Entering the real world can be one of the most intimidating and confusing times for many recent graduates and young professionals. At this age, some people look for traditional jobs while others want to start their own businesses. To help guide this group to start out on the right financial footing, Jim Tucker encourages young professionals to focus on the foundations of financial planning, what he refers to as the 7 essentials of wealth creation: paying off debt; signing up for employer disability insurance; building an emergency fund; starting the parent talk; saving for retirement; maintaining health insurance and making the optimal real estate decision.
Tucker received his MBA from the Harvard Business School and is a CERTIFIED FINANCIAL PLANNER™ professional. His firm, Tucker Bria Wealth Strategies, is based in Chapel Hill, North Carolina and serves clients all over the country. While his core client base is the over-50 crowd, Tucker has an affinity for the young professional. He remembers his journey just starting out in the real world. “It’s an exciting time of life, but one often filled with self-doubt and uncertainty. Job and career changes, relationships and location mobility were all part of my experience.” Tucker continues, “I was basically nomadic for the first 15 years of my post-undergrad life, living in 5 different cities from New York to California. Putting down roots was something I didn’t do until I was in my 30’s.”
Tucker is upfront with the young professionals he speaks with. “None of what I am about to talk about is fun or exciting,” is how Tucker starts many of these conversations. His advice is to start retirement planning as early as possible. According to Tucker, there is a significant difference between starting to save for retirement at 25 as compared to 35. Although many fresh out of college have debts they want to pay off, Tucker strongly advises putting some money aside from each paycheck towards retirement savings. Over time, the compound effect will dramatically impact their long-term wealth.
Nevertheless, the debt conversation is key. “I don’t talk to this group about creating a budget. This can come off as preaching. Instead, I ask them to envision what they want their life to look like in 2 and 5 years. We then set a financial road map to get there. Inevitably, how they spend their paycheck follows. The difference is that they see spending choices as their decision.”
Additionally, Tucker strongly advises young people to sign up for disability insurance, if offered by their employer. While often cost prohibitive if done privately, signing up for both short and long-term disability insurance through their employer, and paying for it with after-tax dollars, should be a cornerstone of all young professionals’ financial foundation. Similar to retirement savings, becoming disabled is either a far-off concept to be addressed when older, or something that happens to others. “Like all of us, young people don’t want to be a burden to others,” says Tucker. “Therefore, I couch disability insurance as a way to avoid becoming a financial strain to their family.”
Tucker then pivots to a conversation about health insurance. “It’s really interesting to see the reaction of the under-26-year-old crowd when I share roughly what their parents are paying to keep them on their health insurance plan. I prepare them for the transition to paying for their own coverage. We talk about high deductible plans and health savings accounts. However, unlike starting retirement savings, I share that I’m not a fan of HSAs until the debt is paid off.”
Another topic that Tucker believes is often overlooked is having a financial conversation with their parents. Although it can be difficult to initiate, Tucker advises young adults to talk with their parents about the parents’ retirement plans and financial stability – a move he couches as contingency planning. He explains that financial assistance to parents can derail their own retirement planning or even interfere with their personal life. “Money conversations are tough enough for couples without adding the flashpoint of providing financial assistance to a spouse’s parent,” says Tucker. By discussing retirement savings and retirement health care planning with their parents early, both children and parents will be better prepared if their parents lose their job or require long-term care.
While it may seem way too early to initiate a conversation, a young professional has a great opportunity to initiate this conversation under the premise of asking to gain their parents’ wisdom of what they did or wish they had done when the parent was younger.
Another basic financial planning step is to prepare for unexpected events by keeping 3 to 6 months of savings for emergencies. Most young adults understand this concept because they have heard of it. But Tucker shares how to do it. Specifically, Tucker encourages the young professional to keep this money just enough out-of-reach to think twice before spending it on a non-emergency. Tucker says, “Where the emergency fund is kept is key. Having it in a checking account or any easily accessible account where it can be lost to an impulse purchase is a no-no. The money must be shielded from Venmo or a debit card.” With interest rates rising, purchasing a 3-month CD is Tucker’s new favorite option.
Lastly, Tucker engages the young professional in a conversation about their living arrangement. “I run into far too many young professionals who are adamant that they want their own place without roommates,” laments Tucker. “Maybe I’m just wired to think that the easiest way to get off on the right financial foot for the young professional is to live with roommates. It’s the simplest way I know to pay expenses when young. I like this option better than living with parents, for the real-world experience of paying utility bills and making choices for things like TV subscriptions. But for most, it’s still better in learning about life’s financial trade-offs than the solo place.”
Jim Tucker, CFP®, CRPS® is a financial advisor located at 3100 Tower Blvd, Suite 117, Durham, NC 27707. He offers securities and advisory services as a Registered Representative and Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Jim can be reached at 919-381-5780 or at email@example.com.