Career Starters: Wake Up!

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What's the one deadly sin that can ruin your financial future? Answer: Spending when you should be saving! If you are part of the millennial generation, take notice. You are now in the best position ever to plan for your future.

Are you just starting your career? If so, you may think you have plenty of time to start saving for retirement - or even for a down payment on a house. But now's the time to make financial planning a top priority and take control of your financial future. Here are five surefire ways to get started!

Save Early And Often

It's important that young professionals understand the impact of saving early. It can mean the difference between being financially secure and needing to work your entire life! Genius Albert Einstein recognized a good thing when he saw it. He once called compound interest the most powerful force in the universe! 

How's it work? Consider the example of Kate and Anthony. From age 22 to 32, Kate routinely contributed $3,000 per year into a Roth IRA and then she stopped. During those ten years, Kate contributed a total of $30,000. Her money remained invested and at age 65, her portfolio had grown to $550,000 (assuming an average annual return of 8 percent).

Anthony, on the other hand, had a thousand reasons not to save during his 20’s. However, he wised up at age 32 and saved $3,000 per year in his Roth IRA until his age of 65. Over those 33 years, Anthony contributed a total of $99,000. He invested the funds and earned an average annual return of 8 percent, just like Kate. Unfortunately, at his age of 65, he only had $438,000 - more than $100,000 less than Kate.

Moral of story: The power of compounding allowed Kate to contribute significantly less to her Roth IRA, yet have a larger nest egg at retirement.  Why? Her money had more years to reap an investment return. Time was on her side!  If Kate continued to save to age 65, she would have nearly $1,000,000! Are you motivated now?

Select the Right Saving Vehicle

Once you’re ready to start saving, it’s important to consider which type of account is best for your long-term needs. The most common is a traditional employer 401(k) plan. These offer tax-deferred growth, meaning the contributions come out of your pre-tax paycheck and are allowed to grow without being taxed until you withdraw from the account during retirement. Traditional tax-deferred 401(k) plans are an easy way to start saving because the funds are automatically deducted from your paycheck. Often your employer will offer a match. That's even sweeter!

A less common, but perhaps even more important, method of retirement savings for career starters is a Roth IRA or a Roth 401(k). These offer tax-free growth, but the contributions come from a source that has already been taxed. Funds are then allowed to grow tax-free and are not taxed upon withdrawal during retirement.

If you are in a low income tax bracket, the after-tax Roth contribution may be best. As your career progresses and you find yourself in a higher tax bracket, pre-tax contributions may provide a bigger benefit.

Take Advantage of Lifestyle Changes

A study conducted by PayScale.com suggests that wages should increase by about 60 percent from age 22 to 30. You might think your tax burden will increase as your income rises, but that’s not necessarily the case! Tax planning is a key element to any young professional’s financial plan. For each of the following common milestones for the 22 to 30 age bracket, there’s an effective tax strategy that can help offset your increase in income tax.

  • Job Relocation: If your new job is 50 miles or more away from your old job location or your home, you may qualify for gas, parking, and mileage deductions.
  • Marriage: Your filing status changes and you may be eligible for additional deductions.
  • Homeownership: Your deduction for mortgage interest can be sizeable (and sure beats living in your parents’ basement!).
  • Parenthood: Another dependent to claim and other potential tax credits can come in handy.

Use Your Year-End Bonus Wisely

Bonuses rank right up there with family holidays and peppermint mochas as things we love about the end of the year. According to the Society for Human Resource Management, 75 percent of companies offered holiday bonuses for 2016. And the average bonus came in at $1,081! Use this extra income for paying off student loans, padding your emergency fund, or saving for a down payment on a house.

Consider Disability Insurance

Disability insurance is often an overlooked area. Why? Most people don't believe it will happen to them. Millennials, in particular, believe they're the invincible generation. However, a recent report from the Council for Disability Awareness indicates a 25-percent chance that someone entering the workforce today will be disabled for at least three months during his/her working career. That's one in every four workers!  How lucky do you feel?

Summary

Developing a financial plan is important whether you are nearing retirement or just starting your career. Starting early can save you time and stress down the road. If this sounds overwhelming, team up with a financial planner to learn how you can get started!

Anthony Harcourt is a Portfolio Manager at Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at BedelFinancial.com or email Anthony.

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