As digital natives, many 20-, 30-, and 40-somethings can find almost anything online, but are still struggling with how to start on the path of financial success. The challenge for most isn't finding information, but sifting through all the noise. The financial industry is publishing reams of information every day, but not giving you access to advice that applies to you personally, and a road map of how to start, right now.
Most of you, event those who think you don't know what to with your money, are facile with Venmo and PayPal, transferring cash online at a flash. You can work your way through financing a first car or getting a good starting salary at a first job. In other words, you already know more than you think. And, wherever you stand now, you can take three steps that will translate into more financial security in the future:
1. Quickly get a handle on your expenses. When you know where your money goes, you are in control and can be thoughtful about aligning your spending to your priorities.
2. Save four times your monthly expenses as a cushion for emergencies. Now that you know how much you spend every month, multiply that amount by four. This is the amount you need to set aside in a readily accessible savings account in case unexpected expenses come up, like repairing your car after a fender member or surgery for your dog. Be disciplined about saving a little every month until your emergency fund is where it needs to be, even if it means sacrificing little luxuries once in a while. Remember to replenish the account every time you use it.
Having your cushion ready whenever you need it will give you a great sense of security and freedom. It will also free you up to work on other savings goals without getting derailed by unexpected expenses.
3. Bite the bullet and start maxing out your 401k and saving in an IRA. Too many of us delay saving for retirement because they don't know which accounts they need, which funds to buy and how much to contribute. Don't overthink it. Get help. Your benefits administrator and reputable fund companies like Vanguard and Fidelity can answer those very questions without requiring you to get a finance major in retirement accounts along the way.
Nervous about committing yourself to the maximum contribution for a full year? Start as close as you can to the maximum, then bump up your contribution at the next enrollment date (usually quarterly) after you understand your expenses more clearly. Set a calendar alert so you won't forget!
Whatever you do, be disciplined about never borrowing from your 401k. Over the years, emergencies will come up, and you will need to cover unexpected expenses like if your car breaks down. Find other ways to cover these expenses. Your 401k is for one thing only: funding your retirement.
One final note. These days, many younger professionals are deliberately "traveling light" financially - for example, by choosing not to own a car or by delaying buying their own home. If you are one of these people, remember that you still need to cover the basics: building a cash cushion, paying down debt, and saving for retirement. But by spending less and assuming less debt, you may be in a position to start an investment portfolio earlier than your peers. Do it. Time is on your side, and earlier you begin, the more you will have when you need it in the future.
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