The Top 4 Financial Priorities for Young ProfessionalsMay 03, 2020
by Jonathan G. Cameron, CFP®
Young professionals are expected to accomplish a lot early in life. You’re beginning to make real money. Time to get sound financial advice to establish a good foundation from someone you trust. The problem is most financial advisors focus primarily on retirement planning. When working with young professionals, I believe this is a mistake.
Where do I start?
With young professionals, we start the financial planning conversation with:
- Debt payoff
- Saving for a home down payment
- Building an emergency fund
- Wealth building (including retirement)
In addition, actively maintaining a budget is essential to establishing a strong financial foundation.
Most financial advisors do not spend time working with clients on the first three financial points. Why? It is likely because there isn’t a product associated with these financial needs. In other words, there is no incentive to talk about debt, home purchase, or emergency fund.
Student loans are often the biggest source of financial stress to educated young professionals. Loan repayments often take a sizable bite out of your checking account every month. The loan balances for young doctors and attorneys, specifically, can feel daunting. It is hard to see past a six-figure loan statement, especially if your payments aren’t keeping up with accumulating interest. When we discuss loan payoff scenarios with clients, we show them options they can implement immediately. They are often surprised by how quickly their loan can be paid off.
After reviewing the various government student loan payoff options with dozens of clients, we’ve found that the forgiveness options available are often a bad deal. Unless you work for a government institution, the remaining loan balance forgiven after 20-25 years is fully taxable at ordinary income tax rates. If you haven't even been making interest payments on your loan, the shortfall adds to the loan balance. So the loan gets bigger instead of smaller. When it is forgiven, it is taxable. So to whom would you rather owe money: the loan servicer, or the IRS?
In addition, you need to consider the opportunity cost in working for the government versus equivalent employment in private industry. While there are exceptions, more often than not we find that working for a higher-paying private employer makes more financial sense then taking a lower-paying government job promising to forgive your loans.
Home Down payment
Buying a home is expensive. It isn’t for everyone, but if done right, buying real property can be a great way to build personal equity. I write elsewhere about getting approved for a mortgage, but ideally you’ll start with a sizable down payment. Building up a down payment will require a significant commitment of monthly cash flow set aside into a savings account.
The advantages of putting down cash towards a home purchase are many – you can avoid taking out mortgage insurance, you’re investing cash into an asset that often appreciates over time, and you pay significantly less interest over the life of the loan. Plus, the higher your initial down payment, the lower your monthly mortgage payment and the better your chances of qualifying for a lower rate.
Unlike those winding down from their working years, your aim as a young professional is primarily wealth building, not wealth preservation. You’re in the accumulation stage of life, and in your mind planning for retirement is secondary. Generally speaking, retirement planning should not be your primary focus now.
It’s important to differentiate retirement planning and wealth building. Retirement planning focuses on income distribution from accumulated assets. Wealth building is just that - building up the assets from which you may distribute way into the future.
We want you to start by creating good money habits. Then you’ll be in a much stronger position to plan well for retirement when that time comes. Good money habits include staying out of debt and systematic savings into both an emergency fund and longer-term investments for retirement.
With the competing interests of debt payoff, the purchase of your first home, and wealth-building, what about your emergency fund? Just like it sounds, this is money you keep on hand at the bank which you do not touch unless you have an emergency. Emergencies are sure to come - we just don't know when. Layoffs, emergency car repairs, and vet bills can all be budget busters.
The emergency fund is there to fund the unexpected, necessary expenses of life when they happen. The point is you have a rainy-day fund to keep you going, without needing to go into debt. This is typically going to be 3-6 months of bare-bones living expenses, not income. Expect the unexpected.
One Size Does NOT Fit All
Getting in control of your personal finances starts with your cash flow. This is where creating and maintaining a working budget is essential. Realistically, you’ll focus heavily on a couple of the priorities mentioned above during a season rather than all of them at once. So don’t get stressed if you can’t do everything at the same time — most cannot. Our advice is different for everyone about where to begin, because it is driven by your priorities. We need to know:
- How much stress are you in from debt?
- How soon do you want to be in your own home?
- What investing opportunities do you have through work?
- What big, unanticipated expenses did you have in the last year or two?
Get Professional Advice
Seeking guidance from a CERTIFIED FINANCIAL PLANNER™ professional is valuable as you establish your financial foundation. The problem is, good financial advisors often have investable asset minimums of $500,000 or more to work with them. Even if your income is strong, you don’t have sufficient assets to meet with these advisors.
More commonly, young professionals have access to financial advisors that do not have investment minimums, but they sell a product. These advisors sell life insurance or annuities, and they often do not follow the fiduciary standard of client care. Ultimately, neither of these models is helpful to young professionals.
CameronDowning is one of a handful of CERTIFIED FINANCIAL PLANNER™ professionals that makes a specialty in working with younger clients with healthy earnings but with little to no saved assets. Our financial planning approach is not tied to how much money you have to invest now, but on your financial trajectory. We’re here to help!
Get in touch!
Check out Jonathan's blog post on Financial Planning for Millennials. Questions? Feel free to get in touch with us at [email protected] Also follow us LinkedIn, Facebook, Instagram, and YouTube for more personal financial information relevant to you!
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