Getting Your Finances Organized - Part 2
Let's continue where we left off!
Retirement – What retirement benefits does your employer offer? Most large employers offer 401(k) plans that allow you to make contributions and invest in a combination of stocks and bonds. Some employers offer matching contributions. That is what I want you to focus on! Employer matching is the same as getting 100% return on your investment. Always contribute enough to receive the maximum employer match. Also check to see if your employer offers a Roth 401(k). Roth contributions are not tax deductible this year, but they will grow tax-free which is a big benefit for younger investors. There are countless examples of employer retirement plans so make sure to talk to someone who can help you decide your best options for your situation. If your employer does not offer any retirement plan, open an IRA and start making monthly contributions.
Tip – Contribute to your 401(k) to receive 100% of your employer’s matching program. If you can save more for retirement, open a Roth IRA to make additional contributions.
Debt – First things first, go check your credit score. There are various websites that allow you to check your credit score for free. It won’t be exact, but it gives you a sense of where you stand. This is also a good way to monitor your accounts in case of identity theft. Your credit score will be very important when you buy a house or need any other type of loan. Otherwise, this section is simple. Keep debt to a minimum. You probably have some student loans. Do some research on what your repayment options are but decide on your own how you will pay them off. You can always pay more than the minimum. Credit cards are a great way to build your credit, but do not carry credit card debt! It will destroy your long-term goals.
Other (Insurance, Housing, Taxes) – Just a few more topics that I think are important to make sure you understand. Let’s start with the many types of insurance. You already have auto insurance if you own a car. Read over the policy to know what you are paying for. (And don’t let your parents pay for it if you have a job now!) Health insurance is hopefully available through your employer. Many companies are offering high deductible plans now, so it is important to know how much you will pay out of pocket each year before your co-insurance kicks in. Other insurances include dental, eye, disability, home/renter’s, and life. Just remember that most people don’t need life insurance unless someone is depending on their income to survive.
Are you ready to buy a home? Don’t worry if the answer is no. I am a firm believer that it is okay to rent for a couple years while you figure out where you want to live and save up for a down payment. The worst thing you can do is buy a house and then need to move in a year or two. Closing costs from buying and selling can cost you more than rent would have. Once you decide to settle in, it is usually a wise decision to purchase a home. Make sure your mortgage payment is reasonable and doesn’t put a strain on your budget.
The last topic to figure out is your taxes. As most of you reading this know, this is my specialty! For your sake, I won’t go through each and every area that impacts your taxes. Just start reviewing your tax returns to understand how much taxes you are paying each year. Then you can start looking at the different ways that you can reduce your tax bill both now and in the future.
Everyone’s financial situation is different. There is no perfect financial plan that can be applied to each person. That’s why it is called personal finance! These areas will give you a baseline for getting everything started on the right track. Ideally, you are reading this as you graduate from college and can start your working career making perfect financial decisions. However, this can help you get organized at any stage in life. As the cliché goes, the best time to start was yesterday, the second-best time is right now!
Mike Zeiter, CPA/PFS