A guide for young workers to saving for emergencies and investing for retirement

When Emily Bailey completed her management degree from Indiana University at Bloomington six years ago, she was part of the group of graduates called the “Lost Generation” as they tried to embark on a career in an economy still marked by the financial crisis and recession of 2008-2009. Like many, she had thousands of dollars in student loans, no job in her field, and chose a wedding planner position to pay the bills.

And then when her career finally improved, the pandemic hit last year and she lost the project manager job she got at GE Aviation a few months earlier. “I was pretty desperate,” she said, after turning to DoorDash for a gig job while looking for a full-time job.

Despite these setbacks, Bailey, now 28 in a new project management role, just bought a tiny ranch house in suburban Indianapolis with a 10% down payment. Even after buying her home, she continues to keep at least $ 10,000 for emergencies in the bank and regularly saves 6% of her retirement pay in a 401 (k) at work, so she is eligible for the contribution. maximum consideration from his employer.

His discipline could be an example for this year’s college graduates, who are entering the workforce in an economy still healing from the pandemic, said Paul Fenner, a Commerce Township, Michigan financial planner who learned to Bailey on how to budget and save money. meager paychecks.

He and other financial planners point out that even in tough times, people often have more power than they realize to stretch limited paychecks and start building wealth. Here are some of their tips for new graduates:

Save for emergencies

Entry-level wages may not leave much to hide, but finance professionals say it’s critical for young workers to make savings a requirement of every paycheck, not what is made with leftover silver. Automatically transfer savings to a bank account so you won’t be tempted to touch them.

This means that before committing to an apartment or car payment, first calculate if you can afford what you envision and still save a specific portion of each paycheck.

There are some rules of thumb that can help. Rent or mortgages, including utilities and insurance, should not exceed 28% of gross income, car payments and insurance should not exceed 10%, and the term of a car loan should not exceed the number of years you are likely to drive the car before purchasing another one. In addition, student loan repayments should not exceed 8% of income; While it may be too late to control this proportion, graduates may apply for an “income-based repayment” if their income is too low to cope with large loan repayments.

Some financial planners suggest using a 50-30-20 budget so that people don’t spend too much according to their income: 50% of the after-tax salary would be reserved for necessities – rent, car and insurance payments, mortgage payments. student loans, health insurance, telephone, food and so on; 30% might opt ​​for entertainment – anything from


accounts for travel; and the remaining 20% ​​must be saved.

The bottom line: Shocks do happen and it is imperative to prepare for them, as young adults are usually among the first outages as economic conditions tighten. So financial planners say it’s essential to be prepared by fully paying off credit cards every month and having an emergency fund to cover basic expenses such as food, shelter, insurance. sickness, phone and car payments, in case someone loses their job. Three to six months is the target.

Saving for retirement

Besides saving for emergencies, financial planners say saving for retirement should start with a first job, especially if employers offer free money to employees who save in 401 (k) at their workplace. job.

As a general rule, if a person saves 10% of every paycheck from their first job, and continues discipline until the current full retirement age (67), they should have what they have. need to pay for her retirement, even though she is living in her 90s.

If 10% is too much, start smaller and increase your progress. Let’s say you’re 21 and your salary is $ 40,000, try to save 5%, or $ 2,000, in your 401 (k) plan. If your employer softens the deal with a quid pro quo, such as giving you half of what you invested in 401 (k) yourself up to a certain percentage, you will get $ 1,000 on top of your membership fee. – by putting $ 3,000 on your retirement, or a little more than 7% of your salary.

If you keep increasing your savings each year with increases and your employer continues to match contributions, the combination will soon exceed 10% of your salary, and by the time you retire you should have around $ 1.1 million. if 401 (k) investment returns a conservative 7% per annum.

Today, more and more financial planners are telling young clients to complete their 401 (k) as much as needed to get the maximum match each year from their employer, but to put in additional retirement savings – up to 6,000. $ per year – in a Roth individual retirement account. When you save in a Roth, you don’t get upfront tax relief like you do with a contribution to a typical 401 (k) account or traditional IRA. But once you put money into a Roth, it is never taxed if you leave any investments in the account until you are at least 59½ years old.

Anyone who has made money in a job or business, or a spouse, can open a Roth IRA as long as their income does not exceed the limits: $ 140,000 for singles and $ 208,000 for couples.

Where to save and invest

You can’t dare with an emergency fund or with savings you’ll need within five years for a down payment, car, wedding, or graduate school. For specific short-term needs, stocks are too risky as the stock market can lose 20% or more during bear markets.

Although safe money choices hardly earn interest anymore, money for short-term needs should be placed in money market funds, high-yield savings accounts or certificates of deposit. Find the best rates on depositaccounts.com or bankrate.com.

Retirement money, however, does not have to be protected in the same way as short-term cash. In fact, being too careful with retirement investments can be dangerous because savings will not grow adequately.

Historically, the stock market – as measured by the S&P 500 – has gained around 10% per year on average. But there may be years like 2008, where the stock market loses 37%, or years like 2019, where it gained 31.5%.

Since guessing when these cycles will occur is folly, even for investment professionals, financial planners say to bet on averages: Keep most of your 401 (k) money in a diverse mix of stocks. Via a fund like a total stock index fund, add to it with every paycheck, and don’t touch it even if a market downturn occurs. While bear markets and losses will occur, historically the good years have far outweighed the bad.

Another diversified investment that is common in 401 (k) s: target date funds. Find them among the funds available to you by looking for a number in the name that is close to the year you are likely to retire, perhaps 2060. This target date 2060 fund will be more equity oriented while you are younger the idea is to give your money the best chance of growing over 40 years or more, whereas a target date 2030 fund, for example, would have fewer stocks and more investments at fixed income, as holders would probably be closer to retirement.

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About Christopher Easley

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