10 Simple Steps To Financial Security Before
30
By Ken Hawkins on October 20, 2009
Being financially secure enough to enjoy your life in retirement is the last thing on the minds of those under 30. After all, with the stress of all the expensive "firsts" that often come about during this period, like purchasing a car, buying a house and starting a family, it's hard to even think about saving for the future. However, working toward financial security need not be an exercise in self-deprivation, as many people assume. Attaining this goal even has some immediate benefits, as financial insecurity can become a serious source of stress - something 20-somethings have enough of already.
So can you achieve long-term financial security without sacrificing your short-term goals? Read on for 10 tips on how to do just that.
1. Have Fun
Enjoy yourself while you are
young - you will have plenty of time to be miserable when you are older. Living
a successful, enjoyable and happy life is about achieving a proper balance
between time with family and friends and between work and leisure time.
Striking a proper balance between your life today and your future is also
important. Financially, we can't live as if today was our last day. We have to
decide between what we spend today versus what we spend in the future. Finding
the correct balance is an important first step toward achieving financial
security. (For further reading, see Budget Without Blowing Off Your
Friends.)
2. Recognize Your Most Important Financial Asset: Yourself
Your skills, knowledge and
experience are the biggest asset you have. The value of your future earnings
will dwarf any savings or investments you might have for most of your career.
Your job and future career is the most important factor in achieving financial
independence and security. For those just entering the work force, future
career opportunities are as bright as they've ever been. The large number of
retiring baby boomers is expected to create labor shortages.
There will be room for advancement as companies scramble to fill the positions
held by these aging baby boomers. Those who are in a position to take advantage
of these opportunities will benefit the most.
Look at yourself as a financial asset. Investing in yourself will pay off in the future. Increase your value through hard work, continual upgrading of skills and knowledge, and making smart career choices. Efforts to improve your career can have a far bigger impact on your financial security than tightening your belt and trying to save more. (To learn more, see Should You Head Back To Business School?)
3. Become a Planner, Not a Saver
Research has shown that those
who plan for the future end up with more wealth than those who do not.
Successful people are goal oriented: they set goals and develop a plan to
achieve them. For example, if you set a goal to pay off your student loans in
two years, you'll have a better chance of achieving this goal than you would if
you merely said you wanted to pay off your student loans, but failed to set a
timetable.
Become a planner. Set goals and develop an action plan to reach them. Even the process of writing down some goals will help you to achieve them. Being goal oriented and following a plan means taking control of your life. It is an important step toward improving your financial independence and security.
4. Set Short-Term Goals - Long-Term Goals Will Take Care of Themselves
Life holds many uncertainties
- and a lot can change between now and 30 years into the future. As such, the
prospect of planning far into the future is a daunting task and in many ways,
it's often an exercise in futility for young investors.
Rather than setting long-term goals, set a series of small short-term goals. These goals could be a simple as trying to pay off credit card debt or student loans in a matter of months. Maybe your goal is to contribute to your company's pension plan with a set salary reduction contribution each month. Setting short-term goals that will help you to advance in your career is important in helping you get ahead. Remember, these short-term goals should be measurable and precise. You can't win a race if there's no finish line.
As you achieve your short-term goals, set other short-term goals. Maybe you want to buy a house, earn a promotion at work or buy a new car. The constant setting and achieving of short-term goals will ensure that you reach your longer-term goals. If your goal is to be worth a million dollars by age 40, you cannot achieve this without first achieving smaller goals like having $10,000, $50,000 or $500,000.
5. Planning For Retirement: Fuggetaboutit?
Just out of school,
retirement planning is the last thing on your mind. So, if you have to for now,
just fuggetaboutit. If you follow the other tips, you will not only be more
financially secure and prepared in the short term, but you will also be
financially prepared for the distant future as well.
However, if you take a few steps now to start saving, like setting up automatic monthly contributions to a retirement plan like an employer-sponsored 401(k) or your own Roth IRA, compounding will work in your favor, which makes reaching your goal much easier.
