As young professionals start their careers, one area of concern shared by many is general financial literacy. A recent survey by Experian¹ revealed that nearly 4 in 5 millennials and members of Gen Z are striving in 2023 to be more financially literate, while nearly 70% are actively searching for a trusted source for information on personal finance. Young professionals yearn to fill a knowledge gap they feel they have when it comes to money management.
Much of the uncertainty related to personal finance in young adulthood isn’t just about knowledge. It’s about striking the right balance amidst competing goals. It can be difficult to prioritize long-term goals amidst all of the more immediate needs and wants. That said, if there’s one thing experience teaches us, it’s that the future arrives faster than expected. This article aims to equip young professionals with the tools to prepare for their financial futures, particularly retirement, no matter how distant it may seem.
Why Is Financial Literacy Important?
Financial literacy is understanding how money works in the real world. It’s about knowing how to make, manage, save, and invest your hard-earned money. For young professionals, this means having the knowledge to make informed decisions about salary negotiations, savings plans, investments, and retirement.
Imagine driving a car without knowing the rules of the road. You’re likely to end up in a mess. Financial literacy acts as your map, showing you the way to your goals while avoiding pitfalls. And it’s all the more important in your 20s and 30s due to the power of compounding. Accepting a lower salary at age 25 can translate into tens of thousands of dollars across your working career. Similarly, it’s possible that failing to invest in retirement accounts when you’re young can add years to the end of your career.²
Steps Towards Financial Literacy for Young Professionals
The initial step in the journey towards financial literacy is understanding core financial concepts. Young professionals should familiarize themselves with the time value of money, the principle of compound interest, the implications of inflation, and the rudiments of taxation. Without a grasp on these basics, more advanced financial decisions can become unnecessarily challenging.
Some institutions are attempting to help young adults build this foundation; for example, Wells Fargo offers its Hands on Banking³ program to a variety of audiences, including young professionals, as well as children, teens, military personnel, and seniors. The program offers a number of topics depending on where users are in their financial journey and can help young professionals take control of their financial futures.
Here at Magellan Financial, we also feature a number of helpful resources for getting started with personal financial management via our Knowledge Center. Once you’ve mastered the basics, strengthen your financial foundation by following these key steps:
- The Power of Budgeting: For many, the transition from student life to a professional setting brings about newfound financial independence—and with it, a slew of expenses. Creating a budget isn’t about restricting spending but rather understanding and controlling it. By tracking and categorizing monthly income and expenses, young professionals can identify spending habits, reduce wasteful expenditures, and prioritize savings.
- Emergency Fund: Life is unpredictable. Whether it’s a medical emergency, unexpected car repairs, or sudden job loss, financial setbacks can occur without warning. An emergency fund acts as a financial safety net, ensuring that unexpected expenses don’t lead to crippling debt. Experts often recommend setting aside three to six months’ worth of expenses in an easily accessible account.
- Managing Debt: Debt, when managed properly, can be a tool. However, unchecked or high-interest debt can quickly spiral into a financial quagmire. Young professionals should prioritize understanding the terms of their loans, focusing on paying down high-interest debts, and leveraging good debts—like student loans or mortgages—which can have long-term benefits. Our recent article on navigating debt repayment in 20234 took a deep dive into the current debt terrain and delivered a number of effective strategies for young adults.
- Early Investment Endeavors: The adage “time is money” is particularly true in the realm of investing. Thanks to compound interest, even small investments made early in one’s career can lead to significant returns in the long run. Learning about stocks, bonds, mutual funds, and retirement accounts can equip young professionals with the tools to grow their wealth over time. Make sure you have an automated process for savings and work with personal finance professionals who can keep you on track for your goals.
- Insuring the Future: Insurance is often overlooked by the young and healthy. Yet, without the right coverage, an unexpected event can lead to financial ruin. By understanding and investing in health, life, disability, and property insurance, young professionals can safeguard their financial futures against unforeseen setbacks.
