Video: Early Career: Establishing Yourself Transcript

[Keshia Galante]

Hello, my name is Keshia Galante, and I'm a PNC Employee Education Consultant. Throughout this presentation, we're going to focus on the importance of establishing yourself early on in your career. To do so, we're going to get started by reviewing the five key concepts outlined on our agenda. To begin today's presentation, we're going to review the basics, which will include establishing a budget, and then discuss why it's important to understand and maintain credit.

We will then differentiate gross vs. net income and discuss some benefits that may be offered by your employer such as a retirement plan. In order to help you better prepare for your retirement, we will also outline some basic investing information and to conclude the presentation, we'll spend a few minutes summarizing the key information that was 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 spending plan in place to track your spending habits, you should consider the statistic on this slide because it is very overwhelming. The average US household across all income levels spends over $60,000 on expenses each year.

Now, I don't know about you, but I feel like that's a pretty overwhelming amount of money. By examining your finances, you're able to determine areas where you can cut back on your spending and save. In order to do this, you need to make a list of your sources of income. This could be done in a variety of different ways, monthly, quarterly, yearly, et cetera.

Next thing, you create a list of what expenses you have for that same time period. And lastly, take your income and subtract your expenses. If you've already 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 may have paid off some debt, which could increase the amount that you could be saving.

Well, 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. In order to do this, 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 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 term goal, which could be anywhere from one to three years?

In addition, when thinking about your expenses, it's also important to consider new and future expenses. Here's a list of some expenses that you might incur in the future. For example, if you're currently renting and you want to own your own home in the future, you need to account for your mortgage payment, down payment, closing costs, which could range anywhere from three 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.

There are a lot of factors to consider when buying a home, and the same is true if you're considering buying a vehicle. Similar to buying a home with a larger down payment on a vehicle, you can avoid a larger loan amount, which will result in a lower monthly payment.
You should 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. If you haven't checked your credit report recently, you should look into that because your credit worthiness will determine what interest rate you were given. Also, think about how long you want to be paying for that vehicle.

I'm sure that you've heard that vehicles depreciate in value, so you want to think about that when considering the term of the loan and what the resale value will be. And of course, you'll still want to consider the additional costs that come with owning a vehicle such as auto 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 take on such a large financial responsibility. 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 how you're going to afford to pay your bills.

And of course, a benefit of postponing 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, like we talked about earlier, you may discover 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, and 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.

And this money could be used for unexpected expenses or larger purchases. And a good rule of thumb is to have an emergency day fund to cover expenses for three to six months. So now that we covered the basics, let's discuss why it's important to maintain your credit. So why is it so important for me to maintain good credit?

Well, credit is important to maintain because your credit report is going to determine if you qualify for future loans. So, for example, a mortgage, an auto loan, a private loan, et cetera. And what the interest rate will be. If you have a poor credit score, you may be denied a loan or be required to pay a higher interest rate.

In order to maintain good credit, remember these tips. Remember to pay your bills on time. This will help you avoid those expensive late fees. Only keep cards and loans that you really need and remember to pay off higher interest rates first. Pay down your debt rather than spreading it around. Research accelerated debt repayment strategies online and following one of these methods can help you reduce or eliminate your debt quickly.

Remember the factors that determine your credit score. If you think you might forget what they are, you can always go back and revisit the website, which is to review them again. 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. And help you monitor for possible identity theft.

It's important to note that credit reports from are free, but 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 equal.

The FICO score by Fair Isaac Corporation is the most commonly used but is not the only scoring model that exists. So now let's take a closer look at your credit score and the factors that are used to create it. Understanding and managing your credit score is an important part of a successful money management strategy.

Just remember the higher your credit score, the better. When you have a higher credit score, you'll pay less in finance charges, which results in a lower interest rate. The factors that affect your credit score are listed on this slide. And just remember under the FICO score, which stands for Fair Isaac Corporation, their credit scores range from 300 to 850.

So, you want to take a look at a couple different factors. First one 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 the most important factor of 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%, and this is another very good reason to reduce your credit card balances.

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

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

Now maintaining good credit goes hand in hand with having a good budget or a good spending plan in place. So, it's important that you do these three things to protect both. One, make sure you budget ahead of time. Use your budget to determine how much you can afford to borrow. Two, make on time payments.

Make every minimum payment by its due date. And three, reach out. Contact your 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 these items would be your income.

Now, earlier when we were talking about creating a budget, it's important to know which income to use. Gross income or net income? Your gross income is your total salary before any taxes and other withholdings 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, a retirement plan, health savings account, life insurance, et cetera.

