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Congratulations, graduates! You’ve landed your first job and entered the real world. But that doesn’t mean there aren’t some tough questions you need to answer when it comes to your financial well-being. While life may seem rather simple upon beginning your career, the decisions you make starting out are important and can impact your life far into the future.
Let’s begin with the end in mind – some retirement planning questions: How much money should a young person put into the company’s 401k plan? Always contribute as much as you can up to the company match and then ask yourself a few more questions.
Does the plan offer a Roth component that will allow your contributions to grow tax free indefinitely? Do you expect your future tax rate to be higher or lower in the future? If the plan doesn’t offer a Roth 401k contribution option you may be wise to take the dollars after the company match and direct them toward a Roth IRA.
You have two things to focus on when beginning to save for retirement. First, make sure you are saving the correct percentage of income for your age. Second, make certain you are building tax diversification into your accounts.
The percentage of your income you need to save in order to meet retirement savings goals is smaller the sooner you begin saving. People under 25 can save 5-7% of their income throughout their career and have a shot at fully replacing their standard of living upon reaching retirement age. Tax diversification means that you want some savings exposed to taxes every year, some funds tax-deferred and (importantly) a bucket of money growing tax-free in some Roth instrument.
Determining housing and how to pay for it is another big financial decision. Rarely do young people stay in one place for very long, yet the parental generation tends to endorse purchasing a home early in one’s career. The math shows that unless you expect to live in a place for seven years or longer you are almost always better to rent. The carry cost – taxes, upkeep, insurance etc. – not to consider the sale price and related acquisition costs, make owning property for a short time a crap shoot at best and a nightmare more often than you would like to know.
Finally, defending your credit score and knowing your debt-to-income ratio are the mathematical metrics you must address. Your credit score not only indicates your worthiness as a borrower but even impacts things like your car insurance rates. Don’t take that score lightly.
Your debt-to-income ratio is one of the most important numbers considered when lenders review a mortgage application. The debt is all of your contractually obligated monthly expenditures divided by your income. Ideally you want your ratio to be about 37% debt-to- income. Student debt, car payments, and credit card monthly payments add up quickly. Manage debt or it will manage you!
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]