Video: Early Career: Establishing Yourself Transcript

[Chris Clark]

Hello! My name is Chris Clark, and I'm the PNC Employee Education Consultant who will be guiding you through today's presentation focused on the importance of establishing yourself early on in your career.

To begin today's presentation, we're going to review the basics, which will include establishing a budget, and we'll discuss why it's important to understand and maintain credit.

We'll cover differentiating between gross and net income and discuss some benefits that may be offered by your employer, such as a retirement plan.

To help you better prepare for your retirement, we'll also outline some basic investing information and conclude the presentation by spending a few minutes summarizing the key points that were covered throughout the presentation.

So, let's go ahead and get started by reviewing some of the basics. If you don't currently have a plan in place to track your spending habits, you should consider the eye-opening statistic that the average U.S. household spends over $70,000 on expenses each year.

For most, that's a significant amount of money, and how we choose to budget those expenses is important. By examining your finances, you're able to determine areas where you can cut back on your spending and create opportunities for saving.

There are many tools out there to assist, but even just starting with a simple spreadsheet can help. To begin, make a list of your sources of income. This can be done a variety of ways: monthly, quarterly, yearly, et cetera.

Next, create a list of expenses you have for that same time period. When you take your income, subtract your expenses, you've essentially established a budget. It's a good idea to go back and reevaluate it from time to time because your income could have increased since then, or you might have paid off some debt, which could increase the amount that you could be saving.

How can I cut back on my expenses and save more? When creating a budget, it's important to be specific and prioritize your financial goals. You can start by separating your needs from your wants. For example, needs are life's necessities like food, housing, clothing, and transportation. And wants are discretionary items, like vacations or more luxurious versions of those needs.

After you've categorized your spending goals, next, assign a timeline for when you'd like to accomplish that goal. Is it more of a short-term goal, which could be less than a year or is it more of an intermediate or long-term goal going beyond a year or more?

In addition, when thinking about your expenses, it's also important to consider new or future expenses. For example, if you're currently renting and you want to own your own home in the future, you'll need to account for your mortgage payment, down payment, closing costs, insurance, which could all range from 3% to 8% of the purchase price of the home.

Home inspections, which could average anywhere from $200 to $500. And, of course, don't forget about your monthly utilities and occasional home repairs. Here is a list of some expenses that you might incur in the future. There are a lot of factors to consider when buying a home. The same is true as if you consider buying a vehicle.

With a larger down payment on a vehicle, you can avoid a larger loan amount, which will result in lower monthly payments. You could also look at your debt-to-income ratio to determine what loan amount you can afford, and if you'll be approved for that amount. Also, think about how long you'd be paying for that vehicle.

I'm sure you've heard that vehicles depreciate in value. So, you want to think about that when you're considering the term of a loan and what the resale value will be at the end of the loan.

Of course, you'll still want to consider the additional costs that come with owning a vehicle such as insurance, gas prices, vehicle maintenance, et cetera.

When you think about all the factors that go into a larger purchase, you may discover that this just isn't the right time to make such a large financial responsibility.

So, it's always better to wait until you're comfortable with your decision and financially prepared versus worrying every month because you don't know if you're going to be able to afford to pay your bills. Of course, the benefit of postponing purchases will allow you to pay yourself first.

When you pay yourself first, you're doing just that. You're paying yourself before paying anyone else. When you complete a spending plan or a budget, you may discover many areas where you can limit your spending and save more.

When you realize how much more you could be saving a month, you can reevaluate what percentage you're contributing to your retirement account, for example, or possibly even increase your contribution amount.

You could also do an automatic withdrawal from your checking account on pay days to go straight into a savings account. This money could be used for unexpected expenses or larger purchases. As a good rule of thumb, it's important to have a rainy day or emergency fund to cover expenses for three to six months. So, now that we've covered the basics, let's discuss why it's important to maintain your credit. A credit report is going to determine if you qualify for future loans and what the interest rate will be. If you have a poor credit score, you may be denied alone or required to pay an even higher interest rate.

In order to maintain good credit, remember these tips. Importantly, pay your bills on time. This is going to avoid those expensive late fees and also helps with your credit reporting. Only keep cards and loans that you really need and remember to pay off the higher interest rates first. Also, pay down your debt rather than spreading it around.

Researching accelerated debt repayment strategies online and following one of these methods can all help reduce or eliminate your debt quickly. In addition, remember the factors that determine your credit score.

If you think you might forget what they are, you can always go to the website: to review them. Be sure to check your credit report at once per year. You can get one free credit report from each of the three major consumer credit bureaus each year, and these free credit reports can help you gauge your debt reduction progress.

They also help you monitor for any possibilities of identity theft. It's important to note that credit reports from are free.

The credit scores are not necessarily free. Be sure to know the source of your credit score and what factors are being used to calculate it. Not all credit scores are created equally. The FICO score by the Fair Isaac Corporation is the most commonly used credit score, but it's not the only scoring model that exists.

