For many, simply landing the dream job and discovering the salary is enough to keep their financial woes at bay. Impressing the new boss and settling in seem like the next—and sometimes only—rational steps in this process. The newly employed look forward to watching their bank accounts grow incrementally, but many, especially millennials, who are soon to take over the work force as the largest generation in the U.S., are neglecting their financial health, especially when it comes to planning for the future.
It’s never too early to begin saving and the first meeting with Human Resources after starting a new job is the perfect place to start. Finances are scary, but thanks to experts, not everyone needs an MBA to understand and navigate financial planning.
Frederick Hubler, President of Creative Capital Wealth Management Group in Phoenixville; Erik Strid, CEO of Concentus Wealth Advisors in King of Prussia and Patrick Burke, Managing Director of Mill Creek Capital Advisors in Conshohocken, share their advice for millennials on smart saving.
MLT: What exactly is a 401K?
FH: A 401K is a retirement plan that a company puts together. A 403B is a plan that a non-profit puts together. In both cases you’re allowed to defer of your income up to $18,000.
MLT: How do you compare retirement plans between two different companies?
FH: If it’s a company, they may have a match, which, if you put in a dollar of your money, they’ll put in a dollar of their money. So that’s a big thing. If two companies are offering you the same salary, and the job is the same and you don’t really care which one you pick, the one with the match will be worth more to you.
MLT: What about an IRA?
PB: An IRA has many of the same features as a 401K in the sense that the savings can grow on a tax-deferred or tax-free basis, but there are no matching contributions. The benefit of an IRA is that you can control all of the investment options that you want, whereas a 401K you sort of have to limit your investment lineup.
MLT: What is the difference between a Roth IRA and a traditional IRA?
FH: With a Roth IRA, you do not get a tax deduction for the contribution up front. But the money goes tax free, assuming that you meet the requirements when you take the money out. The question of whether you want a Roth or a traditional is really based on whether you want the tax deduction now and pay taxes on the money later, or you’re willing to forgo the deduction and let the money go tax free.
PB: For millennials specifically, Roth IRAs are often a much better vehicle. When you’re younger, you tend to have lower income. When you have lower income, the value of the tax deduction is small. If you were a farmer and you had the choice to take taxes on the seed or taxes on the harvest, almost everyone would say tax me on the seed because it’s much smaller than the harvest.
MLT: What are some common financial misconceptions among Millennials:
PB: The most common misconception that I see is you have to buy the best assets, the best stocks, in order to accumulate assets. What matters more is how much you save than how much you maximize your return. So if you can focus on saving 10 percent or 15 percent, that’s going to matter much more than making sure you pick the perfect portfolio.
FH: They also don’t want to pay themselves first. They pay themselves last, and if there’s anything else they then do something for themselves with it. So one of the misconceptions, or financial mistakes, frankly, is they have plenty of time to do it later. And time catches up on them.
ES: I think a lot of times people can get caught up in what they’re saving for. The important thing is to actually do the saving. I think that the first priority is actually building some kind of savings that is liquid and builds a base, like an emergency fund. It’s all-purpose savings. If things work great, it would be still around when you retire. But it could be for some needs that happen in the meantime.
MLT: Is there ever a risk of saving too much?
ES: No. There are two things you want to pay attention to. One is your quality of life today, and the other is your quality of life tomorrow and in the future. Every time you save money, you steal from your quality of life today to enhance your quality of life tomorrow. So that is clearly a trade off. For most young people that balance right now is highly skewed in terms of quality of life today.
MLT: What are your recommendations on finding a financial advisor?
FH: How do you want to pay for the advice? Are you going to give them the money and then hope they give you the advice? Are they going to charge you for advice that is separate from the money, so that you’re getting better advice? One service that I know of is called Wiser Advisor. Basically it’s free for the person to just go in there and put in what they want, and they’ll be matched with someone. It’s almost like a matchmaking service.
ES: I believe that anybody would benefit from having a financial advisor. The way I would go about choosing one is really to get a referral. I’d ask my accountant, I’d ask my parents, my friends, my coworkers—anybody that I trust. Who do they use and why? Get a referral and interview the person. The acid test is the trust test. When you meet that person, do you get a feeling that you really, ultimately can trust them and they have your best interests at heart? If you do, hire them right away.