When our clients come to us for assistance, one of the most common concerns is figuring out how they should address a diverse range of financial goals. This challenge is especially prevalent among younger clients, who are faced with both opportunities and challenges when structuring their investments. 

Young professionals need to carefully balance how they manage their investments in order to meet both short-term and long-term goals, and must also regularly update their portfolios as their circumstances change. When done successfully, they will be well-positioned for the future.

The Financial Circumstances of Young Professionals

Before deciding how they should prioritize their financial goals, young professionals should first assess their financial circumstances. Naturally, each person’s income, expenses, and goals will be different, so creating an investment budget is a useful first step.

Starting a career may be the first time a young professional is handling a complete household budget. Once they have accounted for rent, utilities, groceries, and other essential expenses, along with how much they want to spend on non-discretionary items like dining out and entertainment, they can determine the goals they want to achieve with their leftover income.

Some common aspirations for young professionals include:

• Paying off student loans: For those with a significant burden from their higher education, eliminating this debt enables them to save up more quickly for other goals. 
• Buying a house: This major purchase supports other lifestyle goals such as starting a family, and allows a young professional to acquire an asset that typically appreciates in value. 
• Retirement: Although young professionals still have decades of their working life in front of them, they are often motivated to begin saving early in order to maximize their returns.
• Saving for a major purchase: These may include things like buying a new vehicle, planning a dream vacation, or collecting capital to start a business.

The Risks of Hyper-Focusing on a Single Goal

We sometimes see that young clients are zeroing in on one goal, such as supercharging their retirement portfolio or tackling their student loan debt, and giving less attention to others. In doing so, they hope that they can achieve a goal more quickly and be better positioned to address others. Unfortunately, this strategy risks the possibility that some goals may go unfulfilled.

Here’s how hyper-focusing on a single financial objective can be detrimental:

• Retirement: Putting too much money into a retirement account at an early age can sideline goals that might be more difficult to achieve later in life, such as buying a home or starting a family. This, in turn, can lead to more stress and anxiety in the present day. Retirement accounts also have less liquidity than other investment options, creating more financial vulnerability in the short term.
• Purchasing a home: Conversely, too much attention on building up a savings account for a down payment can leave too little invested into a retirement account, and the loss of substantial long-term gains. Rushing into homeownership can also create financial strain if a person does not adequately budget for certain costs, such as an emergency fund to address unexpected repairs.
• Debt payments: Too much focus on paying down student loans or other debts can also mean missing out on longer-term financial growth. It can also make it more difficult to adapt to unexpected changes in your income or expenses, and create greater stress and anxiety.
• Savings: Putting excessive money aside for an emergency fund or general savings might put too much funding into low-yield accounts. Inflation can also erode the purchasing power of these savings over time.

Investment timelines

Each financial goal will come with its own timeline, which can also guide the investment strategy that is best suited to meet it. Short-term goals include the down payment for a house, paying off credit card debt, establishing an emergency fund, or acquiring enough capital to start a business. Saving for these goals should focus on building up the assets, keeping them liquid so they are easily accessible, and minimizing risk.

Medium-term goals, which can take up to a decade to complete, include paying off student loans, saving for a child’s higher education, completing significant home renovations, and starting a family. Investments toward these goals can assume more risk due to the longer timeline, though a gradual adjustment toward lower-risk investments should occur over time.

Longer term goals include retirement and general wealth accumulation. Investing toward these goals can take place over several decades, and use more aggressive strategies at the outset to maximize gains. By regularly contributing to these funds, periodically rebalancing a portfolio, and taking advantage of compounding interest, the lengthy investment period can potentially build up a substantial balance.

Balancing investments as a young professional

The challenge for investing as a young professional is that so many goals still lie before them, and they are often trying to achieve several goals over varying periods of time. Some general strategies that can be useful for young professionals to work toward these goals include:

• Setting a realistic budget and goals: Taking the time to create an investment budget helps determine how much money is available to save or invest. This, in turn, can help set short-term, medium-term, and long-term goals and how they can be prioritized. 
• Focusing on paying down high-interest debts: Investing can potentially result in major gains, but these are often not enough to balance the high interest rates on certain debts. For example, the historic earnings on major market indices has averaged to about 10 percent per year, while the interest rates on credit cards can easily be double that. Paying down high-interest debt reduces the amount of income going toward interest payments, and makes it easier to balance low-interest debt payments with investments that can earn stronger dividends.
• Taking advantage of employer retirement savings matches: Many employers offer to match the money employees contribute to a retirement savings account up to a certain level. It’s prudent to save at least this percentage of one’s income in order to maximize long-term gains. 
• Opening a dedicated savings account for a down payment: It’s easy to start saving toward a goal only to dip into these funds to meet short-term needs. Setting up a dedicated savings account toward buying a home can help ensure that this money remains untouched. 
• Leaving room for flexibility: Personal circumstances can change quickly, for better or for worse. One should always be prepared to adjust their financial strategy as needed to adapt to major changes.
• Meeting with a financial advisor: A financial advisor offers professional guidance and insights, along with customized plans to address each client’s circumstances. Meeting regularly with an advisor allows plans to be tailored as these circumstances change.

To set up a meeting with one of the financial advisors at Grey Ledge Advisors, call 203-453-9075 or use our online contact form.