Being financially secure enough to enjoy your life in retirement is the last thing on the minds of those under 30. After all, with the stress of all the expensive "firsts" that often come about during this period, like purchasing a car, buying a house and starting a family, it's hard to even think about saving for the future. However, working toward financial security need not be an exercise in self-deprivation, as many people assume. Attaining this goal even has some immediate benefits, as financial insecurity can become a serious source of stress.
1. Have Fun
Enjoy yourself while you're young – you will have plenty of time to be miserable when you're older. Living a successful, happy life is about finding a balance between time with family and friends – and between work and leisure. Striking a proper balance between your life today and your future is also important. Financially, we can't live as if today was our last day. We have to decide between what we spend today versus what we spend in the future. Finding the correct balance is an important first step toward achieving financial security.
2. Recognize Your Most Important Financial Asset: Yourself
Your skills, knowledge and experience are the biggest assets you have. The value of your future earnings will dwarf any savings or investments you might have for most of your career. Your job and future career are the most important factors in achieving financial independence and security. For those just entering the work force, future career opportunities are as bright as they've ever been. The large number of retiring baby boomers is expected to create labor shortages; there will be room for advancement as companies scramble to fill empty positions.
Look at yourself as a financial asset. Investing in yourself will pay off in the future. Increase your value through hard work, continual upgrading of skills and knowledge and by making smart career choices. Efforts to improve your career can have a far bigger impact on your financial security than tightening your belt and trying to save more.
3. Become a Planner, Not a Saver
Research has shown that those who plan for the future end up with more wealth than those who do not. Successful people are goal oriented: they set goals and develop a plan to achieve them. For example, if you set a goal to pay off your student loans in two years, you'll have a better chance of achieving this goal than you would if you merely said you wanted to pay off your student loans, but failed to set a timetable.
Even the process of writing down some goals will help you to achieve them. Being goal-oriented and following a plan means taking control of your life. It is an important step toward improving your financial independence and security.
4. Set Short-Term Goals – Long-Term Goals Will Take Care of Themselves
Life holds many uncertainties – and a lot can change between now and 30 years from now. As such, the prospect of planning far into the future is a daunting task for young investors.
Rather than setting long-term goals, set a series of small short-term goals that are both measurable and precise. For example: paying off credit card debt or student loans in a matter of months; or contributing to your company's pension plan with a set salary reduction contribution each month.
As you achieve your short-term goals, set new ones. The constant setting and achieving of short-term goals will ensure that you reach your longer-term goals. If your goal is to be worth a million dollars by 40, you need to first reach smaller goals like having $10,000, $50,000 or $500,000.
5. Planning For Retirement: Fuggetaboutit?
Just out of school, retirement planning is the last thing on your mind. So if you have to for now, just fuggetaboutit. If you follow the other tips, you will not only be more financially secure and prepared in the short term, but you will also be financially prepared for the distant future as well.
However, if you can take a few steps now to start saving, try setting up automatic monthly contributions to a retirement plan like an employer-sponsored 401(k) or your own Roth IRA; compounding will work in your favor, which makes reaching your goal much easier.
If you implement this pay yourself first ideal, you won't have to worry about how much you're contributing; the most important thing is to develop the habit of saving. You can increase your contributions when your income rises or when you've achieved more of your short-term goals.
6. Make Sure Your Lifestyle Costs Lag Your Income Growth
Many new graduates find that in the first couple years of working they have excess cash flow. Still used to their more frugal student spending habits, it is easy to make more money than needed. Rather than using excess income to buy new toys and live a more luxurious lifestyle, put the money toward reducing debt or adding to savings. As you advance in your career and attain greater responsibility, your salary should increase. If the cost of your lifestyle lags your income growth, you will always have excess cash flow that can be put toward financial goals.
Where people get into trouble is by feeling entitled to a standard of living that exceeds what they can afford. However, if you keep your standard of living below what you earn, you won't have to cut back to accumulate money.
7. Become Financially Literate
Making money is one thing; saving it and making it grow is another. Financial management and investing are lifelong endeavors. Making sound financial and investment decisions is important for achieving your financial goals.
Research has shown that people who are financially literate end up with more wealth than those who are not. Taking the time and effort to become knowledgeable in the areas of personal finance and investing will pay off throughout your life.
8. Seize the Opportunities: Take Calculated Risks
Taking calculated risks when you are young can be a prudent decision in the long run. You might make mistakes along the way, but remember, mistakes are the lessons of wisdom. You often learn more from your mistakes than from your successes. Also, when you are young, you can recover faster from financial mistakes, and you have many years to recover.
Examples of calculated risk include: moving to a new city with more job opportunities; going back to school for additional training; or taking a new job at a different company for less pay but more upside potential. Starting a new company, working for a small startup, or investing in high risk/high return stocks is easier to do when you're young. As people get older and assume more family responsibilities like paying off the mortgage or saving for the kids' education, many are forced to play it safe and are unable to capitalize on riskier opportunities that present themselves.
9. Borrow Money For Investments – Never to Finance a Lifestyle
Using credit for a life you feel entitled to is a losing proposition when it comes to building wealth. The constant borrowing will assure that there is no money available for investing, and the added interest expense of borrowing further increases the cost of the lifestyle.
Borrowed money should be used only for investing – where your gain will outrun your borrowing costs. This might mean investing in the literal sense (stocks, bonds, etc.) or it might mean investing in yourself for your education or to start a business or to buy a house. In these cases, borrowing can provide the leverage you need to reach your financial goals faster.
10. Take Advantage of Financial Freebies
Not many things in life are free. If you belong to a company pension plan, take the free money it offers and make sure that you contribute at least up to the maximum of what your company will match.
You can also look for (legal) ways to take advantage of tax laws. For example, contributing to an individual retirement account (IRA) will result in a tax savings – in effect, the government is giving you free money to provide an incentive to contribute. There is also an incentive to invest in stocks because of favorable tax treatment on capital gains and dividend income.