Just as fashion and other trends tend to differ across generations, the kind of financial product best suited for someone nearing retirement may not be the best kind of product for someone just starting out in the workplace.
First and foremost, when you’re at the start of your career, chances are you’re younger -- possibly just out of college -- looking for a place to rent, not buy, and still trying to figure out how you’re going to pay back those student loans that let you slide while you were still in school.
Fortunately, WalletPop -- a consumer finance site -- talked to some experts who have sifted through the myriad of financial products and services available today to find those that would most benefit a young person just starting out on his or her own. So if this applies to you, here’s what they say you should consider as well as what you may want to leave behind:
If you’re just starting out, you may want to consider a bank or credit union checking account instead of a pre-paid debit card. That way you can write checks for rent and other bills. If you don't already have a relationship with a bank, or if your parents don't recommend theirs, shop around. Ask for information about minimum-balance fees, out-of-network ATM fees and monthly maintenance fees. Ideally, you want to find a financial institution where the fees for all of these are zero and they are there.
One good source is the local credit union, since they often have lower fees than banks. Also, if you're worried that you won't be able to control or keep track of your spending, turn down that offer of overdraft "protection," which could cost you close to $30 every time you spend more than the amount in your account when making a debit purchase.
As for those prepaid debit cards, although they promise to function just like a bank or credit union deposit account, they have some drawbacks in terms of consumer protections. They also tend to be much more expensive than checking accounts, with monthly fees and charges for activities like checking your balance or speaking to a customer service rep that are usually free at banks and credit unions.
When selecting a credit card, pick one with a low limit and a low APR. John Ulzheimer, president of consumer education at SmartCredit.com, says of young adults entering the credit card market should ask for a card with a modest credit limit and resist the urge to take all the credit a company is willing to offer unless they're certain they can use that card without abusing the limit.
In addition to a modest limit, young people should search for cards with low fees and interest rates rather than gravitating toward the flashier reward cards.
It’s never too early to start saving for retirement so select a 401(k) or Roth IRA that contains no-load mutual funds, index or structured funds. Stay away from retirement accounts with actively managed funds.
When you’re in your 20s, you probably don't have a lot of extra cash to throw around at this point. So investing even a small amount has two big benefits: First, you'll get into the habit of putting away money toward your retirement, despite how far-off that may seem in the present day. Second, even a small amount will grow over time, and the longer it's in an investment account, the more it will grow.
Experts say if your employer offers a 401(k) with matching funds, that's your best bet. It's essentially free money, so it's worth skimping a little on your day-to-day expenses to get that. If you don't have the option of a 401(k) plan at your job, or if you've done your research and don't like the financial offerings you can get through it, then it's time to consider a Roth IRA.
Unlike a 401(k), the money you put into a Roth IRA goes in after taxes, so you don't get the tax break you'd get with a 401(k). But on the plus side, you won't have to pay taxes when you withdraw the money decades in the future. Don Chambers, author of Money Basics for Young Adults, believes in index and structured funds versus a more actively-managed fund that commands higher fees. Plus he says they don't always yield better returns than their cheaper counterparts. And, if you're not an investment expert, learning the ins and outs of the investment marketplace can be practically a second job, which probably isn't a burden you want to take on during a time in your life when you might already have a second job.
That said, it's safer for you than for someone a generation older to invest in riskier asset classes like small-cap funds, emerging markets and value stocks, since you have plenty of time for any loss to reverse itself before you need to access your money. At the very least, if you don't think you can lock up your money for an extended period in a 401(k) or other retirement account, open a money market account.
This lets you earn a better rate of interest than an ordinary checking account but doesn't penalize you for withdrawing it or closing the account if you're saving for something like emergency medical expenses or a down payment for a house.
When it comes to health insurance and you are in relatively good health, choose a high deductible. Health insurance is important even if you’re healthy, but something as mundane as a broken arm could derail your financial stability for years. Health care bills are a major cause of bankruptcy. But since you’re young and most likely healthy, though, you might be a good candidate for a higher-deductible plan.
The important thing to remember here is to save enough money to cover that deductible if you need it. If you’re company offers a health savings plan, you could save money there tax free.
You might not think your stuff is worth much, but if you're in an apartment building, and your computer, iPad or digital camera are swiped, you could be a few thousand bucks. If another tenant starts a fire or floods the bathroom, you'll have a much more difficult time replacing everything if you don't have insurance. Before shopping around, check with your car insurer first: some will give you a discount if your car is insured with them, too.
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