Congratulations to the Class of 2023! So Now What?
Many students across the country are preparing for their graduation. Students are finishing their high school, college and even graduate school lives after years of hard work and excitement.
So Now What?
More school in some cases, jobs in others and new financial concerns for all. It is important for graduates to think smart about money and establish life-long healthy financial habits.
Rule #1 Spend Less Than You Earn
Rule number one is to simply spend less than you earn. Don’t rely on credit to cover your normal living expenses. New grads typically receive many credit card offers. Paying off any high-interest debt should be a top priority. Credit card debt is a common high-interest debt that can also affect your credit score. How well or poorly you meet the repayment schedule for the debt will have an ongoing affect on your credit history and your credit score.
There are many ways to earn more income – including getting a part-time job in addition to your full time job or having a focus on professional development and continuous improvement with goal of earning a higher income. Small steps in the right direction can go a long way.
Rule #2 Establish An Emergency Fund
Having money that’s readily available to meet unexpected expenses (emergency fund) is really the foundation for any successful financial plan. Without money to fall back on when an unexpected expense comes up, you may be forced to tap into savings that you’ve earmarked for retirement or another savings goal. How much should you have in your emergency fund? A good rule of thumb is to have three to six months of household expenses saved in a bank account.
Rule #3 Start Early
Now let’s talk about investing and the potential for accumulating wealth since many college graduates will have the option to open a 401K or contribute to a Roth IRA.
"Two things work – people and money – and the sooner and harder money works, the sooner people can be done working," shared G. Ward Keever IV, CLU, ChFC, RHU, AEP, CFS, AIF, CKA®, President and CEO of Covenant Wealth Strategies.
Roth IRA
A benefit of using a Roth IRA is that it provides tax sheltered growth and tax free withdrawals of that growth once you reach age 59 1/2, because Roth IRA contributions are made with after-tax dollars.
To use an agricultural analogy, if you were given the choice to 1) get a tax break on the seed that you plant in the ground and then harvest the entire crop and pay taxes on that, or 2) pay tax on the seed before you plant and then gather the entire harvest with zero taxes, which would you choose? A Roth IRA is like the tax free harvesting of the entire crop!
Rule of 72
Have you heard of the Rule of 72? The Rule of 72 is a formula that calculates approximately how long it'll take for an investment to double in value based on its assumed rate of return. The Rule of 72 applies compounded interest and can be applied to anything that increases exponentially, such as GDP or inflation.
For example, if you invest $5k into a Roth IRA at the age of 21, and that investment earns approximately 10% over the life of the investment, by age 28 you should have approximately $10k. You can follow the pattern below:
- Age 35 = $20k
- Age 42 = $40k
- Age 49 = $80k
- Age 56 = $160k
- Age 63 = $320k
- Age 70 = $640k!
This illustration* above is only reflecting the initial $5k investment and does not include additional contributions that one could make. Additionally, withdraw earnings could be taken out tax free after the age 59 1/2 since it is a Roth IRA.
If you waited only 7 years to begin, you would have $320k less at age 70. Important lesson here - Don't wait!
Dollar Cost Averaging
Another concept that new investors should familiarize themselves with is called dollar-cost averaging. This is a technique that entails investing a fixed amount of money into the same investment at regular intervals over a long period of time. This is particularly relevant and important to keep in mind as the market fluctuates. Contributing regularly each month to a 401K plan is a good example of dollar-cost averaging.
It has been stated, "the best way to predict the future is to create it." We encourage you to share our best practices with the recent graduates and young adults in your life that you care about.
On behalf of our entire team at Covenant Wealth Strategies, we would like to congratulate this year's graduating class for their accomplishments and hard work! We encourage you to Contact Us to learn more about "Strategies for Your Success".
Disclosures:
*This illustration is hypothetical and does not guarantee future results.
The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.
Qualified withdrawals of earnings from the Roth account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
With Dollar Cost Averaging, an investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
This material is for general information only and is not intended to provide specific tax, legal advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. The content is developed from sources believed to be providing accurate information.
Source
https://www.investopedia.com/terms/r/ruleof72.asp