This is the second of a two-part blog series on building a strong financial foundation for younger, early-career professionals. The series covers topics such as understanding net worth, financial goal-setting, investing and saving, debt and tax planning. Click here to read the first part of the blog series.
Manage Your Debt
Not all debt is bad debt, especially if you have a low interest rate that’s helping you finance an asset and thus increasing your net worth. A mortgage is an example of what is typically considered a good debt.
If you have student debt, it’s very important to understand the terms of your loans. Be aware of the interest rates, monthly payments, and the repayment terms. It’s okay to only pay the minimum if you have a low interest rate, but if your interest rate is higher, consider paying more than the monthly minimum so you can pay off debt sooner and accrue less interest.
Credit Card Debt
The most important thing to do for credit card debt is to always pay at least the minimum. If you can’t pay off your debt in full, make a plan using one of two approaches (while still paying the minimum on all accounts): the avalanche method or the snowball method. For the snowball method, focus on paying off your smallest debts first and work your way up to your higher balance debts. With the avalanche method, start by paying off the card with the highest interest rate and work your way down from there.
You might also consider loan consolidation or asking for reduction or adjustment. When used wisely, credit cards can help increase your credit score which can help you get lower rates for future debts. You can also take advantage of credit card points and rewards.
Buying vs. Renting
If you’re not planning on staying somewhere long term, renting may be the better option for you. If you are planning on staying somewhere for a longer period, buying might be a better option. Buying a house can be a great investment and can help you grow your net worth when purchased strategically, but be aware that it comes with maintenance costs and is not always the best option for everyone. Prepare to spend about one percent of your house price on maintenance each year.
Protect Yourself and Your Family
Your most important assets are you and your family, so make sure you have them covered. Insurance is a needs-based approach—different people need different amounts of coverage. Consider what you and your family need to stay protected. Different types of insurance include life insurance, medical, dental, and vision insurance, short- and long-term disability insurance, and long-term care insurance. Some medical insurance plans have high deductibles, which can allow you to get a tax-free Health Savings Account for qualified medical expense.
Estate planning is also an important part of protecting yourself and loved ones. No matter your age, make sure you have designated beneficiaries on all your accounts. Though it can be difficult to think about, you should also put together a will in the event that something happens to you. Finally, advanced healthcare directives and financial power of attorney can help protect your best interest in the event you are unable to make medical and financial decisions for yourself.
Take Advantage of Tax Planning
Make sure to file your taxes on time by April 15th or October 15th, if extended. But remember any taxes owed are due April 15th whether or not you filed for an extension. You should also check your tax withholdings each year. If you had a large refund or a large balance due, go back and adjust your withholdings. You should also maximize your deductions. There are many credits and deductions available, especially when you’re younger and earning less income. Don’t forget to look for tax incentives in your home state.
If you are looking for help with your finances or have questions, please contact Abbie Niehoff via our online contact form.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.