Building a Strong Financial Foundation: A Blueprint for the Young Professional
Article by: Payton VeStrand, CFP®
Embarking on the career journey as a young professional is both exciting and daunting. Navigating through budgeting, saving, investing, and managing debt demands a level of financial literacy that many young adults find themselves unequipped to handle. However, armed with the right knowledge and strategies, building a well-planned financial future is achievable. In this post, we will explore a few essential financial principles tailored to the unique challenges faced by young professionals.
Build an emergency fund
One of the first steps a young professional should take regarding their finances is to establish an emergency fund to cover unexpected expenses. Life will inevitably throw curveballs, and having cash readily available in an emergency savings account is an excellent way to prepare for life's unexpected moments. Aim to save an amount equivalent to three to six months' worth of living expenses. These funds should be reserved exclusively for genuinely unforeseen significant expenses such as car repairs, medical emergencies, or unexpected home expenses.
Set a savings goal
Having margin in your budget is essential. While everyone's financial situation is different, saving 10%-15% of annual gross income serves as a great starting place for many young adults. You'll want to take advantage of favorable tax treatment by primarily saving through your company's retirement plan or an IRA. However, it's also prudent to maintain a portion of savings in an easily accessible account that will not invoke penalties for early withdrawals. For instance, if the goal is to save 12% of your gross income, it would be best to direct a majority of those savings toward your 401(k), maybe 8-9%, while saving the remainder in a brokerage account to help fund larger purchases such as appliances, cars, or a down payment on a home.
Harness the power of compound interest
Compound interest, often referred to as the "8th wonder of the world", is a young professional's greatest ally. Compound interest is like a snowball rolling downhill, where money grows faster over time because interest accrues on both the original amount and on the interest already earned. The power of compound interest is best learned by looking at a comparison of two investors: Suzy and Sam. Suzy started her investing journey early, setting aside $2,000 per year from age 22 to age 33, and never adding to her portfolio again. By age 65, her $24,000 of savings would yield $993,307 (assuming a 10% rate of return). On the other hand, Sam waited until age 34 to start saving, but he thought he could make up for lost time by saving all the way until age 65. Sam saved a total of $64,000 and the resulting o value of his portfolio at age 65 is $442,503. This is $550,000 less than Suzy, who invested much less than Sam but started earlier. This example highlights the true wealth-building nature of compound interest. Even modest savings at an early age can have a profound impact on one's financial trajectory, and starting the savings process as early as possible offers the best chance for future success.
Keep an eye on your credit score
A healthy credit score is crucial for the financial well-being of young professionals, serving as a cornerstone for stability and future financial opportunities. Strong credit not only provides favorable interest rates but also opens the door to pivotal milestones like renting an apartment, purchasing a car, and buying a home. Beyond these tangible benefits, a healthy credit history reflects responsible financial behavior, fostering trust among lenders. To establish a good credit score, young professionals should practice prudent credit card usage, timely bill payment, low credit utilization, and minimizing "hard" credit inquiries. These steps lay a solid foundation for their financial success and positioning them for greater flexibility in the years ahead.
Armed with the insights shared in this post, young adults can empower themselves to make informed financial decisions. From establishing emergency funds, to harnessing the power of compound interest, and maintaining a healthy credit score, implementing these strategies lays the foundation for a secure and prosperous financial future. By taking proactive steps today, young professionals can set themselves up for success, ensuring greater financial flexibility and stability in the years ahead.
The opinions expressed are those of PYAW’s Investment Committee as of the date of publication. These opinions are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
PYA Waltman Capital, LLC (“PYAW”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about PYAW’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. PYA-24-14
