By FPA Members Elaine King, CFP®, CDFA™ and Philip Herzberg, CFP®, AEP®, MSF
How can you acquire and cultivate a stellar foundation for taking control of financial predicaments that arise during personal and professional life changes in your 20s and 30s? Whether a significant life change is predictable or unforeseen, realize that your ability to successfully navigate through its challenges and readily adjust to evolving circumstances is contingent on your financial preparedness.
In addition to ensuring that you are saving on a consistent basis, you should peruse and apply the following essential pointers to help make informed decisions about priorities, debt, housing, investments, and family:
- Acknowledge any credit and debt problems early and take immediate steps to resolve them with the education and guidance of a qualified CERTIFIED FINANCIAL PLANNER™ professional from the Financial Planning Association. As a young adult starting and growing a career, be cognizant of saving and spending money within your limits, especially if you attempting to support a lifestyle equal to the one your parents provided for you. Including monthly payments for college loans, automobile loans, charge cards, and rent or mortgage, your total debt service should not exceed 36 percent of your monthly gross income. If you have no credit history and your earnings are low (or if you already have a bad credit history), you may need to apply for a secured card, with a co-signer or guarantor assuming the responsibility if you cannot pay off credit card debt. Alternatively, you can consider using a debit or prepaid card for purchases.
- When is it time to have your own place? Evaluate a variety of factors, including up-front payment and transportation costs, when figuring out whether buying or renting a home is feasible for you. Before purchasing a home, analyze your current budget and ascertain that your expected housing expenditures allow you to save properly for retirement, as well as for other short-term and long-term (i.e. starting a business) financial goals. Patch up any inaccuracies on your credit rating as soon as possible (www.annualcreditreport.com) and start gathering money for a down payment if you are pursuing a first mortgage. It is a suggested guideline that you spend no more than 28 percent of your gross monthly income before taxes on your mortgage payment (including principal, interest, real estate taxes, and homeowner’s insurance).
- Are you thinking about earning a graduate degree or taking professional certificate classes at a university to get ahead in your career? Specifically inquire about or apply for available grants, fellowships, and scholarships to help finance your education. Consult a college financial aid expert or qualified tax advisor at the college or institution for which you plan to attend. Keep in mind that you may be eligible for the Lifetime Learning Credit, a tax benefit covering up to $2,000 of qualified education expenses to enhance current job skills. For your children’s future college expenses and needs, you can work in concert with a CERTIFIED FINANCIAL PLANNER™ professional from the Financial Planning Association to devise and fund a cost-effective 529 qualified college tuition savings or prepaid state tuition plan.
- Clearly, saving and investing for retirement is your responsibility. To track your current sources of income and to develop your personalized retirement plan, check out the RetireLogix calculator or utilize a similar application provided by your employer-sponsored plan. With concerns relating to the future of the Social Security program and the expansion of defined contribution plans, you should take the initiative to formulate an investment strategy on the basis of appropriateness for overall objectiveness, risk tolerance, and time horizon. Keeping in perspective the long-term planning principles of dollar-cost averaging and compounding interest, you can invest a relatively small to moderate amount of money in your 20s and 30s rather than having to invest much more in your 40s and 50s in order to live comfortably in retirement.
- Are you too young for estate planning? With the assistance of an estate planning attorney, you can name a general durable power of attorney to ascertain that your wishes are executed if you unexpectedly become incapacitated and are unable to make your own health care and financial decisions. Should you feel that the appointed guardian to raise your children is not the best person to manage their financial affairs, you can utilize your will to designate a trustee, who will collaborate with the guardian to carry out your kids’ best interests.
- Update your estate plan and accordingly structure your money matters when you have a newborn. Prepare to likely increase your spending on significant ongoing expenditures, such as housing, child care, and education. Consider boosting life insurance coverage and enroll your baby in your family’s health insurance plan. Build a sound financial foundation and flourish in life by being educated on these tips. Be ready to adapt your financial habits and life skills now and in the future.
FPA member Elaine King, CFP®, CDFATM, is Chairman of FPA of Miami-Dade and Author of Family & Money Matters, La Familia y El Dinero Hecho Facil. FPA member Philip Herzberg, CFP®, AEP®, MSF, is President-Elect of FPA of Miami-Dade and Director of Media Relations & Public Awareness for FPA of Florida/Miami-Dade. They serve on the Estate Planning Council of Greater Miami Board of Directors.