With every passing year, I get a little bit further from the 25-year old who started Money Under 30 deep in debt and still figuring things out as I went.
I struggle to pass on the lessons I’ve learned over the last six and a half years about managing money in your 20s without sounding preachy or wiser “just because I’m older now” – a displeasing attitude so customary in financial advice that I have always made deliberate efforts to avoid it.
So you’ll have to forgive the fact that it’s been ten years since I, myself, was 22. Nevertheless, I’ve spent a great deal of my time over the last six years not only reflecting on my early twenties but talking with people who are in them. Something that we’ve concluded would be useful is a “money in your 20s” checklist of financial matters to consider at various important milestones you may face during your twenties.
You can use this post as one time “check-up”, or — even better — print out the available two-page “Refrigerator Guide to Money in Your 20s”, slap it on your fridge or somewhere you’ll see it every day, and use it as a reminder to pay attention to the important but often unsexy details of building a strong financial foundation.
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Get a job. Okay, duh! But we can’t leave it off – unless you’re heir to a multimillionaire, you’ll probably need to work if you want money. This should be a priority. I’m of the opinion that any job is better than no job, and there’s no shame in slinging lattes or folding sweaters to pay the bills. If you’re having trouble, take time to learn how to stop sucking at applying for jobs.
Assess your debt. If you have credit card debt, pay it off asap. If you have student loans, make a list that specifies each loans’ balance, payment address, the payment amount, and the due date (accounting for any grace periods).
Pay your bills on time, every time. If you do nothing else, pay each of your bills on time. If you’re having trouble paying a regular bill, it’s a sign of financial trouble. Stop and fix your situation before it gets worse. Fight the urge to just kick the can until next month.
Keep an eye on your checking account. Don’t overdraw it. Save enough money to be a “bank account buffer”. If you’re paying lots of fees, call your bank and ask to turn off “Overdraft Protection”. If you run out of cash a lot, you’re spending too much and/or earning to little.
Set a fun budget: You know, for beer. Ideally, take out the cash you’ll spend for the week on food and entertainment and – once you run out – stay in the rest of the week. (Hint: Withdraw the money on Saturday so you don’t run out before Saturday night.)
Start a savings account. Open a savings account at a separate bank from your primary checking account and establish an electronic link between them so you can automatically transfer a little bit each week to savings. If you have grace periods on student loans, paying yourself the amount of the loan payment until they come due is a great way to kick-start this pot of money. Eventually you’ll want to use this account as a bank account buffer and as an emergency fund for unexpected expenses. Understandably, you may also need to use it for a deposit on an apartment and other expenses that will kick start life on your own.
Begin to build credit. If you haven’t already, now is the time to apply for a credit card. Of course, this isn’t to furnish your new apartment and pay later; it’s to begin building a good credit history. Use the card a few times each month and pay the balance off in full each time.
Get health insurance. If you don’t have health insurance through work (because you work part-time or for yourself), find a way to get some. With Obamacare, you can stay on your parents’ plan until you turn 26. Alternatives are expensive, but so are the medical bills from an accident or illness. And it absolutely can happen to you – even if you’re 22 and healthy.
At Your First Job
Enroll in your 401(k). You may have to wait a few months or a year to enroll in your employer-sponsored retirement plan, but do so as soon as you’re able. Even if you can’t afford to contribute a lot – try to put in 4 or 5 percent to get in the habit of putting aside money for later in life. At the very least, contribute enough to take advantage of any matching contributions your employer offers.
Save evidence of your good work. When you’re young, your earning potential is your biggest asset. Your professional decisions in your 20s will have a profound impact on how much you earn for the rest of your life. (No pressure!) Set yourself up for success by saving evidence of good work and how you contribute to your employer’s bottom line. Present this information at your annual performance reviews. Try to earn a promotion in responsibility and pay every year or two – whether you stay at the same company or have to hop around.
Build your network. Don’t save networking until you need a new job. Get to know people at all levels of your company and your field. Attend networking events and invite people you admire to lunch.
Don’t earn the wrong reputation. When managers look at employees to promote to leadership roles, they want to see a hard worker, sure, but also somebody who is admired by up and down the company. Gossiping, backstabbing, and excessive partying at company events may seem like a way to buddy up with a superior in the short-term, but it can backfire at review time.
