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Personal finance is hard no matter what stage of life you’re in. But for Zoomers just entering the workforce, the challenges are also coupled with a lot of uncertainty. And that combination is what brought Carolina to us with her question on this week’s episode of Explain It to Me, Vox’s go-to hotline for all your questions.
Carolina is fresh out of college and already stressing about retirement. The older people in her life give her the same advice that generations before her have gotten: start saving immediately, contribute to your 401(k), and don’t touch it for decades until you’re ready to stop working.
It’s sound advice, but Carolina wonders if it applies to her and the rest of her cohort. She knows the havoc the Great Recession wreaked on everyday people and the economy at-large. “I think people assume the stock market is always safe,” she says. “But then it keeps crashing.” It’s understandable why someone might be hesitant to put their trust in a financial system that had a scare as recently as this summer.
To answer this question, we enlisted Vivian Tu, AKA Your Rich BFF. Vivian is a former Wall Street daytrader and currently hosts Networth and Chill (Explain It to Me and Networth and Chill are both part of the Vox Media Podcast Network).
Can you enjoy today while preparing for the future? “You’ve got the folks who say ‘I’m going to blow all my cash today. I’m going to go on a shopping spree, because who knows if I get to retire in however many years.’” Tu says. “Then there are folks on the opposite side of the spectrum that say, ‘I need to prepare. I need to only think about retirement…I will have the worst life today so I can have a better future.’”
We sat down with Tu to discuss how to plan for the future while enjoying the now, how to protect yourself from financial uncertainty, and how younger generations can adjust to a changing financial landscape.
Below is an excerpt of our conversation, edited for length and clarity.
You can listen to Explain It to Me on Apple Podcasts, Spotify, or wherever you get podcasts. If you’d like to submit a question, send an email to [email protected] or call 1-800-618-8545.
How should we think about balancing living in the now and preparing for the future?
I ask folks to find the middle of that barbell. You are allowed to enjoy your life today. I promise you, you are not put on this big green earth to work a 9 to 5 to hate your life. That is not your ultimate purpose. You are allowed to have the little treat. You are allowed to take that trip. You are allowed to go and grab a manicure with a friend because it is fun.
You do not want to have so much fun today at the expense of future you. You want to be able to have fun today and tomorrow.
Practically, what tips do you have for young people who are thinking about retirement?
I always tell everyone, there is a special Your Rich BFF method: you need to STRIP. Everyone says, “Oh, did I pick the wrong career?” No, strip is an acronym.
S stands for savings. First and foremost you want to set aside an emergency fund. In particular, I recommend putting your emergency fund into a high yield savings account so that your money waiting for that rainy day earns interest in the meantime. If you are a singleton, 3 to 6 months of living expenses is a good bet. If you are head of household, you have dependents, I would say closer to 6 to 12.
T is total debt. A lot of us have debt – that is not a bad word. It is just a tool. What I say is rank it from highest to lowest interest rate. Make the minimum payment across everything to keep your credit score high. But then any additional funds you have for debt paydown goes towards the interest rate that is the highest.
Up next R: retirement. Take advantage of tax-advantaged accounts through your job. You can also open up an IRA or a Roth IRA.
And then I. This is important; it’s not enough to just open those accounts, you actually have to invest. Take the cash that you’re putting into those accounts and make investments that make sense based on your risk profile. Target date retirement funds or index funds often make sense.
And the last step is so critically important: P – plan.
You don’t get to have happily ever after, you don’t get to ride off into the sunset if you do not have a plan. Write down what your goals are, what those milestones are, what you’d like to accomplish, the amount of money it’s going to take to get you there, and then back into what you need to do to get there.
How do you protect yourself and those investments from another financial crisis?
It’s really important that your portfolio makes sense for how far you are away from retirement.
So when you’re 20, yeah, you can be 100% or 90% in the stock market and have 0% or 10% in bonds. When you’re 50, it should look almost flipped.
But it really depends on how much you’re making and how much you already have. Every single person is a little different.
What about people who are just getting by? How should they prioritize retirement savings?
If they are just getting by, first and foremost we want to try and maximize that income. People always balk when I say this: You need to be asking for a raise somewhere between 10 to 15% every single year.
Ooof.
I’m not saying you’re getting it But if you ask for 10 to 15 and you get eight, that’s good, because eight is still going to help keep you above the inflation rate.
Retirement and savings in general are often presented as this sacrifice. You’re going without your fancy groceries now so that future you can go on cruises and golf and do whatever it is that people do when they’re retired.
JQ’s moving to Naples in her retirement!
But how do you find that balance? How do you prioritize those things?
I think it’s about providing yourself with a life that you are happy with today while also thinking, “Hey, it’s not like saving for retirement means this money goes into a black hole.” You still get to spend it just later.
You’re not just setting this money aside and then getting that same number back in retirement. When you start investing your money, when it has a little bit of room and time to grow, that money gets to work really hard for you. And so you might put in $100,000. That $100,000 could be a couple million dollars in retirement.
