Graduating from college and landing your first big job is an exciting time -- but nothing stressed me out more than sitting down and getting my finances in order.
I enlisted the help of Financial Advisor Dan Ament of Morgan Stanley to help explain some confusing financial topics.
Knowing what to do with my 401K was first on my to-do list.
1.I’m Saving for Retirement – 401(k), IRA or Roth IRA?
In a perfect world, on the road to retirement, you’d max out your company 401(k) and your IRA or Roth IRA. But if you’re like a lot of people, “perfect” might not describe your money situation.
So if you have to choose, which retirement account should get first dibs on your money?
Presuming you have maximized any available employer match with your 401(k), you can consider funding a Traditional IRA or Roth IRA with additional cash flow if you are eligible per IRS rules.
Some of the advantages of this strategy may include a broader array of available investment options to select from as well as a unique feature offered with Roth IRAs allowing you to access your principal investment (money contributed) at any time without tax or penalty if needed.
This could allow you to use a Roth IRA as an "Emergency Fund" while ideally keeping the money invested long-term growing tax-free for retirement. You can still fund up to a maximum contribution of $5,500 (Additional $1,000 ‘Catch Up’ for those age 50+) for an IRA or Roth IRA for 2018 through April 15. Note - 2019 contribution limit $6,000.
Next up, credit scores. When you're young, you may not realize just how important that credit score is - until it's too late.
2. The Importance of Monitoring and Managing Your Credit Score
Dan Ament says that these are the habits of people with excellent credit scores. Ament found this information on Kiplinger.com.
#1 factor for credit score? Pay on time! Just one late payment (overdue by 30 days or more) can damage your score. FICO recently reviewed the profiles of consumers it calls high achievers (those with scores in the 750-850 range) and found that 72 percent of those with scores from 750 to 799—and 95 percent of those with scores of 800 or higher—had no late payments on their credit reports.
Credit utilization – (1) Pay down balances intra-month to reduce your utilization of available credit (2) Request a higher credit limit. (3) Even if you stop using a credit card, consider keeping it open so your score benefits from the available credit (unless there is an annual fee you need to avoid) As a guideline, experts often recommend using no more than 30 percent of the credit available to you to show lenders that you can manage credit responsibly.
Length of credit history - Having several years of credit usage under your belt also elevates your score. The average age of revolving credit accounts among FICO high achievers is a little more than nine years for those in the 750-799 range and almost 12 years for higher scorers. Be wary of regularly opening new credit accounts that may shorten the average age of your credit history.
Look for cards with rewards that fit your needs. Evaluate potential card reward benefits against any annual fees, etc.
Monitor your credit report - At AnnualCreditReport.com, you're entitled to a free yearly credit report from each of the three major credit agencies: Equifax, Experian and TransUnion. Scan each report, looking for possible errors or signs of fraudulent activity, such as an incorrect credit limit on a card or an account that you never opened. (If you spot a problem, you can take steps to dispute and correct it. If you suspect fraud, you should also take measures, such as enacting a fraud alert.)
This next one still hurts many of us...but as you embark onto the next chapter of your adult life, it's important to look through all of your student loans - especially when it comes to interest rates.
3. Paying off student loan debt wisely
Focus on the higher cost debt first, depending on when you graduating from school and the different rates that are out there on your loans, you can look at consolidating the loans into a potentially lower cost debt.
Another important thing is having a repayment plan. Having a plan in place can make sure you meet your short-term goals when it comes to paying off your loans.
Try to make a little more than the minimum payments each month. Even if you can only afford a little bit, a few dollars can mean you're closer to paying off your loan completely.
This is the biggest downfall for people with student loan debt. DON'T IGNORE YOUR DEBT. It will follow you later in life. You can't erase student loan debt, even if you file for bankruptcy.
Many people avoid talking about the next topic, because there is a stigma around talking about death. But we are breaking down the importance of having life insurance and protecting your loved ones financially.
4. Protecting Your Loved Ones with Life Insurance
It is difficult to imagine life without a loved one, but even worse to face it amidst financial strain.
An estimated 37 percent of American adults are uninsured. 65 percent of those age 18-29 do not have life insurance.
40 percent of U.S. households recognize they need more life insurance. 59 percent of those with no coverage cite cost as the primary reason. (May 2017 Princeton survey commissioned by InsuranceQuotes)
LIMRA estimates that almost half of U.S. households need additional coverage of $200,000 on average.
The passing of Minnesota’s legendary artist, Prince, has not only left a mark for those that loved his music, it has also elevated the awareness and pitfalls of not planning ahead for your estate. Planning for your estate and surviving family is important regardless of one’s financial position.
Check with your employer about life insurance plans, or check elsewhere. Other places could have options that save you money.
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