A new class of college graduates means millions of young people are entering the workforce for the first time. But between building your emergency fund, paying off student loan debt and investing for the first time, there’s still a lot more to learn. So what do you prioritise? That’s what we’re tackling this week.
This week’s question comes from Aaron:
I recently just started my first job, and now have a lot more cash flow than I’m used to. I’ve been bombarded with financial advice from family and friends telling me to either prioritise paying off debt, start a rainy day savings fund (literally had no savings account last month, so woo progress!), or to start investing.
I’m currently prioritising saving for a rainy day fund, then paying off my debt, and then starting to invest. Though I feel that the last two can be done in parallel, and don’t have to be mutually exclusive. What would be your take on this order of priorities? Any articles that I may have missed that touch upon this?
This is what individual experts have to say generally about an issue that affects each person differently – if you want personalised advice you should see a financial planner.
Prioritise Paying Off Debt
Congrats on the new gig! From what you’ve said, you definitely have the right priorities. What order you tackle them in depends a lot on your individual situation.
First things first: You want to make at least the minimum monthly payments on your debt. You don’t want to fall behind on that and watch the interest and late payment fees pile up.
Plus, it will help your overall financial picture. “When you start paying off your loans…your [credit history] will also start improving. That means you can start receiving better credit card offers and start saving money on future loans, for housing or car payments down the line,” says Jill Gonzalez, an analyst at WalletHub.
“If you have accredit card debt at 15 per cent, then funnel as much of your cash flow as possible into getting it paid off pronto,” says Greg McBride, chief financial analyst at Bankrate. “This is a risk-free 15 per cent return.”
Think about the type of debt repayment plan you’ll need. Consider the more.
Make a Comprehensive Plan
That said, don’t focus on debt to the detriment of the rest of your financial life. “The big picture is this: you can address all of these concurrently, essentially prioritising as 1a, 1b, and 1c,” says McBride.
How to do that? Your standard personal finance rules apply. Set up direct deposit from your paycheck into a dedicated savings account to build your emergency cushion. In fact, as long as you are comfortable with your debt payments – again, making at least the minimum every month – I’d focus on your emergency fund.
“Our research and experience has shown that people worry most about the unpredictable, like unplanned financial and medical expenses,” says Chantel Bonneau, a wealth advisor with Northwestern Mutual. “Knowing that you have some cushion – ideally three to six months of living expenses – will help give you peace of mind and position you to pursue your other financial objectives.”
This is especially important in your first year or so in the workplace. You want to build financial momentum.
“The higher priority should be saving 10 per cent, or ideally 15 per cent, of your income and letting the relatively low rate debt get paid off over time,” says McBride. “Time is your biggest ally in saving and building wealth.”
And remember: Getting everything in order isn’t going to happen over night. Your emergency fund will take you a while to build, and you should plan to invest for the rest of your life. Your debt, too, won’t be gone tomorrow, and you’ll probably face a few setbacks along the way. It may be frustrating at first, but starting now will only be a boon to future you. Good luck!
Comments
4 responses to “What 20-Somethings Need To Know About Getting Their Financial Lives In Order”
This isn’t an Australian based story, so it might be a little different in the US, but I’d suggest getting into a habit of paying into your retirement fund as soon as possible. And put as much into it as you can, at least early on.
That’s part of the catchall comments at the bottom, but it hides the importance. Superannuation works because of compound interest – in the last few years it REALLY grows, because time has meant the amount earning interest is massive.
Getting a good amount in there early means you get to that point sooner. Which can mean being able to retire at 55 instead of 60. But it all needs to start early when its so hard to see that finishing line. I got lucky (default was 5% of my wage, so never missed it), but its so easy to take the money instead of thinking of 40 years away.
This. People suggest property investment but is there a thing so simple (relatively risk free and tax effective) as salary sacrificing into super 5% only drops your pay by 3.5% (2k for the average taxpayer) you won’t notice it. Aim to increase it with each pay rise and in in 40 years you’ll be able to comfortably retire. I tell people our current 9.5% super only replaces the pension, if you want more do more.
Its just something people cant readily get their head around at that age. Retirement is so far away, why worry about it. Not realising that the sooner they establish a set and forget mentality, the better.
Cant blame them, given the choice between putting $100 away that they cant touch for 40 years versus $100 more in the wallet each pay, the wallet is going to be the preferred choice. They can always start it next year…
That 9.5% is a massive boost though. It was 3-4% when it started, but got to a decent level within 10 years. You wont see the benefit of that for another 10 years or so though. The first people to have it their whole working lives are starting to hit 50 about now (Super guarantee started in 1992 with bigger employers).
So in 10 to 15 years, you should hopefully start to see a drop in how many people get an aged pension on retirement, and start seeing a drop in Govt spending there. Massive budget boost once that happens.
I’m not sure we’ll know how effective it is for another 10 years after that myself, which is how long it took to get to a reasonable 9%. People turning 40 now will be those crash test dummies.
My general advice for 20-somethings and new graduates is to start with discipline and maintain it. It is very tempting when having a large new inflow of cash to go out and splurge on all the latest and greatest (I think the economics jargon is “conspicuous consumption”). By all means, improve your quality of life, but while you’re used to living on a small income – use that to your advantage. Keep up with the frugal lifestyle and use the bulk of the excess to then do as the article says paying down debts and/or investing.