Financial advice for younger workers

Jan. 25—Navigating the array of financial choices to maintain a comfortable living while ensuring a secure retirement is difficult for people at any age or income level.

But for younger people entering their careers and perhaps starting a family, those decisions can be particularly confusing.

Beyond educating yourself on what financial tools make sense, local financial planners say creating a plan — even if that plan changes as you go along — and saving early on are the first places to start.

"I always encourage young people to start saving as early as possible as the later they start saving for retirement the more they'll need to save on a monthly basis," said Kaylee Phelps, a financial adviser with Edward Jones in Mankato.

Bryan Pratt, of Pratt Wealth Management in North Mankato, said that while many people starting out may not have sizable incomes or a lot of discretionary money, they still need to have the discipline to sock away what they can.

"Above all else, pay yourself first. No matter how much you are making, find a way to live below your means and consistently save."

Get a strategy

Phelps has 10 steps she gives clients at any stage in life:

1. Develop your strategy.

2. Understand risk.

3. Diversify for a solid foundation.

4. Stick with quality investments.

5. Invest for the long term.

6. Have realistic expectations.

7. Maintain your balance.

8. Prepare for the unexpected.

9. Focus on what you can control.

10. Review your strategy regularly.

Pratt offers similar advice and said people should set a budget and stick to it and work to avoid or eliminate debt when possible.

"Dedicate a few minutes each week to reviewing your finances and spending," Pratt advises. "Find what works best for you, be it a basic budget spreadsheet, a website like mint.com or software like YNAB. The knowledge and awareness gained can be extremely beneficial."

Use the 401(k)

Phelps said an easy and valuable step in beginning retirement savings is to take advantage of a 401(k) plan if it is offered by your employer. The plans allow an employee to have a set amount of their pay taken out of their check each month and invested in a plan that is administered by a third-party investment firm.

And most businesses offer some kind of match in which your employer will add a certain amount to your 401(k), effectively giving you bonus investment funds. According to the Profit Sharing/401k Council of America, an industry trade group, about 78% of 401(k) plans include some kind of employer match for employee contributions.

"It is important to take advantage of an employer match if one is available and to take advantage of the power of compounding," Phelps said. Even if the employer doesn't match, putting money in a 401(k) is a good idea, she says, as it creates an ongoing retirement savings account that the employee doesn't have to think about.

Compounding refers to the interest you earn on your 401(k) or other investments. The interest is calculated on both the initial amount of a deposit and on any interest previously accumulated on that amount. In other words, it's interest you gain on interest you've already gained.

Rebalancing

Phelps' No. 7 rule — maintain balance — means adjusting the balance in your investments to ensure a balance between the goals of growing your wealth and preserving what you have as different investments fluctuate in value.

"In recent years we've seen much more growth in stocks than in bonds, so if an account isn't rebalanced, it can take on more risk," Phelps said.

For example, if you have a strategy where you want 60% of your investments in higher growth funds such as the stock market and 40% in less volatile bond funds, but your stocks have grown significantly while your bonds have had slower growth, you will find that you suddenly have a larger share of your investments in stocks and you may want to move more of your investments into bonds.

Emergency fund

Financial advisers also put an emergency fund high on the list of things anyone should have.

"It is important to have money set aside for unexpected events and emergencies," Phelps said. "Generally for pre-retirees we recommend three to six months of living expenses."

Pratt said that while it can be difficult to save or build up an emergency fund, people need to save whatever they can. Knowing where you're spending money is a good first step to finding places to save.

"Make an intentional effort to know where your money is going. It is too easy to be passive about money — we can easily check balances on a phone and no longer rely on manual tracking and entries in check registers. Unfortunately, that can cause people to be disconnected and not realize exactly where their money is going or how much they are spending," Pratt said.

When a baby arrives

If a baby becomes part of your life, planners say you need to make some decisions. "While saving and investing are important, it's also important not to neglect what's most important, which is to provide for your family if something happens to you," Phelps said.

"It's so important to plan for the unexpected, which includes life insurance," she said.

Some families also utilize a "529 account" to help fund their children's or grandchildren's education. They are often aimed at saving for college, but there are also plans that can help fund K-12 tuition. Putting money in a 529 has tax benefits.

"Setting aside a small amount occasionally can go a long way," Phelps said.

Pratt said planning for "what-ifs" is the priority once you become responsible for another person. "That means having sufficient life and disability insurance, legal documents and emergency savings. A college fund is a great goal but should be secondary to those other items and to personal retirement savings," he said.

"Insurance can often be obtained through your employer or by purchasing a term life policy. The key legal document is a will to direct assets and name a guardian for the kid(s) in the event something happens," Pratt said.

Avoid pitfalls

Beyond what people should do, there are also things they should avoid doing when making investment decisions.

"It's really important to manage emotions," Phelps said. "Invest for the long term with quality investments and frequently review your strategy," Phelps said. "The best strategy in the world is no good if you don't put it into action."

That strategy includes what's important to you, what your goals are and to make a road map to get to the end goal."

Pratt said people need to watch out for lifestyle creep.

"As careers advance and income increases, there is a natural tendency to increase lifestyle spending at a similar pace. We work with a large number of retirees and have found that those who are most successful financially are typically people whose lifestyle spending increased at a much lower rate than their income, resulting in consistent and increasing savings over the years," he said.

And, Pratt said, avoid looking at things in terms of a monthly payment and always consider the total cost, and do not misuse credit cards. "Carrying a balance of any size can be financially devastating."

Phelps, who is a second generation financial adviser, said she enjoys being able to work alongside her dad, Paul Hoffman. She said she enjoys helping people through transitions in their lives, from marriage or divorce to job changes or retirement.

"The most fulfilling part of my career is helping my clients reach their long-term financial goals by finding out what is important to them, utilizing our process to develop a strategy and reviewing the strategy regularly.

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