Helping Hannah: Follow Up
At the end of the year, we asked our readers for their opinions on the financial picture of a 24-year-old named Hannah. We heard some congratulations were in order for how well she’s managed to save. We also heard some ideas on what she can do to help her future self, starting now.
What Hannah knows
Hannah is already practicing a foundational (THE foundational?) rule of financial management: Spend less than you make. She’s been able to meet her expenses and start saving. Establishing that habit will make everything else possible for her. You go, girl! And all that. She deserves it.
Since our last post, as Hannah would certainly know, President Biden extended the pause on student loan repayments during the pandemic. What was to be a February 2022 deadline has now turned to May. That will give Hannah three more months to prepare.
What Hannah doesn’t know
While she may be doing a good job setting money aside, Hannah is missing an opportunity to make that money work for her. She probably has more cash than is necessary based on where she is in life. She knows about emergency funds and the recommended range of 3-6 months of living expenses, but her needs are more aligned to the bottom of that range than the top.
It’s good to be cautious when managing money, but Hannah doesn’t know about opportunity costs. By keeping so much stashed in checking and savings and not starting to invest in a retirement account, Hannah’s missing out on the magic of compound interest. Time works in a young person’s favor when it comes to investing. Getting started with a small amount even one year earlier can make an enormous difference over time.
What Hannah might consider next
Hannah could get started by investing in the 401(k) offered by her employer. Setting aside money there would reduce her tax bill for this year. Unfortunately, her employer doesn’t offer a contribution match.
What might be better for Hannah would be a Roth IRA. She’d pay taxes now, but could then watch her money grow tax free for the rest of her (long) career. Time will work in her favor. Use our calculator to find out how much she could see in her Roth IRA account if she starts investing now.
Lastly, there might be a better job out there for Hannah! It’s a job seeker’s market, where employers are hunting for talent and beefing up benefits packages to stay competitive. Maybe it’s time to find that 401(k) match after all. We wish her the very best!
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Thanks to those who wrote to us with their suggestions for our girl!