So, let's take a closer look at your credit score and the factors used to create it. Remember, the higher the credit score, the better. When you have a higher credit score, you pay less than the finance charges, which results in a lower interest rate. The factors that affect your credit score are listed on this slide.

Credit scores range from 300 - 850, with scores of 670 and above being generally considered good credit scores. So, you want to take a look at a couple of different factors, first, being your payment history. This looks at the number of times you've been late or missed a payment, and it's the most heavily weighted and most important factor in your score at 35%.

Credit utilization, meaning the amount you owe creditors compared with the amount of credit you have available is the second most heavily weighted at 30%. It's another very good reason to reduce your credit card balances.

Length of credit history is how long you've had open accounts, and this accounts for about 15% of your score. In general, the longer your history, the better. Types of credit is 10% of your score. It looks at the combination of types of credit you have. So, for example, car loans, mortgage, credit cards, et cetera.

Generally, lenders like to see a mix of credit as opposed to just one type. And that last one is new credit, which also accounts for about 10% of your score. This looks at any new credit that's been added to your report. Newly added credit accounts lower your average account age and could have a larger impact if you don't have a lot of historical credit information.

Now, maintaining good credit goes hand in hand with having a budget and a spending plan in place. Three things to remember include:

1.) Make sure you budget ahead of time and using your budget to determine how much you can borrow.

2.) Making on time payments, making every minimum payment by its due date.

3.) Reach out. Contact those creditors if you're having trouble making your payments. It becomes much more difficult to get back on track if you don't.

So, now that we've talked about how important it is to create a budget and maintain good credit, something that goes hand in hand with both of those items, would be your income.

Earlier we were talking about creating a budget, and it's important to show which income to use, your gross income and net income, when you're creating a budget. Your gross income is your total salary before any taxes or other withholdings that are deducted from your paycheck.

Those other withholdings would include benefits that are offered by your employer that make up your total compensation, such as your health insurance or retirement plan, an HSA, life insurance, et cetera. Your net income is the income that you would receive after all those deductions have been made and represents the total of money that you earn as take-home pay. Therefore, when you're creating a budget, it's best to focus on your net income versus your gross.

When you take advantage of the benefits offered by your employer, such as contributing to your retirement plan, for example, you're preparing for your future. By investing in your in your employer's retirement plan, you're going to be able to take advantage of compounding growth as well as enjoying the benefits of tax deferred growth, meaning you won't pay taxes on the money you contribute into your account right now, however, you will pay taxes on that money when it's withdrawn.

At this point, think of it like a paycheck. When you withdraw the money taxes are taken out before you're paid. The advantage of tax deferral growth allows your investments to continue to grow faster because all of your pre-tax contributions have compounded tax free over a long period of time.

You may also have the ability to make Roth contributions, which will allow you to take advantage of tax-free deferrals, when you retire. If you're someone who's not taking advantage of this benefit, the chart of the next slide should be an eye opener for you. This chart shows the power of an early start.

In blue, you see the values of a participant who is at 25 years old and invested $75 a month. In orange, you see a 35-year-old who invested $100 each month. Earning the same rates of return by age 65 and you see by starting to save earlier, the 25-year-old has accumulated a great deal more than the 35-year-old simply by their early start.

Even though they've invested less, they had a larger balance when it came to their retirement savings. I wish someone would have shown me this when I was still in school, or when I first started my career, because contributing to my retirement account was really the last thing on my mind.

Instead of contributing to my retirement account, I wanted to have more money in my paycheck to pay for my student debt, or to go on vacations, buy the stuff I wanted because I finally had money to do that. I just assumed I had plenty of time later on to start saving for my retirement because it was so far down the road. I didn't really realize the impact that those early contributions have on my retirement.

Just remember, investing a small dollar amount over a longer period of time can have a greater impact on the eventual investment result than a large amount over a shorter period of time. Since we were just talking about the benefits of contributing to your retirement plan, I want to make sure that we cover some basic investing tips that will help you manage your account.

Before you select which funds incorporate within your portfolio, you need to decide what type of investor you are. Are you more of a hands-on investor or hands-off investor? A hands-on investor is someone who wants to select their own investment options based on the investments provided within their plan.

A hands-on investor is someone who customizes their portfolio to ensure their diversified among stocks, bonds, cash, based on their risk tolerance and their time horizon.

The hands-off investor is someone who wants to invest in just one fund, automatically diversified, based on their time horizon, and professionally managed. It's important to ask yourself which kind of investor you are that way, you can plan accordingly and feel comfortable with your investment decision.

Now, for those of you that consider yourselves to be the hands-on investor, you typically need to determine your risk tolerance and time horizon. Your risk tolerance is how much you're willing to withstand down markets to attain longer term growth.

You need to ask yourself, are you more of an aggressive investor, investing more in stocks or more of a conservative investor, investing more in bonds and cash or are you somewhere in the middle? Your risk tolerance will affect your earnings, and you'll also need to determine your time horizon or how long until you plan on retiring.

With a longer time horizon, you may feel comfortable taking on more risks because you have a longer period of time to recover money that you may lose during market volatility. With a smaller time horizon, you might want to take on less risk because you may feel like you won't recover money from market volatility, given a shorter amount of time.

