Here are 5 important rules to help Millennials on their path to financial freedom.
1. Start a savings plan today
A good place to start thinking about saving is your current salary. Create a budget within your current earning capacity. Every dollar saved each month can be used for more important things later in life. A good way to save is to put a set amount into a savings account, separate from your checking account or debit card. This makes it harder to access the funds, especially for compulsive purchases.
2. Determine your goals and risk profile and invest accordingly
Since no two people are alike, investing looks different for everyone. It is important to determine each person’s risk tolerance early on, and an experienced wealth manager can help.
Those willing to take on more risk must also keep in mind that markets fluctuate in both directions over time. In general, higher-risk investments can produce higher returns, while lower-risk investments produce more stable returns over time.
3. Diversification
Stocks and bonds are diversified in a well-designed portfolio. Sometimes low-cost exchange-traded funds are also used. Risk and volatility can be reduced by owning a combination of these investments. A financial planner who works on a fee basis has access to these tools.
4. Create a fund for emergencies
Creating a contingency fund is an excellent financial planning tool. This fund covers the “what-ifs.” For example, what if you lose your job? What if you get sick and cannot work for a period of time? The list of “what-ifs” can be long but having 3 to 6 months of income available is very helpful in an emergency.
5. Start planning for retirement
In many people’s minds, retirement seems a lifetime away. The truth is, for many Millennials, retirement is not as far away as you might think. For those who take action now, retirement becomes much more tangible.
Taking advantage of an employer’s retirement plan helps save money for retirement in a tax-efficient way. Many employers even offer a contribution to your retirement account to help the cause. Tax-efficient retirement plans are also available for the self-employed. Ask your financial planner for details.
The most important takeaway from starting retirement planning early is that you can harness the power of compound interest. The earlier you start saving for retirement, the more time your investments have to work and compound. The benefits of this strategy are great.