- Continuous Learning and Adaptation: The financial landscape is ever-evolving. Whether it’s changes in tax laws, new investment opportunities, or shifts in the global economy, staying informed is crucial. This means regularly reading financial literature, attending workshops, or even networking with financially savvy peers. Bookmark the resources already shared in this article. Do you still have questions or need additional assistance with setting a course for your financial goals? Reach out to a professional at Magellan Financial.
Retirement Planning – Why Start Early?
Many young professionals question the need to start retirement planning in their 20s or early 30s. Here’s why you should take it seriously:
- Compound Interest: This is the marvel in the world of finance. It’s the interest on your initial principal, plus the accumulated interest from previous periods. The earlier you start, the more you benefit. Let’s take an example. If at 25, you start saving $200 a month with an average return of 7% annually, by 65, you’ll have approximately $525,000. If you start at 35, with the same conditions, you’ll only have around $245,000 by 65. That’s a whopping $280,000 difference!
- Inflation: Prices rise over time. The money you save now will have less purchasing power in the future. Starting early allows you to accumulate more, safeguarding your future self against rising costs.
- Flexibility: Starting early gives you flexibility. If life throws a curveball and you need to reduce or stop your savings momentarily, you’re still on track. Late starters don’t have that luxury.
Practical First Steps to Kick-Start Your Retirement Planning
While the very thought of retirement planning can be daunting, breaking it down into practical steps makes the process manageable and effective. Here’s how you can initiate and streamline your journey toward a fulfilling retirement:
- Enroll In Your Employer-Sponsored Plan: Many employers offer retirement benefit plans like the 401(k) in the US, yet only 57% of Americans who can make contributions do so.5 Enroll in any available program on your first day (or if you missed your first day, now!), especially if your employer matches contributions, as it’s essentially “free money” for your future. When you get a raise, increase the percentage of your savings you contribute.
- Create an IRA: Individual Retirement Accounts (IRAs) offer tax advantages that can help grow your savings. Whether it’s a Traditional or Roth IRA, these tools are designed specifically to bolster retirement funds. Depending on your income, one or both of these might make the most sense for you. What matters is that you take advantage of this additional retirement savings vehicle while you can to maximize your chances for compounded growth.
- Diversify Investments and Income Streams: Don’t put all your eggs in one basket. Diversify your investment across stocks, bonds, real estate, and other avenues. This approach can offer protection against unforeseen disruptions in any one source of income and can also open doors to higher financial growth. Additionally, look to supplement your income by leveraging extra time, assets, or expertise you may have overlooked. Our recent blog6 does a great job of breaking down your options.
- Regularly Review: Financial landscapes, personal circumstances, and goals change. Marriage, children, home purchases, or unexpected health issues can all influence your financial landscape. Review and adjust your retirement plans periodically to accommodate these changes.
- Seek Expertise: Don’t hesitate to consult financial advisors. Professional guidance can be invaluable. Financial advisors can provide tailored advice, help you navigate complex financial decisions, and keep you on track to achieve your retirement goals.
For young professionals, the world is full of opportunities and challenges. In the hustle of managing daily life and building a career, it’s easy to overlook long-term financial planning. However, the choices made today will echo in the decades to come. By embracing financial literacy and making retirement planning a priority, you’re not just securing your future but also granting yourself peace of mind. Remember, it’s not just about how much you earn but also how wisely you use and invest it. The earlier you start, the smoother the journey to a comfortable retirement will be.
For More Information About our Personal Finance and Planning Services, Contact Our Team Of Advisors Today!
- Millennials and Gen Z Consumers Believe Current Economic Environment Is Hurting Their Ability To Be Financially Independent Adults (Experian, 2023)
- Every 25-Year-Old in America Needs To See This Chart Right Now (J.P. Morgan Asset Management via Business Insider, 2016)
- Hands on Banking (Wells Fargo, 2023)
- Navigating Debt Repayment in 2023 (Magellan Financial, 2023)
- Is Financial Stress Hurting Retirement Savings (CNBC, 2023)
- Options For Young Professionals To Supplement Their Income (Magellan Financial, 2023)