February 23, 2019
A financial toolkit for young adults who want to embrace the power of money and grow their impact
We are living in a time when young people have more access than ever before to the knowledge and skills to become impactful leaders—in their communities, professions and families. While those now commonly referred to as “millennials” or “Generation Z” are often encouraged to use their voices to speak up about causes they care about most, nothing wields the capacity to change our world like financial strength. When those in the early stages of building their experience are also financially healthy, they have greater flexibility to seize new opportunities and try new things. Good financial habits paired with sound professional skills gives our next generations a leg up.
Yet this goal can feel daunting.
Often, attention revolves around more immediate concerns like how to fund an urban lifestyle on an entry-level salary, manage debt from student loans or credit cards, and the distant prospect of saving for retirement. To begin saving and investing as early as college to be prepared for “life after school,” young people can utilize practical tips to help get the ball rolling when it comes to managing finances. As these steps become second nature, it becomes easier to understand the implications of having sound financial skills as crucial to having impact in the world.
"As these steps become second nature, it becomes easier to understand the implications of having sound financial skills as crucial to having impact in the world."
If you would like to build your financial skills, the following toolkit provides actionable steps that can catalyze your financial journey and equip you with the tools needed to become financially competent and confident. For many, tackling finances can feel overwhelming, confusing and provoke real emotion. This guide cuts through the clutter and offers a place to start.
For those on the go, here are some marching orders:
- Embrace the transition from “student to worker” as a milestone in your financial journey.
- Plan your budget and financial roadmap ASAP—creating these financial boundaries will help you feel grounded and make reaching your financial goals possible.
- Start saving, full stop.
- Invest your money in companies or funds that you care about and learn first-hand how the stock market works.
- Set out your current and future life goals, and start making your dreams come true.
- Finally, seek a mentor to help you use your financial influence to take your seat at the table.
STEP 1: MAKE FRIENDS WITH YOUR FINANCES
When faced with the realities of leaving college and finding a job, managing one’s finances may seem irrelevant and unattainable. Yet the opposite is true. Instead of viewing our financial situation as a weight on our shoulders, we need to reshape the narrative of our finances as a natural part of our journey. Just as a promising but still young company needs a sound financial strategy to ensure its future growth and success, we need to invest in our own financial health as we do in other personal assets such as physical health and career skills.
"Just as a promising but still young company needs a sound financial strategy to ensure its future growth and success, we need to invest in our own financial health as we do in other personal assets such as physical health and career skills."
Even daunting responsibilities such as repaying student loans can be managed. With sound financial habits and a grasp on the different options available, graduates can pay back their loans faster and deepen their financial independence. Education1 and proactive planning are key to effective repayment. For some personal context, The Cut2 shares stories of real students and their loan journey: “Once I finished, I was so proud. I’ve been shouting it from the rooftops. I think it’s an important message to spread—that it’s possible, and we can help each other by talking about it. People have more agency than they think.”
"Three phrases sum up the challenge: Understand what you own, know what you earn, and manage what you spend."
Three phrases sum up the challenge: Understand what you own, know what you earn, and manage what you spend. Do you have a savings account, a 401(k), a car? What will your paycheck be after taxes are deducted? How much money will it take to fund the things you need to keep you going in the world?
STEP 2: CREATE A BUDGET AND A FINANCIAL ROADMAP
If you’ve never created a budget before, now’s the time to start. Track the fixed monthly expenses you can expect each month like rent, a gym membership or your Spotify subscription. Then, estimate additional monthly costs like groceries, eating out, leisure, etc. Take a good, hard look at your spending from previous months. Make sure that when you create estimations, they reflect your actual spending habits. If last month’s totals alarm you (like the amount you spent on takeout in a week) then it’s time to craft a budget that will help you plan, as well as keep spending realistic for your income.
"One approach is the 50/30/20 budget guide..."
Many rules of thumb exist for how to categorize your budget. One approach is the 50/30/203 budget guide where you spend roughly 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and perhaps supporting a cause you care about through charitable donations.
"After you’ve created a budget, it’s just as important to measure its effectiveness."
After you’ve created a budget, it’s just as important to measure its effectiveness. There are many ways to monitor and track your monthly budget, including building a spreadsheet and using real-time apps4 such as Mint or Acorns.
STEP 3: START SAVING, EVEN JUST $10/MONTH
As a young professional, chances are you grew up watching the realities of an economic recession unfold. Without realizing it, some of your fears and anxiety around money might be tied to both the anecdotal and very real accounts of 2008.
