Think You’re Too Young for Financial Planning?

The first steps to
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“I just started my first job. I want to live a little.” “I’ve been out of school for a few months and my student loan payments have just kicked in. That’s where all my money is going.” “My career just started and my entry-level salary doesn’t leave me any wiggle room.” “How can I manage my wealth when I don’t even have any?” If you have uttered any of these sentences (or something similar), we get it. As a recent grad, you have a lot of things on your mind, but retirement probably isn’t one of them.

It seems a little ridiculous to plan for the end of your career when you’ve just barely started it, but there are a lot of reasons why it makes sense to get a handle on your finances right now.

We asked Craig Frieders, Managing Director / Principal at Crofton Capital Management for some advice on financial planning for recent grads. Here’s what you need to know.

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What is a 401(k)? How can recent grads find out if their employer offers one?

A 401(k) plan is an employer-sponsored retirement plan that allows for employees to defer some of their income; either pre-tax (traditional) or after-tax (Roth) into a selection of investment options for long-term growth towards retirement.

What percentage of their salary should recent grads contribute to their 401k?

Rule of thumb is 10% of pay. I always advise to start out maybe with a smaller percentage, 5–7%, and then ratchet it up if you feel you can contribute more.

The goal is to max out on an annual basis. For 2014, the maximum contribution limit is $17,500.00 for folks under age 50.

What about personal savings?

The old cliché of “pay yourself first” always rings true. Aside from the guidance above, a good amount of personal savings would equate to six to nine months’ worth of living expenses. If you find yourself transitioning between jobs or having an unforeseen expense, it’s good to have a cushion.

What are some general investment strategies recent grads should be aware of?

The earlier you can start, the better. Investing in a retirement plan takes advantage of a few investment concepts. The value of compound interest is by far the most powerful. When investments grow and have their earnings re-invested over and over, the portfolio can grow to an exorbitant amount over time.

A second concept is dollar-cost-averaging. When the stock market goes down, you buy more shares of the mutual funds at a cheaper price. Over time you end up taking advantage of dips in the market and the volatility associated with investing at times. It’s best not to be fearful if you see a decline in the stock market and you are in your early twenties. Instead, embrace the downturn knowing you are purchasing more shares of your investments at a discount. No different than being a smart consumer.

Also, don’t be afraid to ask for help. Though there a lot of self-help websites and guidance out there, ask the advisor on your 401k plan for assistance. [Editor’s note: If you’re not sure who this person is, check with your HR person. They should be able to point you in the right direction.]

How do student loans figure in to all this? Should recent grads try to pay off their loans in full before contributing to a 401(k), divide these payments equally, or some other approach?

Depends on the interest rate. Some of the student loan interest is deductible. You should consult with your tax preparer for help in determining this.

My recommendation is to first see if your company’s retirement plan offers a matching contribution. It’s usually more advantageous to take advantage of free money first. I would only pay down additional principal on the student loans once you have adequate personal savings and are able to put away some money into a retirement plan.

Otherwise, just make the minimum student loan payments and look for opportunities to re-finance or consolidate loans that offer lower interest rates.

Is there anything we haven’t covered yet that you’d like to add?

Estate planning. Why would someone in their twenties need to consider this? Make sure if you join a new company after college that you fill out and complete the beneficiary designation form for your retirement plan.

In addition, some publicly traded companies offer an employee stock purchase or stock option plan. Be sure to open a TOD account (Transfer on Death) as opposed to an individual account (John Smith) when utilizing these employee benefits. If something happens to you prematurely, your employer will know how to distribute your accounts. If you start to build your net worth over time, it would be further advisable to create a will and/or a living trust.

Homework time! Start by investigating your company’s 401(k) plan and making sure that you’ve signed up for it. Many companies offer a matching program, where they’ll put in the same amount that you do each month (up to a certain percentage). This means you can double your investment just by participating. Find out who is the contact person in your company, and don’t be afraid to ask questions if you’re unclear about anything. We also have some other tips on budgeting and staying on top of your finances in this post.

Craig Frieders is the Managing Director/Principal at Crofton Capital Management, a firm that was founded in 2009 and provides comprehensive wealth management and retirement plan consulting services.

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