It has never been more difficult, or confusing, to look far ahead into one’s financial future.
In particular, if you are about to start earning your first steady paycheck — congratulations! — or have come into new money through a bonus or gift, you may have questions about how to manage your money.
Professionals recommend using the cash carefully, of course. Particularly for younger people because for them, money, as an asset, keeps depreciating and costs keep rising.
Gregory Pinto, a senior partner at BostonWealth Strategies in Needham, suggests putting away at least three months’ worth of living expenses, including rent, food, and transportation. How much can you afford for your lifestyle essentials? No more than 40 percent of your gross income is the rule of thumb. Second, save another 10 percent to buy a home, no matter how daunting and far-fetched the prospect of owning real estate might seem. At current interest rates, you can park both these sums in a high-yield money market fund, an online bank savings account, or in short-term US Treasuries. Third, fund your 401(k) retirement plan, at least equal to what your employer is willing to match.
While all of this could feel overwhelming to someone just starting out, one’s finances can be managed with a few basic tips, says Pinto. Begin by saving small amounts, and watch what you spend. For instance, do not buy a more expensive television, whatever its latest feature, if a cheaper one is good enough. With Venmo, Apply Pay, and Stripe payments, it has never been easier to overspend at the point of sale. So he recommends one basic rule: Spend only what you have, and pay off your card every time.
Someone from a family with limited means might find it more beneficial to pay down their loans before saving.
Ultimately, it is crucial for people to understand how credit works and builds, says Alan Gentle, the director of Boston’s Center for Working Families in Roxbury. It affects just about every part of people’s lives. The center gives free coaching to individuals 18 to 24, a key goal of which is to “demystify” credit.
The fact that many college graduates start out laden with student debt only underscores the importance of planning ahead, he stresses. Understand your loan obligations as well as payment options that are available to you, he says. Gentle recommends having these critical conversations early on, because delays will only make repaying more costly.
Beyond that, setting aside a sliver of your cash for a rainy day is prudent. Gentle remembers seeing first-hand how ill-prepared people were to deal with the financial shock caused by COVID-19. Build a cushion for the next shock, he says. Also, current macroeconomic trends do not bode well for social security being the sole retirement solution. So, put away something, even if it’s as little as $25 each pay cycle, he says, and stay the course “incrementally and consistently.”
If you are lucky enough to come into new money, say, through receiving a substantial gift, you may want to pay heed to John Pelletier. He manages the Center for Financial Literacy at Champlain College, in Burlington, Vt. Let’s say your grandmother gifts you $10,000 at your college graduation, and you put away in an inexpensive index fund, like the S&P 500. What might it be worth in 50 years? He calculates it on his computer: $1.4 million, thanks to the fund’s performance and compounding.
“If I could teach [people] one thing, it would be to understand how compound interest works,” he says. “Understand the math behind it. Understand how it can help you to meet your investment goals and how, with debt, it can bankrupt you.”
The instant temptation after receiving a big corporate payout, say, might be to splurge on a flashy boat or expensive real estate. Such things are easy to buy and hard to sell, says Paul Karger. He is a managing partner and co-founder of TwinFocus, in Boston, which oversees $7 billion for wealthy families. Karger recommends not making any major decisions for 6 to 12 months; take the time to let the magnitude of the windfall sink in. Why? Because money’s an “emotional thing,” he says, especially for someone who hasn’t had it before.
To eliminate emotion from the equation, make a financial plan with an adviser who can help solve for the “unknown unknowns.” Look for someone who has done this before and has “been in the trenches,” someone who can be your sounding board and will help talk you out of making a bad decision. That said, Karger is in favor of trimming a small portion off the top to spend.
Finally, whether the total amount is small or big, Karger’s guiding principle is the same: Have three purses — save, spend, and give — and work out the correct balance between them.