Saving proactively is a great way to prepare for the future’s unknowns. Establishing a “nest egg” as early as possible is key to releasing some of the unease related to money and feeling more comfortable making financial decisions.
"...prioritize creating an emergency fund—a certain amount of money that is not used except in cases of a true emergency."
It’s especially important for young people to prioritize creating an emergency fund—a certain amount of money that is not used except in cases of a true emergency. If you’re just starting out, Money Under 305 suggests creating a minimum emergency fund of $1,000 or two week’s pay, whichever is greater. Having this amount readily available will help enable you to pay for a minor unplanned expense—such as a car repair, unanticipated travel or a veterinary emergency—without needing to borrow money.
Here’s a rule of thumb: for professionals entering the workforce, aim to set aside three months’ of your monthly expenses at a pace that makes sense for your current income. For a less predictable income source, like freelancing, consider saving six to nine months of your expenses. The sooner you start saving, the sooner you will reach these goals. But don’t despair if you haven’t reached this goal within your first year in the workforce. Saving is a priority, but so is paying your bills on time.
STEP 4: MAKE THAT MONEY GROW!
As a young person, you benefit from an advantage that can’t be taught, paid for or gained later in life: TIME. Investing for your future and retirement does not have to be a mountainous task. Despite money seeming more scarce, the small contributions you can make now will have a much higher payout in the future.
"As a young person, you benefit from an advantage that can’t be taught, paid for or gained later in life: TIME."
How valuable is the benefit of time? Let’s consider an earner that initially invests $1,000 when she starts working at age 21 and adds $200 each month until age 65. Over those 44 years, she will have contributed $106,600. Yet, thanks to the power of compound interest, if she were to earn a total annual rate of return of 5%, with accumulated interest and dividends reinvested semiannually, her investment would grow to over $382,000 by the time she turned 65 years old. Waiting 10 years until age 31 to start investing would reduce the account’s final value to around $214,000—a difference of $168,000!
Imagine how much your money can grow by making consistent, manageable investments each year—such is the beauty of compound interest.
STEP 5: CONNECT YOUR FINANCES TO YOUR DREAMS
Managing your finances is an opportunity to connect your dreams to a reality. It’s also an opportunity to be direct about your goals. Planning for your financial future requires taking stock of your plans for both the present and future. Want to travel the world? Attend grad school? Start a business? Money is a place where you can (and should!) speak up for the things you care about. Set goals for three “dream” life experiences, plus a budget and timeline for doing them.
STEP 6: FIND A MENTOR
Meeting with a trusted family member, informed colleague at work, or a professional financial advisor is a great way to organize your various financial goals and receive advice. Don’t be afraid to raise your hand and ask questions. If you don’t know the difference between a 401(k) and IRA, ask someone who does! While “investment portfolio” might sound like a feature only wealthy executives get to experience, understand that financial tools are available to everyone. Clifford Swan Investment Counselors are always available to listen, brainstorm, and help.
"Don’t be afraid to raise your hand and ask questions. If you don’t know the difference between a 401(k) and IRA, ask someone who does!"
Once you’ve prioritized saving, learned the basics of investing, and found a mentor to encourage you on your path, you’ll begin to see that learning financial skills is just like any other subject—you get better at it with practice.
The more you ask questions, do research and manage your finances, the more your money (and power) grows. As future leaders, your financial influence can considerably shape the type of world you want to inhabit. Taking control of your finances is not only a source of personal empowerment, but also a multiplier to positively impact the world.
1. Nykiel, Teddy. “Student Loan Repayment: Find the Best Plan for You." https://www.nerdwallet.com, 31 March 2017.
2. Cowles, Charlotte. “How 5 Women Paid Off Their Students Loans in Under 10 Years.” https://www.thecut.com, 29 June 2018.
3. Taylor, Linda Davis. “How to Make a Budget You Can Stick to With the Easy 50/30/20 Rule.” https://www.self.com, 23 October 2018.
4. O’Shea, Arielle and Lauren Schwahn. “Best Budget Apps and Personal Finance Tools for 2019.” https://www.nerdwallet.com, 5 November 2018.
5. Emergency Fund Calculator. https://www.moneyunder30.com/emergency-fundcalculator.
Download Article: How to Build Your Financial Skills and Take Your Seat at the Table
The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.
Clifford Swan does not endorse any of the third party resources named in this article and recommends you conduct your own due diligence or consult with your investment counselor before using any referenced investment tools or advice.
