Cypress Wealth Services
When you’re young, it can be easy to assume the only way to get ahead in life financially is to have a high-paying job. In reality, the choices we make with our money truly make all the difference.
And when it comes to the big things later in life—buying a new house, helping a child with college, paying for a wedding, retirement—the actions from our younger years tend to creep up on us. The good news is that young people have time on their side, and small efforts will lead to a big payoff down the road.
The three primary things I wish I’d known about money when I was young involve paying yourself first, investing early, and taking advantage of tax-advantaged savings tools. Let me tell you exactly what I mean and how to get started.
Do you know where your money goes each month? Understanding what things cost and how much you’re spending can be eye-opening. You may be surprised at how much you’re spending in areas of your life that aren’t that important to you.
If you need a new car but you’re going out for lunch or grabbing a coffee through a drive-through every day, then you may wind up with an auto loan. Although debt is common in today’s society, it’s important to understand that much of it can be avoided with a bit of awareness and discipline.
We promote the discipline of paying yourself first, which means you automatically put away part of your income into savings before anything else. Setting up a recurring transfer from your checking to your savings account is a great way to automate this process.
If you get paid every two weeks, paying yourself first and putting $100 into savings means you’ll wind up with $2,400 at the end of the year with relatively little effort. Prioritizing savings and understanding where your money goes each month can help you course-correct to improve your spending habits and prioritize your long-term goals.
A standard rule of thumb is to put away 15% of your income into a retirement account. A recent Fidelity study showed that 20-somethings on average contribute 7.4% in a 401(k).(*1) While any contribution is certainly better than none, this explains why many Americans wind up concerned about whether they can leave their career once they hit retirement age.
The money you put away during your younger years ends up being the most valuable dollars you contribute. If your retirement funds are invested in the stock market and you realize an overall gain this year, then those gains go on to also be invested. This leads to gains on your gains, with no additional effort.
The same happens with an interest-earning savings account; the scenario is called compound interest. If you make 1% on an account with $1,000, you’ll earn $10 in interest this month. Next month your interest payment will increase because you’ll receive 1% of $1,010, and so forth. Over time, interest payments become a form of passive income.
Does your employer offer a 401(k)? If so, you must utilize this benefit. With automatic deposits through your payroll, prioritizing saving is made incredibly easy. Earlier we suggested the figure of 15%, which is a great starting point if it works for your current budget.
The worst thing you can do is contribute zero dollars. Not only does utilizing a 401(k) benefit your future self in retirement, contributing also lowers your lifetime tax bill. A 401(k) and some other retirement savings accounts, such as an individual retirement account (IRA), are referred to as tax-advantaged accounts.
Your retirement accounts are either Roth accounts or traditional accounts; both provide a tax saving benefit. With a Roth retirement account, you contribute money that has already been taxed. Once the funds are in the account, they grow tax-free. You will not be taxed when you make withdrawals as long as you are 59½ years old.
With a traditional retirement account, your account is funded with pre-tax dollars and your contributions are tax-deductible for the year they are made. Lowering your taxable income in turn lowers how much you pay in taxes for the year. While you see the tax benefit more immediately, you will owe taxes when you withdraw funds in retirement.
All three of these tips are prime examples of working smarter, not harder. These small efforts, over time, can have a big impact on your financial future. While you may not need a financial advisor when you first enter the workforce, educating yourself to make the most of your money during your younger years is a great use of your time.
As you begin planning for larger purchases, starting a family, or highly prioritizing your retirement savings, the team at Cypress Wealth Services is here to meet you in your current stage of life and help you create a plan for the future you desire. To learn more, call our office at 866.888.6563 or contact one of our offices today.
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services is uniquely qualified to serve a broad range of client needs, and their experience and expertise act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With financial advisors in Palm Desert, CA, Tustin, CA, and Anchorage, AK, the firm serves clients across the country in Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250