We have received a number of emails lately asking what steps can young people take to start getting their financial houses in order from the very beginning. In today’s show, Bo addresses what decisions can be made early on to begin on the right track to financial independence.
The first thing Bo recommends is to build up your cash reserves. You want to make sure you have enough in a rainy-day fund to cover 100% of your health insurance deductible plus about 6 months of expenses. He notes that the first step to becoming financially independent is to truly step away from your caretakers and become individually independent.
The next thing you want to make sure you are doing is maxing out any employer match you may be entitled to. We have said it over and over… this is FREE money! It is an automatic 100% return on your investment. If you aren’t sure how much this will affect your cash flow, track your spending for a few months. It is amazing how much information you can collect about your spending habits if you just keep track of everything you spend.
This is also beneficial because it gives you an idea of how much additional money you have to work with. Once you have begun building up your cash reserves and then maxed out your employer match, you may want to consider contributing to a Roth IRA. For young people, Roths are very attractive because of the amount of time you have for that money to grow tax deferred and then even become tax free in retirement! Remember, as you are beginning to build assets, accumulation matters more than return! If you’ve saved $1,000 dollars and earn 8%, that’s only $80. If you’ve saved $1M and you earn 8%, that’s quite a different story ($80k).
Bo goes on in the show to mention what a young person should be thinking about when it comes to health insurance and even briefly touches on life insurance. If you are young and you haven’t yet begun to establish a credit history, Bo suggests going out and getting a credit card (to use responsibly) and begin establishing a record of credit. This will make big purchases such as homes and automobiles much easier down the road!
To close out the show, Bo addresses some out of the box issues that young people may want to begin thinking about now. As you listen, he touches on:
- Not getting too ahead of yourself
- Improving/adding to your skill sets
- Setting Goals
- Investing in your future health
- Enjoying your youth (you can’t get it back)
You may want to use some of these on-line resources as you begin to implement these steps:
Credit Card and Savings Account Research – www.Bankrate.com
Budgeting – www.mint.com
Free Credit Reports – www.AnnualCreditReport.com
Health Insurance Quotes – www.ehealthinsurance.com
Brad says
July 9, 2010 at 3:53 pmAbsolutely great podcast that provided just the right amount of coverage to each area of personal finance for those in their 20’s or early 30’s…. I am 26 and almost 100% agree with everything said. I’ll be forwarding to my 22 and 28 year old siblings. Thanks again!
Peter says
July 19, 2010 at 3:38 pmThat was a fabulous podcast. Thank you Brian for letting Bo out on his own.
I appreciate Brian’s more analytical topics, but it is nice to have some shows that focus on real practical suggestions.
I have to completely agree with just about everything Bo said. It is impossible to understate the importance of starting early. My wife and I started saving right after we got married and have continued to do so ever since. It was slow going at first since you are still accumulating, but one day you look at the portfolio statement and it’s hundreds of thousands of dollars. It’s an unbelievably comforting feeling knowing that you can deal with just about any problem that comes along without worrying about how you are going to pay for it.
I would also second Bo’s comment about the importance of health insurance. Things can happen to a perfectly healthy person that are completely out of their control. Last year I was bit by a bug and developed a skin infection on my foot. It ended up requiring a heavy dose of antibiotics and a short stay in the hospital. I would not be surprised if that would have cost more than $10,000 without health insurance. There is no way you could have predicted something like that happening and a simple problem like that could devastate a young person’s finances.
Keep up the good work and please let Bo do more of these types of shows. Thanks.
Donovan Sexton says
July 20, 2010 at 12:46 pmI got away from your podcasts for a while, but a friend brought me back in and I’m impressed to see how much your shows have matured while I’ve been gone. I’ve done a marathon of some of the recent shows and your show is now back on my RSS Feeds.
The reason for my post is I thought this was a great show, but I’d like to highlight something I felt was missing from the show. I am a fellow CPA Financial Planner who now lives in Chicago and I would like to first say you did a great job Bo. The only thing I thought could have been highlighted more was the risk of Disability to people of our younger age. Not only how important it is to get the group stuff many employers provide, but to also talk about the risks of the group plans and their tax issues. For me, this highlights why it’s a good idea to fully look into the risk of disability. I bring it up because I was surprised to see you jump to Life Insurance before you covered disability for younger people.
Don’t want to write a novel so I’ll end it with that, but good show Bo and I know you can’t please everyone all the time. You did a great job with the time frame and subject matter covered, but I felt a small touch on Disability for your listeners who may not know the dangers of disability would have topped off the discussion.