As a Wealth Advisor, I work with people of all ages, including those just entering the workforce. This is an exciting time in anyone’s life, especially if it brings your first paycheck. But despite the newfound independence, this can also be an overwhelming time. If you’re in this life stage, you probably have many questions: How do I determine whether I’m earning enough? Am I saving enough? What are the best types of accounts to help me reach my goals? While answers to these questions may be different for everyone depending on risk tolerance, timeline, and unique financial goals, there are three simple concepts that can help millennials form a strong financial foundation.

1. Follow the 50/30/20 rule.

The first foundational concept of financial health is cash-flow management. You should strive to be cash-flow-positive, meaning that more money is earned than spent. The 50/30/20 rule helps categorize spending by splitting your paycheck among three different categories. The rule works as follows:

• 50% of your paycheck should be spent on necessities, including housing, food, utilities, and medical expenses.
• 30% of your paycheck should be spent on discretionary expenses. This is your “fun money,” and it could include subscriptions, vacations, hobbies, entertainment, etc.
• 20% of your paycheck should be saved.

2. Establish an emergency fund.

Once your cash flow is stable, your primary focus should shift to saving. While everyone’s specific savings goals are unique, all of us share one priority: establishing an emergency fund. An emergency fund refers to liquid savings (cash not invested in stocks, bonds, or other securities, but instead kept accessible). The amount of the ideal emergency fund is different for everyone, but the general rule of thumb is enough to cover three to nine months of nondiscretionary expenses (such as bills). This amount can vary depending on your job security, whether you are a single- or multiple-income household, and personal preference. Once your emergency fund is established, any additional savings can and should be invested.

3. Start investing early.

The stock market can be intimidating, but it is an incredibly powerful tool to help build wealth. Although there are no guarantees when it comes to the market, one of the best strategies is to start investing early: The longer you keep your funds invested, the higher your odds can be of experiencing potential positive returns. This time can help allow you to capitalize on compound interest.

There are different types of investment accounts. Brokerage accounts are particularly useful if you are trying to save for a particular milestone, such as a wedding or home purchase. Although brokerage accounts do not offer any tax advantages, there are also no limitations on how much you can contribute, making them an attractive savings option for larger expenses.

If you want to begin saving for retirement, consider two types of IRAs: Traditional and Roth. While Roth IRAs do not provide any immediate tax benefits, withdrawals are tax-free if you are 59½ or older and have held the account for at least five years. This is likely desirable for younger clients, as many people earn less when starting out compared with when they retire. Contributing to a Roth will ultimately have a tax advantage. Traditional IRAs allow you to deduct yearly contributions from your taxes. What’s more, contributions grow tax-deferred, meaning no taxes are owed until funds leave the account. In 2023, those under age 50 can contribute $6,500 to an IRA if they earned at least that much from employment during the year. Because IRAs promote saving for retirement, you cannot take a distribution prior to age 59½ without incurring a 10% penalty (with a few exceptions).

If you have access to a 401(k) through your employer, it’s vital to contribute as much as you can, especially if your employer matches your contributions. 401(k)s are a great way to help save, because the money comes directly out of your paycheck, so you don’t even see it. What’s more, many employers will match your contributions. Since you likely have a few decades until retirement and plenty of time to take advantage of the time value of money, your account can grow with compound interest. Compound interest is the amount earned on your principal (your original contribution amount) plus the accrued interest, which can really add up over time. Curious how this works? Check out this compound interest calculator.

While it may feel daunting to become financially independent, it provides a unique opportunity to set yourself on the path to economic freedom. Implementing these three strategies can help lay a strong foundation for your financial future. If you’d like personalized advice tailored to your unique financial situation, let’s talk.