.).
- Maximize Your Employee Benefits
Oftentimes what makes working for an employer so great are the benefits offered to the employees. These benefits help attract young professionals and keep them employed long-term. Having an understanding of your employer benefits and taking advantage of the ones most beneficial to your family can be critical to long-term financial success. Most importantly to consider is the employer’s retirement savings plan, usually a 401K, 403B, or comparable retirement plan. An employer usually offers a match that, 9 times out of 10, an employee should take advantage of.Not only may an employer match employee retirement savings, but in some cases, the employer may match payments towards expenses such as student loans, up to an annual maximum (many medical professionals are offered this benefit). If the budget allows, paying as much as you can on your loans in a given year to receive a payment match from the employer is a huge benefit to getting those loans paid down, and off, as quickly as possible. This ultimately frees up future cash flow for savings or other beneficial uses of this money. Study your employer benefit options thoroughly and understand which ones make the most sense for your situation.
- Purchase Life Insurance
Not just the right amount, but also the most appropriate type of life insurance. Too often I see young professionals getting “sold” permanent life insurance at a very young age, on the promise of a favorable growth of cash value for future income purposes. While there are definitely specific instances where the permanent insurance strategy is appropriate, more often than not the protection offered through term insurance is most advantageous for the main purpose why life insurance is needed – family protection. Oh, and it costs a lot less too.
- Invest in Yourself
Outside of time, the biggest asset a young professional has is themselves. Today, a person’s future income potential is based on the skills and values they bring, and continue to bring, to the table. It’s important to realize this early and take advantage of the flexibility one has to further their education in their respective field, learn a new and complementary trade, or take a professional or entrepreneurial risk. These things become much more difficult as life goes on. Professional regrets are hard to stomach ten and twenty years down the road.