Planning for your financial future

Learning to be financially independent can be a challenging experience no matter what age you are. Even when you are financially independent each new life event can present a new challenge and a new learning experience. The transition from life in university to the “real world” can be especially challenging. Many of us are entering the world with student loans, potentially still searching for a job and trying to figure out all the financial lingo around us.

During my first few years post college, I entered the workforce with student loans, moved across the country to one of the most expensive cities in the country (since then moved half way back) and had an unexpected hip surgery at age 24. Life is full of surprises and new adventures but taking steps to make sure they are not also a financial burden is incredibly important. By no means am I an expert in financial responsibility, but here are some tips to set you up for financial stability

1.401(k) and Roth IRAs

Thinking about your financial future is not something we necessarily like to do. It is often hard to imagine planning for something that may be 40 plus years away when you are starting your first job, but contributing to a 401(k), a Roth IRA or another retirement savings program is an easy way to set aside money. So what are these savings programs and how do I start contributing to them?

a. A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes are not paid until the money is withdrawn from the account. Often your employer will match a certain portion of your contribution. I highly recommend you look to see what your employers matching rate is and contribute at least up to that amount.

b. A Roth IRA is an individual retirement plan that bears many similarities to the traditional IRA. The biggest distinction between the two is how they’re taxed. Unlike a 401(k) or a traditional IRA, a Roth IRA is funded with post-tax dollars or money after you receive your paycheck. These funds are not taxed when you withdraw from them down the road.

One thing to remember with employer sponsored 401(k)s is that you need to be sure to take the necessary steps to transfer your 401(k) to your new job if you decide to switch careers. The account will not automatically transfer with you when you when you leave.

2. Health Insurance and Health Savings Accounts

If you elect to get health insurance through your employer be sure to do some research on the plans offered and what it includes. For example, my employer offers three different tiers of a high deductible plan which means you pay out of pocket for medical expenses until you reach a certain dollar amount, while some employees offer an open access plan where you pay a co pay for medical expenses.

One thing to take note of is if you are under 26-years-old and you are on your parents insurance, you could opt out of your employers health insurance Another important area of health insurance to look into is whether your insurance plan offers an FSA or HSA. Both of these allow you to contribute pre-tax dollars towards future health expenses.

a. A Health Savings Account (HSA) is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. An HSA can be used only if you have a High Deductible Health Plan and has a maximum annual contribution which is set by the IRS each year. Any amount left in your HSA at the end of the year will roll-over like a traditional savings account.

b.A Flexible Spending Account (FSA) is a pre-tax benefit account used to pay for eligible medical, dental, and vision care expenses that aren’t covered by your insurance plan or elsewhere. Like an HSA, the IRS sets a maximum contribution each year, but unlike an HSA, a FSA will not rollover anything above $500 each year.

3. Other Employer Benefits

When starting a new job, I encourage you to look into other benefits that can help you save money or be more fiscally responsible. For example, my company will allow you to contribute pre-tax dollars towards commuting related expenses which can be used towards bus passes or shared ride companies like Lyft or Uber.

Employers often have other benefits like matching contributions for charitable donations which encourages you to give back to your community or non-profits that are important to you.

4.Setting a Budget and Tracking your Spending

Another way to help you set yourself up for success in the long run is to set a monthly budget and track your spending. In college I started making a budget in excel to track my spending, but these days we have amazing technology that can help make this significantly easier. Just a quick search on the internet will pull up a list of apps such as Mint, Wallyor and YNAB. It is important to research apps and pick which one will work best for your needs. As you continue to use the apps you can see where you are spending your money and adjust as needed.

According to Northwestern Mutual’s 2018 Planning & Progress Study, millennials age 25 to 34 have an average of $42,000 in debt each and surprisingly the primary source of this debt is not from student loans but rather from credit cards. Keeping track of your spending can help you better live within your means and help reduce your debt balance.

5. Regularly Check your Credit Score

One piece of advice I learned as I was entering the workforce was to regularly check your credit score. By law you are entitled to receive a free copy of your credit report from TransUnion, Equifax and Experian each year. Advice I was given is to not request them all at the same time, but rather throughout the year. Again, technology is allowing us to have this information way more easily with many credit cards giving you your FICO credit score each month or third-party companies like CreditKarma allowing you to check your credit score at any time. Keeping an eye on your credit score regularly can help you keep track of how you are doing financially as well as potentially helping you catch identity theft by noticing if new accounts are being opened in your name.

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