As a golfer, I am always looking for a way to improve my putting and hit the ball longer and straighter. There are countless tips available online and in magazines for me to reference. However, what I’ve found is the more tips I try to implement, the worse I play.
Why is this? Simply put, sometimes we suffer from information overload. As our minds try to process more data, we reach a point where instead of doing good it actually creates confusion.
I’ve seen many young professionals experience this when it comes to their personal finances. They read, research, and ask trusted friends for advice, but ultimately find themselves confused and unsure of their next steps.
My goal is to help you address five key areas of your personal finances so you can turn your attention towards more important things in your life. Sure, there is a lot more to discuss than what I’m about to highlight, but think of this as a good foundation on which to build.
So what are five key financial areas every young professional should address?
1. Reserve for unforeseen events
Young professionals should set aside sufficient funds to turn to in case of an emergency. Let’s face it, life happens. Whether it’s you, a family member, a home, car, etc. there will be something come up that requires an unexpected check to be written.
I recommend setting aside six months of living expenses in a bank or credit union account. Keep this reserve liquid, even if it means the account pays very little interest. That way you know it’s available when the unforeseen event occurs.
2. Invest for the long-term
Early in your career, it’s the accumulation of funds that really matters. Too often I hear young investors getting caught up with the allocation of funds. As a young professional, time is on your side. You can afford to be more aggressive now than you can later in life. However, the real goal should be setting aside as much as possible to invest for the long-term.
3. Maximize employer provided benefits
During your next Open Enrollment period, don’t just check the boxes by your current benefits because it’s the easy thing to do. Take time to fully understand your options and, if applicable, coordinate your elections with your spouse’s benefits.
A practical step you should take today is to be sure you’re getting the most from your employer provided retirement plan. If your employer will match a certain percentage of your 401(k) contribution, take advantage of that benefit…after you’ve completed #1 above, of course! Not doing so means you’re missing out on FREE money. According to a recent study by Financial Engines, employees leave $24 billion on the table each year as a result of not receiving the full match from their employer. Don’t be part of this statistic!
4. Carry sufficient life insurance
Some items to consider when determining how much life insurance you should carry are:
Debts – What is the balance of your mortgage? Student loans? Auto loans? Personal loans? You may want to consider coverage to pay off any loan that would not be forgiven in the event of your death.
College funding – Is saving and paying for future college expenses one of your goals? Would you want to fund this future expense in the event you die prematurely? Use a college savings calculator to project future costs.
Survivor cash needs – Would your surviving spouse continue working? Would there be additional childcare costs? Should you set aside sufficient funds for someone in case of an unforeseen emergency? It’s important to have this conversation with your loved ones so you can plan accordingly.
This is far from an exhaustive list. However, it should help you begin to assess your current coverage and determine whether additional life insurance is appropriate.
5. Get your estate planning in order
Putting together an estate plan will require time, legal fees, and a conversation that many people find uncomfortable. However, it’s one of the most important steps you may take.
I recommend you consider the following documents:
Financial and Healthcare Power of Attorney – Should you become incapacitated, these documents enable you to designate an Agent to make decisions on your behalf.
Living Will – This document allows you to spell out your desires regarding end of life decisions.
Last Will & Testament – Explains how you want certain assets to be handled and also designates a Guardian for minor children in the event of your death.
In some cases, a Revocable Living Trust may be beneficial as it provides more flexibility than a Last Will & Testament in regards to the distribution of assets. In addition, certain creditor and spousal protections may be available with a Revocable Living Trust.
Finally, you should periodically review beneficiary designations, both primary and contingent, on life insurance policies and retirement plan accounts (e.g. your 401k), to make sure they are still as you desire.
There’s a lot more to consider, but addressing these five areas will create a solid financial foundation that can be built upon in the future. My hope is you review these issues so you can confidently turn your attention towards higher priorities in your life!