By: Aditi Bhatt
Maybe you have just started high school OR maybe you are nearing your college graduation, regardless of what stage in life you are at, it can seem daunting to understand the world of personal finance. According to Anthony Ryan, a financial planning associate, “it is important to think about the return-on-investment and make decisions that you believe your future self would be proud of” when making choices about your personal finance. A good first step would be to open accounts that help you plan for the future.
There are several different financial accounts and which ones you choose to have may differ based on your individual circumstances and goals. Some common accounts are a checking account, savings account, 401(k), 403(b), and 457(b) accounts.
A checking account is a type of deposit account that allows you to deposit or withdraw money at your convenience via a check or debit card. Having a checking account makes following the 50-30-20 rule easier, which is a budgeting technique that divides your after-tax income into one of three categories: 50% for needs, 30% for wants, and 20% for saving. Your needs and wants can be managed easily with the help of a checking account.
While a checking account is important for managing day-to-day expenses, a saving account is a safe place to store your money while earning a little interest. The interest you earn in a savings account may be relatively low, nonetheless, a savings account allows you to store liquid assets safely. A Survey of Consumer Finances (SCF) by the Federal Reserve reveals that “the median [American] transaction account balance is $5,300” (Bennett, 2022). Most financial experts advise having three to six months of living expenses (rent, utilities, food, etc.) in your savings account. The burden of paying for big purchases or unforeseen emergencies can be mitigated with a savings account.
Lastly, 401(k), 403(b), and 457(b) are all employer-sponsored pre-tax retirement plans. According to a new analysis from the Pew Research Center, “Americans aged 20-29 have the lowest 401(k) contribution of any age group at only 7 percent” (Adamczyk, 2019). It is completely understandable if planning for retirement is not on your mind right now, but starting early is advantageous because of compound interest. The main difference between the three employer-sponsored retirement plans is: that a 401(k) is offered by corporations and privately-owned groups, a 403(b) is offered by public universities, public hospitals, and religious groups, and a 457(b) plan is offered by government departments and certain guidelines. Other than employer differences, all these retirement plans have varying set guidelines on withdrawal, contribution limits, and investment options within the plan.
Living a financially healthy lifestyle is a feasible goal that can be achieved with good personal finance habits. Cyan Baker, a civil engineer believes “finding a balance and weighing the options” before you take any financial decisions is crucial for long-term success. Establishing financial accounts that fit your needs early on will help you keep track of your expenses, savings, and investments, enabling you to have a more financially secure future.