As careers begin to take shape and incomes grow, developing a solid financial plan can provide stability and peace of mind for young professionals. With costs of living, student debt, and the unpredictability of economic conditions, young professionals face unique challenges that can impact their financial well-being. Here are 10 things young professionals can do to start building their financial futures:
1. Get organized
Get a full understanding of your financial situation by reviewing all your accounts and monthly spending habits. There are a variety of budgeting apps that can help you stay organized to see more easily what is happening with your money.
2. Assess your savings
Start establishing an emergency fund to cover three to six months of expenses. Consider holding this cash in a higher interest-bearing account (like money market or high interest savings). Also, consider creating other savings accounts if you have larger ticket item goals, such as homes, vehicles, or vacations based on the timeline of when the funds are anticipated to be needed.
3. Get familiar with employee benefits
Whether you have a 401(k) or similar retirement plan through your employer, make sure you’re deferring enough of your compensation to get your full company match, at minimum. Review contribution maximums annually and contribute as much as you can. Many young professionals are not contributing as much as they could/should to their employer-sponsored plan. Depending on your health insurance plan, you may be eligible to take advantage of a Health Savings Account or Flexible Savings Account, as well.
4. Review outstanding debt
Assess the debt you have accrued and make a plan to start paying it off. Here are a couple debt payoff methods to consider.
Debt Avalanche Method
- List outstanding debts
- Pay extra on debt with highest interest rate
- Move to next-highest interest rate
- Pay minimum on everything else
- Rinse and repeat until all debt is paid off
Debt Snowball Method
- List outstanding debts
- Make minimum payments on everything
- Pay extra on smallest debt
- Move on to next-smallest debt
- Rinse and repeat until all debt is paid off
5. Fund a Roth or Traditional IRA
An Individual Retirement Account (IRA) allows you to save additional funds for retirement within an account owned by you that is not tied to your employer. Traditional and Roth IRAs have differing features and benefits, similar to Roth vs. Traditional 401k accounts. Familiarize yourself with the annual funding limits and potential income restrictions prior to funding.
6. Establish professional advisor relationships
Start forming relationships with a tax advisor, banker, attorney, insurance broker and others. A simple way to find a professional is by asking a trusted friend or family member for their recommendation.
7. Consider purchasing life insurance
Life insurance can be a smart, cost-effective way to protect loved ones from financial hardship. You may receive a base offering through your employer; however, this is typically not portable if you leave that job. There are many types of life insurance, so discuss with a professional which type would be best for your situation.
8. Consider contributing to a 529 plan
If you have children, this tax-advantaged savings plan can be used to put money away for qualified K-12 education and/or future college expenses, such as tuition, room and board, and books. Each child will have their own plan, and anyone can contribute funds toward it, such as grandparents and other family or friends. Rules and tax benefits may differ from state to state.
9. Create an estate plan
While most young professionals may not feel pressure to get their affairs in order, it’s important to plan for the unexpected. Talk with an estate planning attorney to have documents drafted, including establishing a living will and a power of attorney for financial and healthcare decisions. Also, review your beneficiary designations on financial accounts to make sure they align with your estate plan.
10. Look into Roth IRA conversion
A Roth IRA conversion allows you to move money from a pre-tax retirement account (traditional IRA, 401k, etc.) to an after-tax Roth account. Typically, this is done while in lower tax bracket years with the anticipation of higher earnings in the future. If you expect yourself to be in a higher income tax bracket in retirement, a Roth IRA conversion may make sense. You pay taxes on the amount converted for the benefit of tax-free distributions from your Roth in retirement. It’s an opportunity to be tax-efficient with your retirement funds by paying the tax when your tax bracket is lower. Consulting a tax professional or financial planner to confirm whether this is the right move for you is advised.
By creating a clear plan early on, young professionals can manage debt, build savings and invest wisely for the future. Establishing good financial habits now allows you to achieve life goals such as homeownership, starting a business or retirement, while also providing a safety net for unexpected events.
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