When starting a career as a young adult, it can often be challenging to understand the best ways to use your money. It can be overwhelming at times because the decisions you make now can significantly impact your life down the road. Although that might sound scary, following the proven steps detailed in this article will help set you on a path to financial success for years to come.
Where Do I Start?
The best place to start is to build out a budget. This will show you what expenses you currently have and how much money you have in excess you can begin to put to work for you. Once your budget is built, working through Dave Ramsey’s Baby Steps is the best way to start your financial journey. A more in-depth guide to the Baby Steps can be found here, but at a glance, they are as follows:
1. Save $1,000 for a starter emergency fund
2. Pay off all debt (excluding a house) using the debt snowball
3. Save 3-6 months worth of expenses in a fully funded emergency fund
4. Save 15% of your income towards retirement
5. Save for your children’s college fund
6. Pay off your home early
7. Build wealth and give
Where Do I Put My Emergency Fund?
There are many great options for places to keep an emergency fund, such as savings accounts, money market accounts, and more. Most people want their money to do some work for them, even if it is just their emergency fund, so I believe the best option would be a money market fund, which typically has the highest returns of any of the safe options without having your money locked away. From a money market fund, there generally is a waiting period of a few days to access this money, so I also recommend keeping some instantly accessible money, such as cash, on hand for emergencies that cannot wait.
How Do I Save 15% For Retirement?
Once your debt is paid off and your baby step 3 emergency fund is established, that’s when the fun begins. First, take a look at your employer’s retirement options. A 401(k) is the most common option, but there are more accounts available, such as 403(b)s, pensions, Sep IRAs, and more, all with different rules associated with them. It is important for all plans to see how much your employer will match and if you are required to contribute to this plan. If there is a match, you should contribute enough to get that match to get the free money from your employer. Anything over the match or the required contribution amount should be contributed to a Roth IRA to get the tax-free growth that a Roth IRA offers. If that still doesn’t get you to the 15%, then a few options exist, including contributing more to your employer-sponsored plan or a brokerage account.
Following these steps will put you on the right path toward financial freedom, and the earlier you can get started, the better. If you are ready to begin this process and would like some guidance or have any more specific questions, one of our many financial advisors on the Whitaker-Myers Wealth Managers team would be happy to help!