Hopefully you guys appreciate the time these folks put together to give you some free advice on putting a little away toward your future.
Answers provided by AICPA National CPA Commission members Craig Steinhoff, CPA, Kelley Long CPA, Ted Sarenski, CPA/PFS, and Leonard Wright, CPA/PFS.
Adrienne Gonzalez: How do you suggest young professionals who are also likely paying down student loan debt maximize their savings possibilities? Is it smarter to pay down the debt or put that extra money into savings?
Craig Steinhoff, CPA: I would recommend that the students start by creating a small ($1,000) emergency savings fund. After that, they should tackle both obstacles (debt and savings). Since the debt in this case is student loan debt, it’s (typically) tax deductible, therefore the individual isn’t necessarily paying on the full interest rate, since they’re getting a tax break. However, rather than wholly focus on one (debt vs. savings) over the other, I believe that doing both simultaneously makes the most sense. Student loans usually have a long term, therefore if you focus all of your attention to pay it off, you’ll be wasting a significant amount of time which you could’ve stashed money into savings (or the stock market) to earn compounding interest."
Ted Sarenski, CPA/PFS: The young professional should surely make their minimum student loan payments but should look to maximizing their 401(k) contribution to the extent of any company match that is offered. Even if the company match is 25% of each dollar up to 6% of salary (one of the lower matches you will find for those companies that do match) you are getting an instant 25% return on your money. Let’s hope your student loan interest rate is not that high!
Leonard Wright, CPA/PFS: It is important to form the proper habits right after school. I recommend that in the lower tax bracket, that they should consider a focus on the Roth 401k plan. While in a low tax bracket, it is efficient to fund lifetime tax-free accumulation. When the professional receives their first raise, the recipe is 1/3 to debt, 1/3 to savings, 1/3 spend it however they choose. It is important to enjoy life!
AG: For a new hire fresh out of college used to being a broke, a $55,000 salary can seem like a ton of money – how do you suggest young professionals make the most of their newfound "wealth"?
CS, CPA: I suggest that they should TRY to continue to live like a broke college student as long as possible! The biggest reason so many folks are in financial trouble is because they’re living beyond their means. They’ve either tried to “keep up with the Joneses” and have racked up tons of debt for the coolest toys, TVs and cars. However, if you aren’t concerned with what everyone else has and just live your own life within your own means, you’ll be much better off over time.
TS, CPA/PFS: Their first 'real' car (one they are buying) should be a used car. Not only are they getting a late model car at 1/3 off the sticker price but also their insurance costs will be much lower than if they had purchased new.
LW, CPA/PFS: Take the car issue one step further. Buy a used car for 75 percent off of sticker. If the newly minted college graduate searches hard enough, there will be an opportunity to purchase a low mileage car at 75 percent off. My personal last car purchase, a Lexus ES 300 with 22,500 miles. Cost was $10,000. If that amount alone is plunked into savings over a five-year period, the $30,000 saved by age 25 will amount to nearly $480,000 by age 65 at about a 7.2 percent rate of return. Not to mention the savings on annual registration and insurance.
AG: I often recommend candidates taking the CPA exam reward themselves with a "toy" (iPad, new cell phone, etc.) when they pass a section to motivate themselves to study and pass – would you agree with this suggestion or do you have an alternative?
CS, CPA: I like the idea of rewarding ourselves for achieving a goal. I believe that we should reward ourselves once we meet financial goals as well. For instance, you’ve just paid off a credit card, now you should treat yourself to a dinner out or a new outfit. However, I warn against rewarding ourselves with expensive rewards. We want the reward to match the goal obtained. If you pass one section of the exam, maybe a treat should be a new game for your xBox, however not a new cell phone or iPad. I would think that once you passed the entire exam (and hopefully received a bonus from your employer for doing so), you can pull the trigger on a larger reward.
AG: What do you think is the biggest mistake young people make when it comes to their financial future?
CS, CPA: I think it’s a tie between getting sucked into the ease of using credit to buy things (i.e. the keeping up with the Joneses mentality I mentioned above) and not realizing the magnitude of stashing money away and using the value of time (i.e. compounding interest) in your favor.
TS, CPA/PFS: With my kids, I see that they want to have the lifestyle that they were living before they went to college. They do not realize or understand that it took Mom and Dad 30 to 35 years to get to that lifestyle and they, at one time, were poor college students too. Patience, patience, patience.
