Financial Focus: Good financial habits for young people

Q: What are some good financial practices people just entering the work force should do to ensure financial stability?

1. Needs and wants

I would think that most people entering the work force would have little or no experience with money management. Generally, this type of person would be in their late teens or early 20s and probably not used to a steady paycheck. The first practice would be to determine the difference between "need" and "want."

The availability of new income can be a temptation to buy items an individual wants but may not actually need. People should enjoy the fruits of their labor, but should also understand that it is important to set some money aside for a "rainy day" to pay for car repairs, common bills or unexpected financial emergencies. The general rule is to set aside about 10 percent of your pay check into a savings account for these potential expenditures.

New workers should also avoid charging too much on credit cards. A new job may provide financial stability that can create a false sense of financial security and could lead to overextending a person's debt - assuming that the debt can be paid for with future earnings.

Understanding the company's pension/retirement plan (if available) would also be important. Many of these programs will allow individuals to participate with as little as $50 per paycheck. These plans often provide employer matching contributions. Retirement may be the last thing on a young person's mind. Starting early can provide a good foundation for future retirement, home purchase or education.


2. Pay down debt

For most young adults, paying down debt is the first step to begin achieving financial stability.

Look to replace credit card debt to lower interest rate credit cards or a bank loan to consolidate to one payment and lower interest rate. Do not spend more than you make (this is part of the reason for the current economic state of our country).


Next step is getting health insurance then look at life insurance if you have dependents. If these insurances are not offered by an employer, you should contact a local agent or adviser.

Next, everyone should build a cash reserve for unforeseen job loss or disability to cover monthly living needs until paychecks start again. Savings account and money market accounts are usually a good place for short-term liquid assets. Find an institution that accept money as a direct deposit from your paycheck to avoid spending it. Out of sight out of mind - this is an easy habit to get used to. Build to a minimum of three to six months of living expenses in this type of savings.

Last but not least enroll in your company's retirement plan. If your employer does not offer one, set up your own. Either of these options can be done with direct deposit from your paycheck before you get your hands on it. If you want to enjoy retirement, you are going to have to invest on your own because if you get any support at all from the government, it will not be much. It looks as if there will be more people receiving Social Security than paying into it in the coming years.

Overall, this would be an outline to begin the road to financial stability.


3. Live below means

First, live below your means. Just because you can afford a bigger house and two grand vacations a year doesn't mean you should spend your new, larger income on these items.

Start the saving habit immediately. Put away money into a savings account and don't stop until you have six months of emergency savings in place.

Take advantage of any matching funds your employer will put into a 401(k) or similar type program.

Drive your vehicles until they are 6-10 years old, depending on mileage and reliability of the vehicle. Don't fall into the trap of buying new vehicles every 3-4 years; otherwise, you are taking the depreciation hit too often. Maintain you vehicles well. "The ounce of prevention is worth a pound of cure" adage is right on the mark here.

Take advantage of well-priced employee benefits, and then look at supplementing them in the private market while you are young and healthy. For example, permanent life insurance is much more affordable at a younger age and can be a great buy. Ask about guaranteed insurability options at time of purchase to protect against changes in your health.

It can be a challenge to plan for the long term at a younger age. But if it is done, and you stick with the budget you've laid out, you'll be better able to weather the tough economic times that come along, enjoy the better economic times that follow, and truly live a wonderful retired life.



4. Use time wisely

You must develop good financial habits. At first, this may be hard to do, as it might be the first time you have "real" money in your pocket. Try to live within your means and be realistic of your lifestyle. Don't abuse your credit cards or go crazy buying "stuff" you don't need. If you have student loans, set up a repayment schedule and make sure you stick to it. Try to live your life as debt free as you can.

As you work to reach your financial goals, you've got one of the greatest assets on your side: time. Many young workers believe time allows them to hold off from investing until they're older; however, this is a huge mistake many people may never recover from.

Get in the habit of saving instead of spending. Try to put aside some money each month in an investment account, even if it's only a modest amount. With time, even a modest amount invested wisely can grow into something significant.

As you move through your adult life, you'll have many financial goals, such as buying a home, saving for your children's college and working toward retirement. Having good financial habits in your early working years will help you achieve all your financial objectives and dreams.

Finally, as your career advances and you start earning more money, make sure you save more along the way.