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5 Financial Tips to Take You From Graduation to Retirement
When you graduate from college and start your very first job, retirement is probably one of the last things on your mind. After all, retirement comes at the end of your career, and you’re just at the beginning. However, while it’s true that there is no obvious urgency to planning for retirement when you’re young, the earlier you start doing it, the better off you’ll be in the long run.
You don’t need to have a concrete plan in place for retirement, but you should have some idea of how much you’ll need to save to be able to live comfortably when you stop working eventually. You’ll also want to make sure you have a basic understanding of money and finances. If you don’t know a thing about budgets, mortgages, taxes, and interest rates, it’s a good idea to start educating yourself. Most importantly, though, you’ll want to cultivate strong financial habits today to ensure you are setting yourself up for success in the future. Here are a handful of tips to get you started along your journey towards prosperity.
Learn How to Create (and Stick to) a Budget
Much like healthy eating and regular exercise, budgeting is simple in theory, but not so easy in execution. It takes discipline to create and stick to a budget, but getting into this habit will pay big dividends down the line.
Budgeting is useful because it allows you to see exactly how much you earn, and where your money goes every month. Without a budget, it’s all too easy to lose track of spending. By creating a budget and sticking to it, you can maximize early paychecks and slowly start preparing for retirement. For instance, if you want to begin building up your investment portfolio, you will likely need to fund it from your savings, and it’s difficult to save if you’re not tracking spending.
Learn How to Negotiate your Salary
If you’re not negotiating your salary, you are leaving money on the table—money that could be used to better set you up for a retirement. With statistics showing that your peak earning years are in your 40s, and that failing to negotiate can cost you $1.5 million in the long term, proper salary negotiation is an invaluable skill.
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Make Compound Interest Work for You
Albert Einstein once referred to compound interest as the eighth wonder of the world, claiming that, “He who understands it, earns it.. He who doesn’t… pays it”. Even low interest rates, compounded over a sufficiently long time, can turn a small principal amount into a significant one. One easily-accessible financial instrument that can do this for you is a high yield savings account. The great advantage of being young is the fact that time is on your side. Thanks to compound interest, a small amount saved in your 20s can be a large sum when you reach your 60s. The longer you wait to start saving, however, the less you’ll be able to rely on compounding, and the more of your monthly paycheck you’ll need to try and save.
Understand Different Types of Debt
Compound interest can just as readily work against you as for you. Key to avoiding debilitating debt is understanding the various types that exist. Not all debt is created equal. Mortgage debt is a substantial long-term commitment that can seem daunting, but at the end of it all, you will be the owner of a piece of real estate that adds to your overall net worth, and can even generate supplemental rental income. This is different from other forms of consumer debt such as credit cards and personal loans, which should be used more judiciously. These can sometimes be necessary to make ends meet, especially when starting a family or furnishing a home, but always make sure that you know (and understand) the terms and interest rates associated with the debt you incur.
Understanding different types of debt will also help you better manage your credit score. A bad credit score can be a major barrier to achieving your financial goals, so understanding the relationship between debt and your credit score is crucial.
Understand Portfolio Diversification
Billionaire investor and philanthropist, John Templeton, once said, “Diversify. In stocks and bonds, as in much else, there is safety in numbers”. The numbers seem to bear this out Statistics have shown that passive index funds, which track a broad asset class such as the S&P500, generally outperform active funds.
By not putting all your proverbial eggs into a single basket, your investment portfolio has a much higher chance of surviving the boom-and-bust cycles of the market. Many people put off things like financial planning, saving, and investing simply because the subjects intimidate them. That’s the worst thing they can do. Tackle the issue of retirement when you’re young, and life will be much easier down the line. Investing can be complicated, but with the right help and advice, and it can be relatively simple to start.
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*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Citadel has contracted with CFS to make non-deposit investment products and services available to credit union members.