LW, CPA/PFS: Other mistakes which are true of sophisticated business owners and professionals, as well as the 20 something former college student are not setting aside the time to consider financial consequences and not engaging a professional to bounce ideas off of.
AG: I'm old now but I remember being 22 and at that point in my life, the very last thing I thought about was my retirement. Do you think it's at all realistic for 25 – 30 year old young professionals to start plotting out their retirement plan, especially if they are also still paying student loans?
CS, CPA: Absolutely! Just ask someone who is 'old' that didn’t think it was important to put money away for retirement. Although it doesn’t typically hurt as much, I would rather learn from another person’s mistakes than I would like to learn from my own.
TS, CPA/PFS: We do a number of 401(k) meetings and I suggest each time to the younger folks to speak with the older folks and ask them if they are working because they really love their job or are they there because they did not save early enough to have options now that they are "old." The old folks eagerly share their knowledge. In group meetings at the companies, the old folks gladly share their thoughts about this; we only hope the younger folks take it to heart.
AG: What are some of the easiest ways busy people who don't want to think about it can put money toward their savings?
CS, CPA: Set up a separate account and automatically set it up to take a predetermined amount each month. Once it’s gone, forget about it! Every year when you (hopefully) get a raise, try to increase your monthly amount going to the account, or maybe you can set up an account with a brokerage house and this deposit is now your Roth IRA contribution!
AG: Being a new professional often means having to spring for a new professional wardrobe. In your opinion, are there any ways to save a few bucks on this?
CS, CPA: Shop for deals! Look online! Use coupons! Also, ask for gift cards (or the wardrobe pieces themselves) as birthday and holiday gifts.
Kelley Long, CPA: It's worth it to spend a little more money on the wardrobe basics (these work for guys and gals): a great suit in a neutral color, a crisp white shirt, a comfortable pair of shoes that are professional and understated (so they'll go with everything), a well-fitted overcoat, a pair of great-fitting black pants, and for women, a sheath dress in a complimentary color to your suit jacket. Using those as the foundation of every day's outfit, shop thrift stores, consignment shops or lower-priced retailers for accessories, statement pieces and more trendy pieces like sweaters, tops, handbags and shoes.
LW, CPA/PFS: There are extraordinary deals to be had if we are patient. For suits, the styles don't change all that much from year to year. Very expensive purveyors of clothing offer them at 80 percent off. A $1,600 suit can be purchased on sale for $300-$380 at the right time of the year. A professional wardrobe is easy to secure at a fraction of the cost. New York City has some of the best shopping when it comes to discounts. So do the Outlet Malls. Shoe closeouts and overruns can be a boon to a significant discount. The key is to look, look, look.
AG: CPAs are known for being money-conscious, so are there any splurges that you think are necessary or totally reasonable?
CS, CPA: I personally believe in the mantra, "you get what you pay for." Therefore, for large purchases (appliances, TVs, computers, cars, etc.) I’m willing to buy a name brand over a generic model and spend the extra money, since I’ve gotten burned on poor quality before. Of course, I’ll shop and compare prices on these items, however I do believe in buying a strong brand name on expensive (over $500) gadgets.
AG: Even though a lot of professional costs can be expensed while at the client or on a work trip, the accounting lifestyle often means long hours and bad lunches – are there any ways you think young professionals can save a few bucks in this area?
CS, CPA: Potluck office lunches. Brown bag lunches. Make your coffee at home vs. buying it on your way to work. Keep snacks (hopefully healthy ones) in your desk, so you’re full throughout the day. That will keep you more productive and will mean less trips to the vending machine and allow you to order smaller (read: less expensive) lunches and dinners.
LW, CPA/PFS: The long hours and eating out is a lifelong curse. Fun at first, but it soon loses the luster. My wife makes homemade meals when I go on the road. I pack an ice chest and refill it when I stay at hotels. I eat carrots, and just plain eat better. I get five days of food packed in a little ice chest. Also, I make heavy use of Hotels.com and surf the Internet when I get home late at night for airfares. I have stayed in suites for as low as $17 a night. Very nice suites for next to nothing…just don't open the 3-ounce bag of $15 potato chips.