Your net income is the income that you would receive after all possible deductions had been made, and this represents the total amount of money you earn on payday or your take home pay. Therefore, when you're creating a budget, it may be 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 setting yourself up to prepare for your future.

By investing in your employer's retirement plan, you'll be able to invest for your future, but also 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 that point, think of it like a paycheck. When you withdraw 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 would allow you to take advantage of tax-free withdrawals when you retire.

If you're someone who's not taking advantage of this benefit, the chart on the next slide should be an eye opener for you, because I know it was for me. This chart shows the negative impact of what can happen if you delay too long. I just wish that someone would've told me about this when I was still in school or when I first started my career, because contributing to my retirement account was 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, go on vacations, and buy the stuff that I actually wanted to buy, because I finally had the money to do it. I just assumed that I had plenty of time to start saving for my retirement because it was so far down the road. I didn't realize the impact lane could have on my investment.

Just remember, investing a smaller dollar amount over a longer period of time could have a greater impact on the eventual investment result, rather than investing a larger amount over a shorter period of time.

Since we were just talking about the benefits and 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 to incorporate within your portfolio, you need to decide what type of investor you are.

So, are you more of a hands-on investor or a hands-off investor? A hands-on investor is someone who wants to select their own investment options based on the investments that are provided within the plan. A hands-on investor is someone who customizes their portfolio to ensure that they're diversified among stocks, funds, and cash based on their risk tolerance and their time horizon.

A hands-off investor is someone who wants to invest in just one fund, which is automatically diversified based on your time horizon and is professionally managed. It's important to ask yourself what 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 yourself to be a hands-on investor, in addition to identifying what type of investor you are, you also need to determine your risk tolerance and your time horizon. Your risk tolerance is how risky you want to be with your money. You need to ask yourself, are you more of an aggressive investor, investing more in stocks, more of a conservative investor, investing more in bonds in cash, or are you somewhere in the middle?

Your risk tolerance or how risky you're willing to be with your money will affect your earnings. You also need to determine your time horizon or how long until you plan on retiring. With a longer time horizon, you may feel more 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 may 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 100% of their money in the stocks, while a balanced investor may 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 funds to incorporate within your investment lineup, you need to consider the three major asset classes, which are stocks, bonds, and cash. Stocks are going to be higher risk, but they also have potentially higher returns as well. And this is because stocks represent ownership in corporations.

Think of it this way, a corporation does well, you see higher returns. But if the corporation is performing poorly, you'll see lower returns. Bonds are slightly less risky than stocks, but still pose some risks because bonds still represent money lent to corporations similar to a loan. So, bonds aren't as risky because they're assuming that the money will be paid back in full.

But the risk factor associated with this is if the money isn't repaid. Cash is the lowest risk, which is ideal for liquidity and easy access. However, this is not ideal if you want to receive higher returns because these funds are similar to putting your money in a savings account. You'll 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 are bonds and are cash. It's important for you to understand the three major asset classes so you can ensure that your portfolio is diversified and that your investments are protected.

Now we're going to talk about how to be and stay diversified. You might be asking yourself, why is it so important for me to ensure that my portfolio is 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 a catastrophic loss while not missing out on market rebounds. Now, 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, and 8% cash.

But if you only own three investments, one in each class, you may need to adjust it depending on your time horizon and your 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 could be said for a high yield bond fund and a government bond fund.

Now, for those of you that see yourself being more of a hands-off investor, then choosing a target date fund is the best decision for you. Target date funds eliminate the guesswork 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 in stocks when you're further away from retirement and will automatically adjust to become more conservative. More of a balanced portfolio and stocks, bonds, and cash, as you approach your retirement date or your target date. These funds are convenient for people because you don't have to necessarily adjust your allocations over the years because these funds are designed to do that automatically for you.

In order to choose the correct target date for you, you need to determine the year when you think you will retire. For example, if you think you're going to retire in the year 2040 and you choose the target date 2040 fund. The year is associated with your retirement date, not the date when you select the fund within your portfolio. Just remember, as the target date nears, the fund’s manager automatically shifts the asset allocation of the fund to a more conservative risk profile as you approach retirement.

Now, let's go ahead and summarize some of the key points that we already discussed. Remember that a budget can help plan out your financial roadmap. Don't forget to revisit it regularly, and don't forget to pay yourself first with automatic contributions to your retirement account. Remember to maintain good credit because they could help you in the future.

Make sure to check your credit report annually. Use a budget to help determine how much you can borrow. Make on time payments and reach out to creditors if you're having issues. Remember that your employer benefit package includes access to a retirement plan, which gives you an easy way to invest for 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 a hands-off investor. Understand the investment options that are 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.