Just Starting Out? Take These Seven Steps Toward Financial Independence

Dear Readers,

I’d like to extend a hearty congratulations to the Class of 2021. There’s no doubt we’ve all weathered a tough year and a half. But now, as a new grad, you can prepare to strike out on your own. Maybe you’ve got your first “real” job, or your first apartment—or are still deciding what your next chapter will be. In any case, this is the perfect time to take some tried-and-true steps toward financial independence.

You may have heard much of the following advice before, but it bears repeating—both as a call to action to young people and as a reminder to anyone at any age who aspires to financial freedom.

Seven steps to financial independence

1. Spend less than you earn. Overspending is super easy to do, especially with the ease of online purchases, credit cards and “buy now, pay later” offers as a constant temptation. Therefore, you have to draw a line between what you absolutely need and the nice-to-haves. The best way to do this is to create a budget listing essential expenses like housing, utilities, food, transportation, insurance and debt payments in one column and extras such as entertainment, dining out and vacations in another. A shortcut for budgeting is to use the 50/30/20 rule: This means targeting 50 percent of your income toward needs; 30 percent toward wants; and 20 percent toward savings.
2. Have a saving mindset. For some people, saving comes naturally. Others almost have to trick themselves into doing it. One great tactic is to pay yourself first by setting up an automatic monthly transfer from your checking to your savings account. But whatever it takes, make it a habit. To keep you motivated, spell out your goals, periodically check your progress and make adjustments as needed.
3. Create a rainy-day fund. Continuing the theme from point two, carve out a portion of your savings budget to build a separate emergency fund, aiming to have enough cash to cover three-to-six months’ essential expenses. If you’re just starting out, aim for $1,000-$2,000 and build from there. Why? Look no further than the pandemic when millions of Americans were caught with a drop in income and unexpected expenses. What would happen if you lost your job or were injured in an accident? How would you pay your bills? That’s why a rainy-day fund is essential, regardless of your age.
4. Control debt—don’t let it control you. Credit cards can feel so freeing—but they can also lock you into spiraling and expensive debt. It’s fine to use credit cards for convenience, but only if you don’t charge more than you can really afford and can pay off in full every month. In addition, if you have student debt, stay on top of your loans. Consolidate if it makes sense, review your repayment options, and reach out to service providers if you’re struggling and are at risk for missing a payment.
5. Get insured. You’ve heard it before, and you might have resisted it, but make sure you have health insurance. Whether through work or an individual policy through healthcare.gov, don’t take the risk of being uninsured. If you’re 26 or younger, you’re still able be included on a parent’s policy. Of course, if you have a car, you need automobile insurance. Renting? Look into a low-cost renters’ policy. A big part of being independent is being prepared. 
6. Think retirement starting now. It’s super easy to postpone saving for retirement when you’re young, but the sooner you get started, the less you’ll need to save. In your 20s, aim to save between 10-15 percent of your gross salary between what you and your employer are contributing. Wait until you’re in your 30s, and you’ll need to ramp that up to 15-20 percent. If your employer offers a 401(k) match, you should at the very least contribute enough to get the full amount. If you’re on your own, consider opening a traditional or Roth IRA. They each have different tax advantages that may make one a better choice depending on your situation. Roth accounts may be a good choice for a young person because, while you don’t get the tax advantage up front, withdrawals are tax-free after age 59½ when you’ll potentially be in a higher tax bracket.
7. Invest. Saving is one thing, but investing is another—and I encourage you to start investing as soon as you’ve built up your rainy-day fund. Before you get started, think about your goals, time horizon and risk tolerance. This will help you develop an investment strategy and choose appropriate investments. Thankfully, it doesn’t take a lot of money these days to get started, especially if you use mutual funds, exchange traded funds, or fractional shares. Depending on how involved you want to be, you also might consider a robo-advice service. If you’re still unsure, consider working with a financial advisor who can help you get started, diversify, and make adjustments to your financial plan as your goals and market conditions change. You don’t need a lot of money to get help. 

There’s more of course. However, if you take these seven steps now—and remain mindful about the way you spend and save—you’ll not only give yourself a good start, you’ll be on your way to lasting financial independence.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.