Now, this chart shows, some examples of asset allocation based on your risk tolerance. Obviously, someone who is an aggressive investor may choose to put a 100% of their money in stocks, while a balanced investor might decide to put 35% in bonds and 65% in stocks, which is the opposite of a conservative investor who may decide to put 65% in bonds and 35% in stocks. So, when choosing to incorporate within your investment line up, you need to consider the three major asset classes, which are stocks, bonds, and cash.

Stocks are going to be higher risk. They're going to have the potential for higher returns, as well, because stocks represent ownership in corporations. Bonds, slightly less risky than stocks, but still pose some risks because bonds still represent money lent to corporations, similar a loan. So, bonds aren't as risky because they're assuming the money will be paid back in full.

Cash is the lowest risk, which is ideal for liquidity and easy access; however, it's not ideal if you want to receive higher returns, because those funds are similar to be putting into a savings account and you receive a very low return on your investment. Something to keep in mind though, is that in your retirement account, you're not buying individual stocks and bonds.

You're buying mutual funds, and those mutual funds can consist of multiple stocks, and bonds, and cash. It's important for you to understand the three major asset classes so you can ensure that your portfolio is diversified and your investments are protected. Now we're going to talk about how to stay and be diversified.

You might be asking yourself why is this so important for me to ensure that my portfolio was properly allocated? Well, history has shown us that the three major asset classes, stocks, bonds, and cash don't typically move up and down at the same time. So, by properly allocating your assets, you can reduce the risk of catastrophic loss while not missing out on market rebounds.

Having a properly allocated account is important, but having a diversified account is just as important, meaning you don't have all your eggs in one basket. You might have an allocation of 65% stocks, 27% bonds, 8% in cash, but if you only own three investments, one in each class, you may need to adjust that, depending on your time horizon and risk tolerance.

There can be a big difference in risk level between a large cap fund and an international or emerging markets fund. And the same can be said for a high yield bond versus a government bond. Diversification, or having your eggs in a variety of baskets, helps to take advantage of opportunities for growth and minimize the impact of volatility.

Now, for those of you that see yourself as more of a hands-off investor, then choosing a target date fund is the best decision for you. Target date funds eliminate the guess work that may be involved in assembling a portfolio of individual mutual funds, while still benefiting from a fully diversified portfolio.

Target date funds are designed to be more aggressive, meaning investing a larger percentage of stocks when you're farther away from retirement will automatically be adjusted to become more conservative and more balanced portfolio of stocks, bonds, and cash, as you approach your retirement date or your target date. These funds are convenient for people, because you don't necessarily have to adjust your allocations over the years. These funds are designed to do that automatically for you.

In order to choose the correct date for you, you'll need to determine the year when you think you'll retire. It's typically around 65, and for example, if you think you're going to retire in the year 2040, and you choose a target date for the 2040 fund. The year is associated with your retirement date, not the date when you select the fund within your portfolio.

So just remember as the target date nears, the fund manager automatically shifts the asset allocation to a more conservative risk profile, as you approach retirement. For those hands-on investors, just remember that retirement investing is much different than brokerage investing. Retirement investing is a marathon. It's not a sprint.

Mutual funds are built for the long-term investing. Those are not they're not designed as investments to take advantage of those short-term market trends. Chasing the hot fund can really result in negative returns from a retirement account perspective. If you look, for example, these are the asset class performances from 2008 through 2023, and as you see the large growth, for example, in the top of 2023 in orange, you see that was the number one performing asset class, but if you look back to 2022, you see,

it was the trailing performance asset class. Trailing performance. So, selecting one fund or one group of funds puts you in a situation where that volatility can have a negative impact on your overall growth. Spreading between asset classes helps to make that growth more tempered and allows you to take advantage of the growth over the time as well as minimizing your risk over time.

On a similar note, trying to time the market with your retirement account can have an equally negative impact. Participants who move into very conservative portfolios, because they anticipate a down market, often missed the recovery from the down market, and it negatively impacts returns. The best days the market has had often comes shortly after its most negative days.

So, missing that opportunity really has a negative impact as you can see. It's best to set your time horizon, risk tolerance, and stay the course versus missing those best days while you're trying to time the market.

Now, let's go ahead and summarize some key points that we've already discussed. Remember that a budget can help put out your financial roadmap. Don't forget to revisit regularly and don't forget to pay yourself first with automatic contributions into your retirement accounts and into your savings accounts.

Remember to maintain good credit, because they can help in the future. Make sure to check your credit report annually and use a budget to help determine how much you can borrow. Make online payments, and reach out to creditors, if you're having issues.

Remember that your employer benefit package, if your employer benefit package includes access to a retirement plan, it gives you an easy way to invest in your future, and it's never too early to start saving for your retirement. And lastly, remember that you have the option to be a hands-on or hands-off investor.

Understand the investment options available to you and remember to be and stay diversified. Well, that's all for me. So, on behalf of PNC, thank you all so much for listening today.