Friday, June 3, 2016

6 Financial Planning Tips for Recent Grads and Their Families

With graduation season upon us, many college graduates, as well as their loved ones, are thinking about finances. As the new grads apply for jobs, earn their first paychecks and move in to their first homes, this is a key time to assess lifestyle expectations and financial goals.
Here are a few tips that can help young people get started on the path to financial well-being:
Start an emergency fund. Typically, as people get older their responsibilities and assets increase – as does the opportunity for unexpected expenses. Starting an emergency fund that is equal to at least three months' salary will prepare you for medical bills, job loss or other unfortunate circumstances that may occur.
Don't have the cash on hand? Try depositing a portion of each paycheck, even if it's just $50 a week; over time, you should have enough to cover you during a rainy day.

Implement a plan to pay off any student loans. Millions of Americans are saddled with student loan debt (more than $1.2 trillion, according to the Federal Reserve Bank of New York), often preventing them from achieving other life goals, like planning weddings and buying homes. Save money by examining your loans and paying those with the highest interest rates first.
If you can afford it, pay more than the minimum monthly payment to decrease your debt faster. Some borrowers may benefit from refinancing loans in order to scale back on interest. A little-known secret is that some student loan servicers offer interest rate reductions for borrowers who set up automatic payments.
Contribute enough to your 401(k) plan to get the maximum match. For most young people, their retirement years seem too far into the future to impact current decisions. However, it's incredibly important to start accumulating money in a retirement account now – many retirees delay saving and are left with a nest egg that doesn't support their standard of living.
A Fidelity analysis showed that a 25-year-old could generate $1,000 in monthly retirement income by contributing just $160 a month (assuming a 5.5 percent annual return and not taking taxes into account). A 35-year-old just starting out would need to save $270 a month to achieve the same goal, and a 45-year-old would need to contribute $500.
Ask your employer for information on its 401(k) plan and start putting away a percentage of your earnings as early as your first paycheck. They may even offer an employer match that will help your savings grow even faster. When you start, take advantage of the employer match.
As time goes on, contribute more and more with the goal of eventually maxing out your contribution each year. If your employer doesn't offer a 401(k), research other options such as an IRA or Roth IRA.
Consider a tax diversification strategy. Many financial advisors speak about the importance of investment diversification. Few, however, focus on how important tax diversification can be. Whether you decide to participate in your employer-sponsored 401(k) plan or select a different option, it's important to understand the tax implications of your plans.
For example, a 401(k) and IRA are tax-deferred, meaning participants aren't taxed until it is time to withdraw retirement funds. (It is important to note that withdrawing before the age of 59½ will incur an additional 10 percent penalty, and once you are 70½ you are required to take out annual withdrawals.)
On the other hand, Roth IRA contributions are made with after-tax dollars, so account withdrawals do not incur a tax penalty. It often makes sense to contribute to two or three accounts with different tax treatment in order to prepare for a variety of scenarios, including emergencies.

Assess your asset allocation now. If you're comfortable with risk, it may be in your best interest to start off with an aggressive asset allocation and transition to a more conservative mix as you approach your retirement years. Conventional wisdom says that young investors should hold mostly stocks, and replace equity exposure to bonds as they get older. This can vary depending on risk capacity and risk propensity.
Don't get too skittish. During times of market volatility, investors sometimes get jittery and make rash decisions that, while at the time may be comforting, hurt their investment goals unnecessarily. For example, some investors sell stocks during market dips, fearing further losses. In doing so, they lose the opportunity to recover their portfolios when the market recovers.
Similarly, during times of hardship it can be tempting to withdraw or borrow money from a 401(k). However, this is almost always inadvisable, as early redemptions from a 401(k) incur heavy tax penalties, as noted above.
Remember, volatility is part of the investing process, and if you are very concerned, you shouldn't hesitate to call your financial advisor before making a major change in your portfolio that you may regret later.

Congratulations to all of the graduates! As you venture into your career, independence and new responsibilities, there is no better time to build a strong foundation for financial success.