Posted on Fri, Jun. 08, 2012

You’ve just graduated from college, and need to start paying student loans. You and your bride are looking for your first home. You and your young family can’t figure out how to save.

The first third of your professional life, around age 22-35, can be a financially stressful time, with so many responsibilities pulling at your meager dollars. Add to that navigating an economy that is still recovering, and it may seem like you can’t get ahead.

But financial planners say the early years are a great time to start building a foundation of wealth and security.

Here are some tips from the experts:

Start with a self-analysis

Track where your money is going. Look at your responsibilities and your living situation. Are you living with parents? Paying rent? Tie that in with your goals.

“This is a pretty awesome time of life, you’ve graduated from college and if you are lucky enough to have a job, you should be thinking about paying down your debt and having fun,” said Howard Kramer, a certified financial planner with H.A. Kramer and Associates in Plantation. “It’s important to maintain a balance, no matter how focused you are on building wealth or reducing debt.”

Make your own job

Don’t have great job prospects? Create your own. “People no longer have the security of staying in the same job until they retire,” Kramer said.

A tough economy calls for more entrepreneurial endeavors. “So you should think about a hobby or something you enjoy that you can cultivate to one day generate a revenue stream,” Kramer said. “You have to take personal responsibility for your livelihood.”

Young people who do land a job today are more likely going to change employers during their career, and unless they’re government workers with a pension, they’re going to have to come up with a retirement plan, said Jack Patterson, a certified financial planner in Coral Gables.

“If you’re not going to work for someone who gives you a pension, you’re going to have to be a good saver and investor,” he said.

Examine your debt

Look at the interest rate of your mortgage and student loans. If they are high, pay down the highest first, then move on to the next one. If they are low, don’t pay down debt at the expense of saving, Patterson said.

“A lot of people retire and say ‘well, the house is paid off’ but they don’t have any savings,” Patterson said. “You can’t just pay off your home, you have to have money put aside, too.”

Rent vs. buy

Back in the day, renting was “throwing away your money,” said Mary Kirtland, a certified financial planner with Kirtland Financial Management in Coral Gables. Now things have changed.

Today, you need a 20 percent down payment to avoid the costs of private mortgage insurance. “Plus, in South Florida, there are higher than average costs associated with buying a home,” Kirtland said.

For a $300,000 home, windstorm insurance can run $3,500 to $4,500. Then there is the cost of the windstorm deductible, typically 5 percent — or $6,000 for our $300,000 homeowner — that should be put aside in case of a hurricane. Top that with keeping your home up to code and paying property taxes.

If you’re considering buying, is your job stable? If work requires you to relocate, will you be able to recoup the investment you made to buy a home?

“People need to stop thinking of a house as an investment and think of it as a used asset,” Kirtland said.

Most couples in this age group who have already bought are now typically in a home worth less than they paid for it, Kirtland said. In this case, as their family grows, they must either save for another down payment to move to a larger home, or save to remodel because they can’t afford to move.

Find mentors

Find financial planning mentors to get personalized advice to supplement what you read on the Internet. The Financial Planning Association’s site, www.fpanet.org, offers a directory of financial planners who work with young investors.

“It’s not cost effective for couples at this stage of their investing life to pay someone to manage their account on a yearly basis,” Kirtland said. “However, since the most important step of their investment plan is the actual accumulation process, meeting with an advisor once a year to review their progress would be a good idea.”

A young couple with a small amount to invest may find that many financial planners have a minimum portfolio they work with. You can meet up with a fee-based financial planner for an hour or two at $150 to $200 an hour to get an overview, Kirtland said.

Young investors also can look to a mutual fund family with low overhead, such as Vanguard or Fidelity, Kirtland said.

Save early

“You have to think of retirement savings as a necessity,” Kramer said. “Set it up so you don’t have to think about it.”

Accumulating wealth requires two things — time and consistency, he said.

“The magic of compounding will make you a richer person if you start saving earlier,” Kramer said. “Take advantage of dollar-cost averaging, when you continuously invest, rather than trying to time the market.”

Take care of financial housekeeping

Make a will. Draw up financial and health directives. Buy disability and renter’s insurance. “It’s all about risk management,” Kramer said. Buy term insurance, rather than whole life or universal, because you get the most death benefit for you dollar, Kramer said.

Develop positive relationships

Look at Mark Zuckerberg. Many of the Facebook founder’s friends who joined the company are now millionaires, because they were in the right place at the right time. “Align yourself with the right people,” Kramer said. “Look for relationships that will help you achieve success.”

“When you’re young, and you have no kids, no spouse, you have the perfect opportunity to take risks,” Kramer said. “There’s more to life than how much you have in the bank or your 401(k).”

Where to invest

With small investors, Kirtland likes mutual funds, because of lower overhead and decreased risk. “With smaller portfolios, I never recommend more than 2 percent to 3 percent in individual company stocks, because individual stocks can blow up on you pretty fast,” Kirtland said.

There also are transaction fees for purchases and sales of individual stocks and bonds that can be avoided by buying no-load mutual funds with periodic investments, Kirtland said.

Kramer recommends a balanced portfolio of diversified equities. The easiest way is to invest in a Target Retirement Fund, based on the target date of your retirement. The fund automatically rebalances every year, adjusting to a more conservative portfolio as you reach retirement age.

“You can set it and forget it,” Kramer said.

Patterson said while many investment planners like mutual funds, he prefers individual stocks, bonds and exchange-traded funds, known as ETFs.

The strategy follows technical analysis, and involves charting patterns that are going to give you an entry and an exit point, he said.

“When the stock market is high, mutual funds are going to do very well, but in an environment where it’s choppy, ETFs give you way better performance and no restrictions on getting in and out of the market,” Patterson said. With ETFs, you have more flexibility, and because they are not actively managed fees are extremely low, he said.

Retirement savings

For retirement savings, Kirtland likes the Roth 401(k) plan, because you can get the employer match for contributions, enjoy tax-free growth and have fewer restrictions if you want to borrow against it in the future for a down payment on a home. If a Roth 401(k) is not available, she advises investing in a 401(k) up to the match. Any surplus can go in a Roth IRA, because of lower overhead and more investment choices, she said.

“If your income is too high to qualify for a Roth IRA, consider making a contribution to a traditional IRA and converting to a Roth. There are currently no income limits on conversions,” Patterson said.

If you leave an employer, don’t just leave your 401(k) sitting in the old account, Kramer said. Roll it over to a self-directed IRA. You ‘ll have more investment choices than a company plan, Kramer said. Then, if you’re new employer has a fantastic 401(k) plan, you have the freedom to roll the money over into that.

Live frugally

“A married couple in Miami needs to have two incomes, but if you can keep your standard of living and save 50 percent of the wife’s income, if she is the one likely to stop working or go part-time when you have kids, you will be so much more ahead,” Kirtland said.

Live beneath your means so you are not dependent on both incomes, she said. “Don’t let your cost of living or lifestyle absorb both incomes, because that can change in a heartbeat,” she said.

The new normal is going to require more saving, Kirtland said. “The financial crisis has laid down the foundation that it is good to save.”