As my niece Jessica and many of her peers get up and running in their new careers, they face one more important financial challenge. In school, there are the three Rs: Reading, Writing and Arithmetic. Post-graduation, most young adults must manage one or more of the three Cs: College loans, car payments and credit cards. This can get in the way of your otherwise-solid head start on saving and investing for the rest of your financial life.
Of course it’s wonderful if you emerge from your higher education with little or no debt to begin with. But we all know that, in real life, this is not always possible. When you must assume debt along the path to your career, here is some advice.
Each individual’s circumstances are going to vary widely. But no matter who you are, I encourage you to commit yourself to saving and investing for your future, and eliminating burdensome debt as aggressively as you’re able. Both are vital to your long-term well-being. By striking a good balance between them, you can make best use of every one of your earning years. Here are some steps to follow to find a balance that makes sense for you.
Establish That Emergency Fund
We already mentioned this one in our first post on saving and investing, but it bears repeating as an important priority. It’s best to acknowledge that when it comes to preparing for financial “emergencies,” it’s really a matter of when, not if. We would suggest establishing six to 12 months of reserve based on how much you typically spend in a month or how much you earn – and to avoid using it for anything other than true emergencies.
Itemize Your Debt
Not all debt is cut from the same cloth. Credit card debt typically extracts excruciatingly high interest rates, whereas college and car loans may be less onerous. Some debt may call for higher monthly installments to make an effective pay-down dent; others may be easier to slip in as a modest added expense that you’ll scarcely miss.
A good first step is to sort out the types of debt you’ve got. If you aren’t in a position to pay everything at once, this will help you prioritize where to allocate available dollars. For example, ignoring a high-interest credit card balance is more hazardous than taking a little longer on a lower-interest loan. Skipping a minimum monthly payment will dig you into a deeper hole than underpaying on the full balance.
Take Stock of Your Savings
Resource: David Weliver’s “Money Under 30”
Your saving and investing opportunities vary as well. As we mentioned before, leaving your employer’s matching funds sitting on the table instead of contributing in equal kind into your tax-favored retirement plan is a lot like telling your boss, “No thanks, I don’t need that raise.”
On the other hand, if there is debt to pay off, you may need to minimize (without necessarily eliminating) your saving and investing while you work on that. Bernstein notes: “It’s a math question. Basically what it boils down to is: Which is higher, your loan interest or the return you’re going to get on your investments?” If you can access some professional advice to sort out the equation, a little help here may go a long way.
In short, once you’ve identified your varied opportunities for saving and investing, and compared and contrasted the expected benefits against the types of debts you’re facing, it should make it easier (although probably not easy!) to create a balanced plan that works for you.
Carpe Every Diem
Resource: Erin Lowry – US News & World Report
Lowry raises a good point in her article when she reminds us: “Don’t Forget to Celebrate the Little Wins.” Paying off long-term debt is hard, so keep up your spirits and your long-term resolve by setting mini-goals to celebrate along the way.
Also, don’t forget to seize unexpected opportunities to make extra progress when you’re able. For example, if you receive a raise at work, allocate some or all of it to savings or loan payments – automatically and before you get used to spending at a higher level. If you pay off a loan, shift at least a portion of the assets that were earmarked for that expense toward long-term savings. A birthday check from your favorite aunt? What better use for it than to invest it in your future?
Sage Serendipity: Need some inspiration for Halloween costume? The Los Angeles Times website has an amazing photo gallery – Images from New York Comic Con 2015. New York Comic-Con was held at the Jacob Javits Center last week.