Young adults: Avoid these 6 financial mistakes

Most of my clients have children; some are young, working adult children. Some of my clients are young adults as well.

Occasionally, clients ask me for tips they can offer their adult kids. I angle my suggestions toward preventing mistakes, because for people of any age, especially young folks, mistakes made today have an exponentially large impact on their lives 10, 20, or 30 years from now.

Here are some considerations that young people (post-school, working young adult) should keep in mind. Ignoring them could have a major impact on their long-term wealth and quality of life. 

  1. Disability insurance. Young people, and often their parents, tend to be grossly uninsured for disability. A working person’s human capital is essentially everything for the next 20 to 40 years of his or her life. Yet most young people, and even those who hire me, lack proper disability insurance. Whether you are married or single, obtaining adequate disability insurance is critical.

    As an aside, it’s highly unlikely your work-provided disability plan will be sufficient. See a qualified (and ethical) insurance agent to discuss this gap. Buy the best plan you can get. Keep updating that plan on a regular basis (usually annually or every few years as income increases). This is an area you don’t want to ignore. 

  1. Life insurance. This is almost as important as disability insurance — equally so if you’re married. Again, most folks are grossly uninsured for life because they often rely on their ridiculously inadequate employer-provided coverage, or they use silly rules of thumb like 10 times salary for coverage needs. Which makes sense only for the person whose salary, multiplied by 10, would cover the survivor’s needs for the rest of his or her life. That’s likely insufficient for young married couples, especially those with kids.

    Further, many people don’t buy a lengthy enough term. A 20-year policy should be a minimum purchase; 30 is often ideal because it offers a sufficient time frame to save the difference in your investment portfolio. Beyond 30 years, you’re getting into permanent life insurance, which most young folks do not need. Here’s a better rule of thumb for life insurance: Figure out what you might need if one of you were gone. For every $10,000 of gap need, in today’s low-yield environment, you will likely need about $500,000 of coverage (yes, that’s a lot for a young person, but that money calculation is designed to cover your survivor for at least 30 years and beyond). It’s not unusual to find a young family needing at least a couple of million dollars in life insurance for either income earner.

  1. Emergency fund. It’s said that most young people will have three to 12 different jobs/careers during their working years. If that’s true, those transitions will not be easy! An emergency fund of three to six months in cash or short-term investment-grade bonds makes those transitions easy.

    I would argue that beyond maximizing any retirement plan deferral strategy through work (to take advantage of company matches), you should be putting all discretionary savings into an emergency fund until you hit at least three to six months of lifestyle needs. Once that’s covered, go ahead and increase long-term retirement savings plans like work plans, Roth IRAs, etc.

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  1. Not saving nearly enough. The savings rate in this country is ridiculous. Here’s a tip: Most recent graduates have lived like college students for four to seven years, so why not continue to do so for another four to seven years after you graduate by living way below your means? Then establish a habit of saving at least 10% to 20% of your gross income per year. This sounds like a monstrous proposition, but that’s roughly the math if one wants to accumulate enough wealth to retire “young.”

    Living like a college student after college will help with that. Another aside: If you’re over the age of 35 and want to retire “young,” you’ll need to save a much higher gross income than 20% to cover a comfortable young retirement. This is important for young doctors to understand … but they often don’t. Young doctors are often among the poorest working-class citizens (relatively speaking) because they have too much debt yet have a much shorter time frame to recover or rebuild out of that debt, having started paying it off a decade later than their non-doctor peers. There’s essentially nothing to save because there’s too much debt and too little time.

  1. Taking on too much debt. This should be obvious, but it’s apparently not. Unfortunately, students start early in thinking debt is okay. They take on too much student loan debt even though it’s pretty clear now that the debt is usually not worth it. This essentially impoverishes them at a young age, yet they’ll often leave college and take on more debt with a car, possibly a home, and credit cards. If this is the path you’re on, you’ll never come and see a good financial adviser because you’ll never have anything to talk to them about. You’ll need a credit counselor. Not that you need to hire an adviser, but it won’t matter; you’ve essentially set yourself up for a lifetime of servitude.

    Start fresh, live below your means, don’t take on massive student loans unless you plan on making at least low six-figures right out of college, don’t take out car loans, don’t take out credit loans. Your mortgage, if done right, should be your only debt in your life. And parents, don’t encourage your kids to take out student loans either unless they plan on leaving college making a seriously good income. You’re just encouraging that servitude as well. 

  1. Having no estate plan. Once you turn 18, you’re technically an adult. If you’re single, you still have estate risks if you pass away or become incapacitated. If you’re married, especially with kids and no plan, you’re really being negligent in planning for the welfare of your family if you die or become incapacitated.

    I’m not going to get into any specific legal advice since I’m not an attorney, but to put it as simply as possible, you’re flying blind without an estate plan. A basic estate plan should be part of your high school graduation transition and is a necessity if you’re married. Hire an estate-planning attorney. 

Of course, there are a number of other issues one should consider at a young (or even older) age, but hopefully, if young adults start with this list, their future will be a lot less uncertain.

Michael Dubis is a fee-only certified financial planner and president of Michael A. Dubis Financial Planning, LLC. He is also an adjunct lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at financialperspectives@gmail.com.

 This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this website or that of the author’s. Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio's performance are based on historical data and one should not assume that this performance will continue in the future.
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