- January 29, 2021
As an early career 3M professional, you have entered the world of personal finance and all the accompanying aspects—income, budgeting, savings, insurance, estate, etc.
This blog post will go over some of the tools at your disposal that can help you move towards establishing a strong financial foundation, accumulate wealth, and utilize your benefits to accomplish your unique goals and life aspirations.
Having likely begun your 3M career after January 1, 2009, you are a Portfolio III employee. Meaning, you are not eligible for 3M’s pension, but you do receive a higher employer 401(k) contribution than Portfolio I and II participants.
- 5% Match
- 3% Retirement Income Account contribution
In other words, 3M automatically contributes 3% of your income (Salary + AIP) to your 401(k) annually. Moreover, if you contribute 5% of income to the 401(k), they will also contribute 5%. Your deferral percentage should be at least 5% to take advantage of this free money.
Pre-Tax vs. Roth
Within the 401(k) is an option to save Pre-Tax or Roth. For Pre-Tax, you do not pay taxes now, but will have to pay taxes upon withdrawing money during retirement. For Roth you pay taxes now, but will not pay taxes when withdrawing funds.
There are many factors to consider when choosing between Pre-Tax and Roth but given that you are a young professional and expect your income to increase in the future, it is likely beneficial to save Roth now and during your peak earning years to switch to Pre-Tax. This blog post talks about Pre-Tax vs. Roth Savings in more detail.
Your 401(k) is probably in a LifePath Portfolio, which is a stock and bond mixture that shifts from stock-heavy to bond-heavy as time passes. The LifePath is beneficial because it is low maintenance, low cost, and contains diversified investments. However, these funds can get too conservative too quickly, do not consider your other investments, and do not offer opportunities for rebalancing. You may want to consider other investment options as your 401k balance grows.
3M General Employees Stock Purchase Plan (GESPP)
Thrift shopping anyone? As a 3M employee, you have the special opportunity to buy 3M stock at a 15% discount. This benefit is unavailable for others on the open market.
- You can contribute 3-10% of your income
- The maximum contribution amount is $25,000
- There is a 1-year holding period requirement before you can sell the stock
While the GESPP is a great way to build long-term wealth, you will want to be cautious to not accumulate too much of your portfolio in 3M stock i.e., having too many of your eggs in one basket. Purchasing 3M stock at a discount and later selling it to diversify can help strengthen your growing investment portfolio.
While the previous two subtopics focused on building long-term wealth, it is also important to ensure you have a cash store in case of an emergency. The metaphor I like to think of is a growing tree. A tree that has firm, strong roots, will not blow over in a storm.
Having an emergency fund of 3-6 months living expenses builds your root structure providing security should the unexpected happen. Consider using an online savings account to hold your emergency fund. These banks offer higher interest rates than the typical brick and mortar bank and are FDIC insured.
Health Savings Account (HSA)
3M provides employees enrolled in the Choice Advantage and Prime Advantage Health Insurance plans a $600 contribution for individuals and $1,200 for families to an HSA. However, you must re-enroll each year to receive these contributions!
HSAs are triple-tax advantaged, as contributions are Pre-Tax, investment gains within the account are tax-deferred, and withdrawals for qualified medical expenses are tax-free.
For those with lower expected medical expenses, the Advantage Plans coupled with an HSA are a great option, but if you expect larger expenses (e.g., birth of 1st child), then the Basic PPO plan (higher premium, lower deductible) might be more appropriate.
Another sign of a strong root system is having adequate life insurance. As a young professional, you probably do not need much (if any) insurance in addition to the complimentary 1x Salary benefit that 3M provides. However, once you begin taking on more financial responsibilities (e.g., mortgage, children, etc.), it will also likely be appropriate to increase your insurance.
Keep in mind that Term Insurance will probably be less expensive than the 3M Additional Group Life and will allow you to lock-in the lower premium amounts given to young, healthy persons.
One of the typical goals we see with our young professional clients is a home purchase. A home can be one of the largest purchases of your life, so proper preparation is essential. Consider price range, monthly costs, and down payment.
For the down payment, it is beneficial to put down 20% of the home value to avoid Private Mortgage Insurance (PMI) costs, which can amount to 1% of the original loan value. A good rule of thumb is to keep Principal, Interest, Taxes, and Insurance payments less than 28% of gross salary.
Another consideration is how to hold the money you are saving for the down payment. If you are thinking of purchasing within the next 24 months, it would be beneficial to hold funds in cash as opposed to investing, in order to minimize the risk of having a market downturn prior to purchase.
Hopefully, this blog post has helped you gain clarity to set you in the right direction. Small steps today can lead to massive ripples over your lifetime.
If you have questions regarding your benefits and how they relate to your own unique circumstances or are looking for professional financial advice, please feel free to reach out.