No-nonsense financial advice for Generation Y

Robert Kloss for the Buffalo Law Journal writes: Those with few financial resources have the greatest opportunity for improving their finances.

Today's economic headwinds, escalating costs of college tuition and resulting student loan debt can seem like insurmountable barriers. Young professionals can find starting a financial plan with limited financial resources daunting. How do you get out of the gate? 

First, breathe deeply and collect your focus, grab your favorite caffeinated beverage and, armed with a positive attitude, set out to collect the components of your current financial condition. Simply put, find all things owned and all things owed.

Obtain details of your insurance coverages. Collect your latest tax return, information on all loans and debt payments. Obtain information on any 401(k) or comparable retirement programs you may be able to enroll in. To review Social Security retirement benefits, you must now register online at www.ssa.gov. Verify all wage history information on the statement for accuracy, as errors can occur. Saving the best for last, create a budget of monthly income and expenses to determine discretionary savings or deficits. 

While not exactly a walk in the park, the details that emerge from this exercise will give you an idea of your net worth and monthly discretionary savings. Maximizing these dollars by scrimping some now will allow you to get momentum on your side, using the power of compounding over time. Compounding debt and monthly payments work the same way in reverse, so keeping debt and interest rate payments as low as possible will free up more monthly savings, enabling you to use the most productive financial planning strategies available today.

After doing the grunt work, you can proceed to the fun part, putting your discretionary savings number to work. Young professionals new to the workplace confront a myriad of financial planning needs such as managing student loans, credit card and car loan debt, investing in a retirement program and obtaining basic life and health insurance.

With so few dollars to spread around, where do we put our money to work? 

Start by determining rates of return on invested assets as compared to the cost of borrowing on all debt. On a pure rate-of-return basis, most likely your best investment will be an employer-sponsored, incentivized retirement plan offering some kind of match or free money. The returns on matches can be as high as 100 percent or a dollar-for-dollar match, in effect doubling your money. In addition, a pretax deductible retirement contribution has the benefit of lowering your tax liability and tax bracket and opening up tax incentives you might lose with a higher income.   

Retirement plan investments come with strings attached. Unless there is a loan option, retirement plans limit access to funds until age 59.5, subject to a few exceptions. Most plans require the employee to remain employed for some period of time for vesting. Check with your employer to find out detailed vesting information. If you are planning to remain with your employer for a few years and you have vested benefits, it pays to contribute to your 401(k) before paying off lower interest rate debt. Defer your immediate gratification and plant the seeds of the future.

If there is no match on the 4019k), then begin a high-interest debt pay-down plan. Investigate consolidating student loans and shopping for the lowest rate on car loans through banks and credit unions and minimize credit card debt. 

What to do with little or no discretionary income?

Revisit the budget and find areas for improvement. Focus on eliminating or reducing nonessential purchases. Some of the biggest expenses end up being entertainment-oriented. Hotel and plane travel add up quickly. Limit the amount you spend out on gourmet food and drinks. Financial well-being is improved as we defer some of today's gratification, reaping greater peace of mind tomorrow. Each dollar you can save multiplies over time when using above-average rate of return opportunities such as the paying down of high-interest debt and the contribution to retirement plans with matching money benefits.