If you implement this pay yourself
first ideal, you won't have to worry about how much you're
contributing; the most important thing is to develop the habit of saving. The
rest will take care of itself. You can increase your contributions when your
income rises or when you've achieved more of your short-term financial goals. (To learn why starting now can save
you thousands later, see Understanding The Time Value Of Money, Compound Your Way to Retirement and Delay In Saving Raises Payments Later
On.)
6. Make Sure Your Lifestyle Costs Lag Your Income Growth
Many new graduates find that
in the first couple years of working they have excess cash flow.
Still used to their more frugal student spending habits, it is easy to make
more money than they need. Rather than using excess income to buy new toys and
live a more luxurious lifestyle, this excess could be put toward reducing debt
or adding to savings. As you advance in your career and attain greater
responsibility, your salary should increase. If the cost of your lifestyle lags
your income growth, you will always have excess cash flow that can be put
toward paying down debt, making investments, saving for a home, or achieving
any other financial goals you may have.
Where many people get into trouble is that they feel entitled to a standard of living that exceeds what they can afford. However, if you keep your standard of living below what you earn, you won't have to cut back to accumulate money; instead, you will naturally have excess cash flow because you earn more than you need to live on. In addition, keep in mind that trying to keep up with the Joneses is always a recipe for financial failure. For all you know, you may make more than the Joneses, who may be funding their lavish lifestyle with debt anyway. (For more on this topic, see Stop Keeping Up With The Joneses -They're Broke.)
The good life should be a reward for your hard work, good fortune and successful planning, not something that you are entitled to. Once you have established a certain lifestyle, it is psychologically difficult to lower it. It is very easy to raise it.
7. Become Financially Literate
Making money is one thing;
saving it and making it grow is another. Financial management and investing are
lifelong endeavors. Making sound financial and investment decisions is
important for achieving your financial goals. The more knowledgeable and
experienced you are in financial matters, the fewer mistakes you will make.
Research has shown that people who are financially literate end up with more wealth than those who are not. There is a strong monetary incentive for becoming financially sophisticated. Taking the time and effort to become knowledgeable in the areas of personal finance and investing will pay off throughout your life.
8. Seize the Opportunities: Take Calculated Risks
Taking calculated risks when
you are young can be a prudent decision in the long run. You might make
mistakes along the way, but remember, mistakes are the lessons of wisdom. You
often learn more from your mistakes than from your successes. Also, when you
are young, you can recover faster from financial mistakes, and you have many
years to recover. (Keep on
reading about this in Retirement Savings Tips For 18- To
24-Year-Oldsand Retirement Savings Tips For 25- To 34-Year-Olds.)
Examples of calculated risks might include moving to a
Taking calculated risks when you can afford to do so is necessary to get ahead financially. Playing it safe might be the bigger mistake in the long run.
9. Borrow Money For Investments - Never to Finance a Lifestyle
As mentioned before with the
Joneses, you should never borrow to finance a lifestyle you cannot afford.
Using credit for a life you feel entitled to is a losing proposition when it
comes to building wealth. The constant borrowing will assure that there is no
money available for investing, and the added interest expense of borrowing further increases
the cost of the lifestyle.
Borrowing money should be
used only for investing - where your gain will outrun your borrowing costs.
This might mean investing in the literal sense (for stocks, bonds, etc.) or it
might mean investing in yourself for your education, extra training, to start a
business or to buy a house. In these cases, borrowing can provide the leverage you need to a reach your financial
goals faster. Borrowing to meet short-term desires is counterproductive. (To
learn about your borrowing options, see Different Needs, Different Loans.)
10. Take Advantage of Financial Freebies
Not many things in life are
free. If you belong to a company
pension plan, take the free money it offers and make sure that you
contribute at least up to the maximum of what your company will match.
You can also look for (legal) ways to take advantage of tax laws. For example, contributing to an individual retirement account (IRA) will result in a tax savings - in effect, the government is giving you free money to provide an incentive to contribute. There is also an incentive to invest in stocks because of favorable tax treatment on capital gains and dividend income.
Conclusion
Achieving financial
independence is a goal most people strive for. It is not necessarily easy, but
it is achievable if you understand your priorities, set achievable goals and
take the proper steps toward reaching them.
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