 Here's
the scenario: You have graduated college and landed your first "real"
job (delivering pizzas does not count). You have bills to pay, and for the first
time, maybe even investment decisions to make. Where do you start? What do you
do first?
This scenario
may apply to you, your child, or even your grandchild. It's likely that either
you or someone close to you is nearly ready to take those first few steps to eventual
financial freedom. It's important to develop good financial habits at an early
age, as these are the habits most people retain their entire life. Here's a list
of helpful hints to get someone on their way! 1.
Budget
The first place to start is to make sure your income allows you
to maintain your spending level. Start by listing your monthly after-tax income
at the top of a sheet of paper. Then, list all the expenses you incur monthly,
starting with those that cannot be avoided, such as car payments, rent or mortgage
payments, utility bills, etc. Subtract your expenses from your income to see what's
available for savings. If your income is less than your expenses, you should either
find ways to earn more income, or find ways to decrease your expenses. A budget
is avoided by many, but really should not be.
2. Save for a Rainy Day
The next step
is to take set aside some funds as a "rainy day fund", or "emergency
reserves." In most cases, you should have the equivalent of three to six
months of basic living expenses available from emergency reserves. Depending on
your risk tolerance, this may mean either cash in a money market fund, or cash
available from a line of credit. We strongly recommend that you have at least
one or two months worth of living expenses available in a cash equivalent, such
as a money market fund.
3.
Manage Your Debt
Once you have established an emergency fund, take control
of any debt you have. Some debt, like mortgages or school loans, comes with tax
benefits, and is not necessarily bad debt. Income tax breaks are available to
those who carry mortgages or school loans. Car loans are usually necessary, but
not really "good" debt. You should make sure your car payments fit into
your monthly budget. If they don't, consider downsizing your car or leasing. Finally,
there is credit card debt. In general, credit card debt is the worst type of debt
you could have, as interest rates on most cards are generally higher, and no tax
benefits exist. In most cases, any extra money left over after expenses should
be used to pay down credit card debt.
4.
Start Investing!
Now the fun begins! You've taken care of the basics,
and can begin saving money for your long-term life goals, such as retirement.
There are some valuable savings vehicles available for those who can save, specifically
Roth IRA accounts, and employer sponsored retirement plans (such as 401(k) plans,
403(b) plans, SEP & SIMPLE plans). If your employer offers a "match"
on contributions to a company retirement plan, this should be the first place
to save. You are basically giving yourself a raise by saving your own funds in
these plans as well. You should invest enough in the company plan to take full
advantage of any "match" offered.
If
you are eligible for Roth IRA contributions, you should use the Roth IRA as your
next place to save. Tax credits are also available for low-income earners who
make Roth IRA contributions, making them even more appealing. Roth IRA contributions
grow tax-free, meaning that income taxes will not be due on distributions from
the Roth IRA. $4,000 may be contributed to a Roth IRA in 2007. One suggestion
is to make monthly contributions to a Roth IRA, spreading out the contributions
over the entire year. If you still have money remaining, consider contributing
the maximum allowed to your 401(k) plan. After that, all additional savings should
be added to a regular brokerage account. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. |
