Commentary by Joseph Clark
Congratulations 2015 grads (and parents)! As you begin your career, you’ll make many decisions that impact your financial future, including participating in your employer’s retirement savings plan.
I’m often asked how much money an employee should contribute to their employer’s plan. Always contribute as much as you can up to the company match. Ask whether your employer’s plan offers a Roth component that will allow contributions to grow tax free indefinitely. And consider whether you expect your tax rate to increase in the future. If your employer’s plan doesn’t include a Roth 401K option, you may be wise to take the dollars after the company match and direct them to a Roth IRA.
Make sure you’re saving the correct amount of income for your age. The percentage of income that needs to be saved in order to reach retirement savings goals is smaller the sooner you begin saving. People under 25 can save 5-7 percent of their income over the course of their career and have a shot at fully replacing their standard of living.
It’s also important to build tax diversification into your accounts. This means that you want some savings exposed to taxes each year, some funds tax-deferred, and some funds growing tax-free in some type of Roth instrument.
Defending your credit score and knowing your debt-to-income ratio are important financial responsibilities. Your credit score not only indicates your worthiness as a borrower, but impacts other factors like car insurance rates. Your debt-to-income ratio is one of the most important numbers considered when lenders review a mortgage application. The debt refers to all contractually obligated monthly expenditures divided by your income. Ideally, you want your ratio to be about 37 percent debt-to-income. Manage debt or it will manage you.
Speaking of mortgages, don’t rush into home ownership too early. Young people rarely stay in one place for very long. Unless you expect to live in a place for seven years or longer, you are almost always better to rent. Taxes, upkeep, insurance and other costs related to home ownership add up quickly.
Congratulations on your achievements. Now, start saving!
Joseph “Big Joe” Clark is a Certified Financial PlannerTM and the managing partner of Financial Enhancement Group, LLC an SEC registered investment advisor. He is the host of “Consider This” found on WQME Saturday mornings at 9 a.m. and Shine 99 on Sunday’s at 10 a.m. Joe also serves as an adjunct assistant professor at Purdue University where he teaches the capstone course for a degree in Financial Counseling and Planning. Securities offered through World Equity Group, Inc., member FINRA/SIPC, a broker dealer and SEC registered Investment Advisor. Advisory Services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated and are not affiliated. Big Joe can be reached at email@example.com, or (765) 640-1524.