Happy 1st Birthday
Wow, what a difference a year can make. Hard to fathom that a year ago I was writing my first blog for this website, we were planning for my son’s high school graduation, going to college orientation and getting ready for a trip to Europe. This year none of those things are possible, except for writing my one-year anniversary blog. I do hope that at this time next year high school seniors will be walking across the stage in cap and gown and the COVID-19 virus will be a distant memory, we can hope.
Helping young people get started on their investing journey
I have enjoyed hearing how people are coping with the many different facets of change the virus has created. Clients have been able to take advantage of not commuting, not having any social engagements on their calendar which has meant spending less money and having some time to reflect on life. Interestingly, I have had multiple requests by parents to meet with their post graduate children (when it is safe to do so or by zoom) and help them get on a good financial path now that they’re earning money. Of course, these requests have thrilled me, first I love the idea of helping young people get off to the best financial start possible and second, seeing parents wanting their children educated for a better financial start than they had. These inquiries started me thinking about the old time value of money chart that we used to use in the late 80’s that demonstrates what happens when Investor A starts saving at age 19 and then stops after 8 years and then Investor B waits 8 years before he begins investing and then has to save the rest of his life and still never catches up to Investor A. What makes me laugh the hardest is that chart is still out there, and they still use a $2000 contribution. Well, what’s funny about that is that a long time ago $2000 was the annual IRA contribution limit. So, in honor of my one-year anniversary, I am updating that chart!
My updated version of the chart uses the current maximum IRA contribution which is $6,000 and goes to age 67 which is the full-benefit retirement age for anyone born in 1960 or later. Of course, we have no idea what that age may be for young adults today, but I am sure they will still be glad they started saving earlier than later. I also used a 10% annual interest rate, rather than 12% to be more conservative.
Take control of your money early
The first thing I want to share with young people (well, actually anyone who is reading this) is that they must take control of their financial future because if they don’t, no one else will! How many of us wish we had started saving in growth investment vehicles when we were 19? I certainly wish I would have known that a growth investment existed when I was 19. In comparison, in the early 90’s a money market was paying 10%, circumstances are very different for younger people today. Don’t feel sorry for them yet, this week I heard about one high schooler that had begun day trading (and had already lost $30) and one that knew someone that was day trading that was going to show him how to do it. My point is that these kids are already being exposed to trading stocks, Bitcoin, expensive tennis shoes and have the technology to do it so I want to make sure that they have the basic foundation covered first.
Start with an Emergency Fund
The amount to save in an emergency fund will be different for everyone and should be determined by the type of “emergencies” you may have. For working adults, an emergency fund should get you through 3-6 months of expenses if you lost your job so that you don’t lose your apartment, house and car with that job. The emergency fund should be in an account that does not fluctuate, like a savings account or money market. You should definitely search around for the best interest rate because a lot of banks are not paying a fair interest rate for savings. Depending on your situation, I would strive to start your emergency fund at $500 or $1000 and continue adding to it until it meets your potential emergencies.
Stay as far away from debt as possible
The next discussion point is debt. I would encourage young people to stay away from the credit card trap. If you can’t afford it right now, then you don’t need it right now. Americans are charging trillions of dollars a year and a lot of them carry a balance on the card that they are paying interest on every month, making that Starbuck’s coffee very expensive. When I went to college, the credit card companies all had tables on campus to help you apply for your first credit card and I know a lot of people that got into serious debt trouble that took a long time to dig out from under. The problem now is that so many students are already in debt for the cost of college.
Now let’s talk about investing
You have an emergency fund, you have your debt under control, now you can start investing in an account that will fuel your long-term goals. I encourage you to start with a Roth IRA that is a great long-term investment tool, especially if you have time to let the account grow tax free. One difference between an IRA and a Roth IRA is that you can often contribute to a traditional IRA with pre-tax dollars but when you take that money out, you will pay taxes on the money. With a Roth, those contributions will be after tax dollars and will then grow tax free and when liquidated after age 59 ½ will be tax free. Some pluses to a Roth IRA are that you can avoid the 10% tax penalty if you withdraw the contribution (not the earnings), use the money to pay for college expenses and pay for a first-time home purchase (up to $10,000), just to name a few.[i][ii]
Here to help you face the storm
I recently heard a great quote, “We’re all facing the same storm, but we are not all in the same boat.” This is a great analogy for COVID-19 and for financial planning. It’s true that we are each weathering this extraordinary experience, but some have lost their job, some are working from home with toddlers running around, others are retired at home feeling isolated so we will each have to navigate the storm in our own unique way. As always, Impact Wealth Advisory is here to help you maneuver your boat to your particular destination. Please do not hesitate to contact us if we can help you along the way. Until next time, stay safe, take care of yourself and your family and keep rowing.
Impact Wealth Advisory is not affiliated with or endorsed by Centers for Disease Control and or any government agency. The content of this blog is for informational purposes only and should not be used to make any financial or personal decisions.
[i] https://www.irs.gov/publications/p590b
https://www.irs.gov/publications/p590b#en_US_2019_publink1000230955