Ask for raises. Don’t just assume your employer will reward your hard work with annual raises. If you are performing well, be confident enough to ask for the compensation you deserve. Learning to negotiate can be one of the most valuable decisions of your life.
Start the conversation. You may or may not get married in your 20s, but at some point you may consider shacking up with a significant other. If things are serious, use the move as a financial conversation starter: discuss your credit histories, debts, earnings, and financial goals. Most importantly, hash out expectations for who pays for what and what say each party has in the each other’s personal spending.
Keep things (mostly) separate until marriage. After you get married, money you earn is legally half yours and half your spouse’s. That’s true whether it’s in a joint account or not. But until your married, you have no legal protection. So, in the event you cheat on your partner, s/he finds out and cleans out your savings account that you gave her access to, you’re SOL. With the exception of a small checking account you might use to pay combined bills – keep it separate.
Discuss the wedding (if there’ll be one). Weddings can get ridiculously expensive. If tying the knot is in your future, talk about expectations for the big day and who will pay for what. And unless you’re just heading down to City Hall – start saving.
When Starting a Family
Get life insurance. As soon as you have a spouse or child that depends on your income, it’s time to get life insurance. Opt for less expensive term life insurance and get enough to replace your income until you would retire.
Create a will. If you don’t have a lot of money, you may not think you need a will. But if you have kids, you should at least specify who should be your child(ren)’s guardian if something should happen to you (be sure to talk to them about it first). As your assets grow, you’ll likely want an attorney to help you with an estate plan, but for now, a simple do-it-yourself will should suffice.
Double down on your savings. Kids are expensive: From diapers to childcare to college, few life decisions will have as big an impact on your disposable income. When you have kids, it’s more important than ever to save for contingencies and your own future. Although it’s tempting to begin setting aside money for your newborn’s college tuition, make sure you’re taking care of your own retirement before you do so: when it comes time for your offspring to apply for financial aid, colleges won’t consider money in retirement accounts as available to pay tuition.
When Renting a Place
Understand your rights. Although landlords get a reputation for being tough, it’s only because tenants often have the upper hand from the law. Before you sign a lease, know what your landlord can and can’t do.
Get renter’s insurance. If you’re renting and a fire destroys your building, not only are you out of a place to live, all your stuff is gone. Renter’s insurance can replace your stuff and provide money for temporary shelter. It’s also fairly inexpensive, making it a smart move.
When Buying a Home
Save a down payment (and then some). Traditionally, it took 20 percent down to get a mortgage and buy a home. Today, lenders will approve loans with much smaller down payments, and the FHA loan program lets you buy with just 3.5 percent down. A down payment of 20 percent or more may net you the best mortgage rates and save you from paying private mortgage insurance (PMI). But whatever you put down, make sure there’s ample cash left over for moving, furniture, all the less-fun expenses that come with home ownership like the leaky sink, the downed tree, or the busted washing machine.
Buy what you can afford. There’s no faster road to financial troubles than trying to swallow a mortgage payment you can’t afford. Being conservative with home much you spend on your home won’t only provide breathing room should you ever lose your income, it frees up money for other things you enjoy. This may mean you’ll have to put off buying a home a few more years or live in a starter home until you’re ready to move up.
As You Move Forward
Reinvest your raises. Lifestyle inflation happens to (almost) all of us: As we earn more, we spend more. We buy bigger homes, newer cars, and more stuff. A little bit of lifestyle inflation is OK. After all, aspirations can motivated us. If you’re smart, however, you’ll save more as you earn more. An easy way to do this is to simply invest all or part of any raises you receive. For example, if you get a 5 percent raise, increase your savings by 3 percent of your annual pay. Do this every time you earn a pay bump and you’ll be saving plenty before you know it.
Keep investing. Take time to learn how to invest for the long run. Once you’re saving enough for retirement, invest for other goals, too.
Watch your credit. At least once a year, pull free copies of your three credit reports from annualcreditreport.com. You may also want to track your credit score using a free service like CreditKarma.
Focus on what YOU want from life. Money is a scarce resource, but time is the scarcest. Don’t spend money on stuff that doesn’t matter t you just because everybody else does. Use Money Under 30’s Richer by the Week workbook (available free to email subscribers) to identify your financial values and prioritize your goals.
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What do you wish you had known about money in your 20s before you got there? Are there things you would add to this list?