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Kathy Healy
Hi, I’m Kathy Healy with Healy Wealth Management. Today I’m here with Erick Murray of Healy Wealth Management, and we’re talking about what it takes to be an adult. Erick, let’s start with when you’re ready to move out on your own, what are some of the things that people need to think about?
Erick Murray
Yeah. So one of the main things you need to think about when you’re moving on your own, when you’re sending the application for your first apartment is, where am I going to get my security deposit? And how am I going to have saved up for it? A lot of places, they require that you save up at least 1 or 2 months in rent before you actually can send in the application and get approved.
And so having that in place is really important. And there’s a factor to consider is also renter’s insurance. Some apartment complexes might not require you to have that. But it is really important to protect yourself and have that in place. And most renter’s insurance policies, just depending on the different kind of companies you go through, is relatively inexpensive. So it’s great just to have some sort of protection just in case something were to happen is always something that we would recommend as well, just protecting your bases.
Kathy Healy
So something like a fire in the apartment or a break in or what?
Erick Murray
Yeah. So anything that’s unexpected. Usually most renter’s insurances are pretty comprehensive. But obviously if you are at fault, for certain events, then you wouldn’t be covered underneath it. But anything that happens, incidentally that wasn’t your fault it’s just a great way to have another layer of protection in place, just in case the unexpected happens. You have that, even if most places don’t require it.
Kathy Healy
So we happen to be in the Atlanta metro area, which is a pretty expensive place to live. Not as expensive as New York or San Francisco, but what kind of salary would you need in your job to support living in an apartment on your own?
Erick Murray
Yeah, so typically for the Atlanta metro area, we see a lot of one bedrooms and even some different apartment prices average around about or around $2,000 a month. Because what we’re looking at is we want you to make sure you’re setting aside at least 30% of your income towards housing costs.
That’s one thing that you’d want to really make sure that you’re monitoring is whether you have the income sustainable to live out on your own. And if you don’t, try to get creative with different solutions, whether it might be living with relatives or finding roommates to make sure that you’re not overextending yourself, making sure you’re staying within that limit of spending 30% of your actual income and housing costs.
Kathy Healy
Do you have any advice or rules of thumb for how much you should spend versus how much you should save? How much you should invest?
Erick Murray
A great rule of thumb that we like to think of is the 50/30/20 rule. So 50% of your income goes towards basic living costs. So your rent, a mortgage payment if you have a house, groceries, medical co-pays go towards essentials, 30% goes towards what we call your wants category. So spending on vacations, going out with friends, going out to eat, and then ideally setting aside 20% to go towards savings.
So whether that’s going into a 401K or a Roth IRA or just into a high yield savings account or money market account, that’s how we would want to break it up into. And it is very aspirational, and it might not be something that you can do right away, but it’s a great goal to push towards and making sure that you’re setting yourself up for your great financial future.
Kathy Healy
Let’s talk about your benefits that you have from work. Investing in a 401K. Is that something people should do?
Erick Murray
That is one of the first places that we would recommend. And that’s really where a lot of Americans start when it comes to saving/investing, is within their 401K. And it’s a great vehicle to have at your disposal, because what it creates is kind of a forced savings mechanism that you can set up automatically through payroll. And what that does, it allows you to reduce your take home pay and understand that those dollars that you have now allocated towards a 401K are now invested in the market and growing each year over year.
A great mechanism that’s also involved with the 401K is if your employer offers an employer match. And what that looks like is some employers offer a dollar for dollar match on each dollar you put into your 401K, they might match 50% of every dollar that you put in. This is a great mechanism for a lot of young adults take advantage of, because by at least getting what your employer is matching inside your 401K, it’s a 100% return on your investment, and there’s very few mechanisms or very few vehicles in the market that can give you a 100% rate of return year over year.
It’s essentially free money, and you do not want to throw that away. If you have accessibility and the availability to invest in a 401K.
Kathy Healy
So let’s talk about some pitfalls and traps that people fall into. One would be high interest rate credit cards.
Erick Murray
That is really one of the biggest traps, especially for younger adults that are starting off that might not be able to pay for all of their basic living expenses. And that’s why it’s really important to also create what’s called an emergency fund, making sure that you have 3 to 6 months of savings that are built into a high yield savings account or a money market account.
Again, just in case an emergency were to come up. You’re not having to rely on credit cards that have really high predatory rates of interest. When you carry a balance, those rates can be as high as 25 to 30%. And so making sure you have a financial cushion to be able to fall back on when times do get hard or you have an unexpected event to make sure you’re not taking out.
Credit card debt is a really important part, and making sure that you are setting yourself up, not really falling into those pitfalls that you had previously mentioned when it comes to having credit cards.
Kathy Healy
But do you have any recommendations for people that have gotten into some problems with credit cards?
Erick Murray
Yeah, I think one of the biggest things that we can start doing if we do have issues with credit card debt, starting to section it out. Right. So we start prioritizing what is higher interest debt that we have on our books or what’s lower interest debt. What we would start doing is really we really want to prioritize paying off the high interest debt first.
And working our way down. A 25% interest rate on a credit card will never beat out any kind of investment that you make in the market. We look at historical data of the S&P 500, that index tracks the 500 largest companies in the United States. And since its inception, its returned about 10% year over year.
So you can already see that if you have a credit card balance that has a 25% interest rate, you’re already going to be behind 15%. Even if you’re going to invest those funds aggressively in the market. And so making sure you’re freeing up and paying off that high interest debt will make sure that you’re not falling into those common pitfalls that we see a lot of younger individuals get into earlier on in their careers.
Kathy Healy
What should people use for keeping up with their expenses and budgeting?
Erick Murray
What you can use to budget. There’s a lot of different tools that are out there in the market. There’s different budgeting apps that you can utilize that are free and paid for. One of the best ways that we’ve seen a lot of our clients that we work with help them budget is actually an Excel spreadsheet. What you can do is actually categorize down to different sections, even down to the minute details, like even dry cleaning on a month to month basis.
And so a spreadsheet is a great way to utilize being able to budget. You’re able to break it out more evenly, or you’re able to break it out, and it’s more accessible for you to be able to see what your dollars are really doing. And so that’s a great way that you can utilize budgeting in general using a spreadsheet.
And we’d be more than happy to send over our Excel spreadsheet that we share with our clients. That helps them to be able to budget and be able to see where exactly their dollars are going when it comes to actually building out a financial plan for themselves.
Kathy Healy
Thanks for joining us today. This has been a great informational session with Erick for advice for young adults. If you are a parent of a young adult or you’re a young adult yourself, we would love to hear from you.
Feel free to leave a like, comment, subscribe and also in that comment, feel free to let us know what your best piece of financial advice was to better help another young person that’s starting off, to really understand how best they can really set themselves up for their financial future.
Erick Murray
We’ll see you on the next video.