Young people have all the time in the world and they’re bulletproof, as a 23-year-old, I would know. Thinking critically about how their retirement income will be sourced is not always top of mind.
This demographic has new spending money of their own and with this culture moving towards immediate gratification, naturally, there is a lot less emphasis on saving and investing, but rather enjoying every dollar earned. There is absolutely nothing wrong with spending the money that many have worked so hard to earn, but being informed on slight changes to implement with your savings and investing could have a drastic effect on a future “nest egg” in retirement.
Mistake #1: I am not making enough to save
Many times, this demographic has new expenses to learn how to balance along with their new and growing income. This can include rent, utilities, credit card(s), student loans, car payments, etc. (Although, if you do have debt payments – we hope you are working to pay them off using the steps our friends at Ramsey Solutions lays out for us.)
Maturing and learning how to spend only what you can afford is a big learning curve for some in this demographic. I am asked many times to help my friends and acquaintances with budgeting.
For advice, I have two different categories that I, as an advisor for others, like to create when it comes to my expenses each month. At the end of the month, I pay rent and utilities - things that are necessary for me to live. In the middle of the month, I pay for all of my other expenses. The key with discretionary spending is…if you cannot afford it, do not get it.
Here is an example of how someone making $2,500 per month after taxes could easily figure out what they can save at the end of each month:
$2,500 Net Income
- $1,200 Rent & Utilities
- $1,000 Other spending/expenses
= $300 per month in savings/investments
The trick is to simplify everything and keep track of what everything costs. For those with dual income, and more expensive living costs, it is the same calculation, just with bigger numbers. Just separate it into those 2 categories.
We understand that budgeting can be a daunting task so if you want someone to help you get started, our Financial Coach would be more than happy to speak with you!
Mistake #2: I can do it on my own
I hear this all the time. Many young people and plenty of adults still choose to manage their savings and investing on their own. Many are successful but like anything else, you give up a valuable asset - time.
On the other hand, many are not successful. Reading articles about the best types of investments, the best types of stocks, bonds, mutual funds, ETFs, etc, can all be very daunting, and many times, people do not choose wisely.
One simple mistake can cost someone thousands of dollars in the short term, and even more in the long term, especially when it comes to taxes, potential gains, and timing the market. It may be worth your time to speak with an advisor to organize what you have, check your spending, and find the right way to start investing to set it and forget it.
Mistake #3: Set it and … can I make a withdrawal?
An important question someone in this demographic should ask is, “What is my timeline for this money?” This question is essential because it can help you decide where to start saving your money, and how much to save into each “bucket”. Many times, this demographic starts to save for a house, a new car, etc. That is all money needed for the short term. That type of money should be put into a separate bucket of investment - like a non-retirement brokerage account.
At the same time, there needs to be considerations with retirement. Many times people will use their 401(k) to invest, and that is fine, but 3-5% generally isn’t enough. Dave Ramsey recommends that after your debt is paid off and one has an ample emergency fund (3-6 months of expenses saved and not invested), they should be saving and investing 15% of their annual income. In these retirement buckets, you have different tax-advantaged accounts. The 401(k) takes pre-tax contributions, so you’re putting off your taxes, while a ROTH will be tax-free in retirement. For investing in both accounts, it is crucial to understand that an investor will not touch this money before 59 ½ years of age. Any withdrawals before then will result in penalties. Knowing your timeline is something regularly overlooked by people ages 22-30, and thinking critically about goals and the future could have a tremendously positive effect on your financial life; especially at this young age.
The power of speaking with your advisor
As overwhelming as the stock market, timing, capital losses, and more can become, always feel free to use an advisor you know to just ask questions. It is our passion to help people understand these topics. When it comes to the life work of our clients and prospects, no decision is ever taken lightly. No account value is disregarded because all concerns and questions hold such a heavy weight in a time like this. We hope you’ve learned a great deal from this article, and more importantly, reduced some stress from your life today.
3 MISTAKES PEOPLE AGES 22-30 MAKE WHEN IT COMES TO SAVING & INVESTING
November 24, 2022
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