You’ll sometimes hear these days that 30 is the new 20, and the importance of moving towards career, relationship, and finance goals in your twenties gets overlooked.
When it comes to the latter category, it may seem like getting your financial house in order is something you can work on once you settle down and start your “real life.” After all, it may not seem like you have many assets to manage; you may be just out of college, still in debt, and not making much money at your first job. But even so, there are steps you can start taking now that will lay a good foundation for building wealth and security as you get older.
Everyone is different, so naturally everyone is going to have different financial goals. But if you’re feeling confused and overwhelmed about money, it’s sometimes helpful to see suggestions for milestones to hit at certain points in your life. You can then take those broad suggestions and refine them so they fit your personal circumstances.
To that end, today we begin a series on financial goals to aim for during different periods of your life. First up: personal finance goals for your twenties.
1. Start educating yourself about personal finance. One of the weird things about the modern age, is that even though money plays such a huge role in our lives, most of us don’t get any formal personal finance classes in school. Parents often don’t talk with their kids about the finer points of money management either. This is unfortunate, because knowledge truly is power.
2. Create a budget. I went off the college never having budgeted money for myself. This is a blessing, but I was entirely unprepared for the challenge of managing my own money. It was fine for the first year when I lived in the dorm and could always fall back on my meal plan, but as the years went on responsibilities piled on (cable, insurance, gas, rent) and it was all very overwhelming. I felt like I just barely made enough money to cover my expenses and that I would never be able to get ahead financially the way things were going. Eventually my parents came to the rescue and helped me create a rough budget for myself. Seeing a bird-eye view of my financials helped give me a sense of control and gave me insight about where I could cut back. Budgeting allows you to make informed, purposeful decisions as to how to best allocate your money in order to reach your goals. If you haven’t already, make it a goal this week to set aside an hour and create a budget for yourself.
3. Research health insurance options. While the number of young people with health insurance has been increasing due to the Affordable Care Act, they’re still less likely to be covered than other demographics. Many young men forgo insurance because they feel like it’s cheaper to pay the penalty to Uncle Sam than it is to pay a monthly premium for a service they’ll likely never use. While I understand this cocksure attitude, it’s always better to be safe than sorry. As someone who has first hand experience, medical bills are expensive. The blanked they cover you with in an ambulance alone costs over $500, and you don’t even get to keep it! Getting insurance isn’t for the everyday medical stuff (although it helps), it’s for the unexpected emergencies that crop up. If you’re healthy, you can save some money on health insurance by opting for a high deductible plan and opening up a health savings account (HSA). You’ll pay a lower monthly premium, and the money you set aside in your HSA is tax deductible.
4. Start an emergency fund. Sh*t happens! Instead of taking on more debt to pay for an unexpected car repair, use the cash in your emergency fund. That extra cushion of cash can go a long way in helping you achieve your long-term financial goals. Make it a goal to set aside $1,000 to start your emergency fund. I use CapitalOne 360 for our family. Once you pay off your high-interest consumer debt (see below), you can set the goal of creating a fund to cover 3-6 months of basic living expenses.
5. Eliminate credit card debt. One of the best investments you can make in your young financial life is to eliminate high-interest credit card debt. With the average interest rate hovering around 13%, credit card purchases can get really expensive, really fast. As personal finance author Beth Kobliner notes in her book Get a Financial Life, when you pay off a credit card bill with a 14% interest rate, “you’re in effect paying yourself 14%, guaranteed, and tax free.” That’s an amazing return on investment! Make it a goal to pay off your credit cards as soon as possible. There are several approaches to doing so, which you can read about here. Once you’ve got them paid off, consider getting rid of them. I know there are all sorts of arguments for keeping a credit card around — they’re great in emergencies, you can earn rewards and cash, etc. I don’t deny that, if used properly, a credit card can be an extremely useful tool. It’s just so laden with possible pitfalls (accidentally miss a payment, rate hikes, etc.) that the downside often outweighs the benefits.
6. Start tracking your credit score. While you might not be planning to purchase a home or a car anytime soon, once you do, you’ll need to have good credit to take out a mortgage or a car loan. The financial moves you make when you’re 23 and dirt poor can affect your credit score when you’re 33 and applying for a mortgage. So it’s a good idea to start tracking how the banks view your creditworthiness by requesting a free yearly credit report and checking your number every year or so. Reviewing your credit report at least once a year can also ensure that you catch illegal loans taken out in your name by identity thieves. The earlier you catch fraudulent loans, the easier it is to do something about it.
7. Start a retirement account. It’s almost become a tiresome cliché in personal finance books and blog posts, but it doesn’t make it any less true: time is your biggest ally when investing. To show you the power of time on your investments, let’s look at an example from the book Get a Financial Life:
“Suppose you set aside $1,000 a year from age 25 to age 64 in a retirement account that earns 5% a year (historically, stocks return about 8%, but we’ll be conservative). That’s $39,000 total you invest. By the time you turn 65, you’ll have $126,840. If you don’t get started with saving until you’re 35, you’ll only have $69,760. Starting just ten years earlier would have doubled your total. Yes, doubled.”
Starting early with retirement pays off big time down the road.So after you’ve started that emergency fund and after you’ve paid off that high-interest credit card debt, start a retirement account. If you have a job that offers a 401(k) plan, sign up. Don’t know which investments to fund your account with? Go with index funds. If your employer offers 401(k) matching, contribute at least the minimum amount for which you’re eligible to receive matching funds. But the more, the better. If your job doesn’t offer a 401(k) or if you’re self-employed, open up a Roth IRA account. Your bank likely offers one or you can use an online broker service like Vanguard or Fidelity. Fund it with index funds. Aim to contribute at a minimum 5% of your gross income to retirement. As you start to pay down debt and increase your emergency fund, bump up your savings rate.
For more information about retirement accounts, see our articles on:
8. Plan your debt repayment for student loans. Once you’ve paid down your high-interest debt, set aside $1,000 for an emergency fund, and opened up that retirement account, the next step is to put in place a plan to pay off the rest of your debt, and for most 20-somethings that debt is going to be made up primarily of student loans. According to U.S. News and World Report, 70% of college grads in 2013 left school with an average student loan debt of about $30,000. The college debt many young people are carrying is keeping them from pursuing large life goals like getting married and buying a home, even when they’re well into their 30s. To give yourself some more financial flexibility to have a baby or start a business, make a plan to pay off your college debt as quickly as possible.
If you have any private variable loans, pay those off first. Sure, the interest rate on them might be lower than federally backed student loans, but if the Fed decides to hike interest rates in the future, the rate on those variable loans could climb 5-6%, says Mark Kantrowitz, publisher of FinAid.org. That could make your payments on those loans unmanageable. Better to pay them off now.
For your federally-backed student loans, you have seven repayment plans to choose from. Most young people make the mistake of picking the plan that has the smallest monthly payment. Doing so causes you to pay more on interest over the loan’s lifespan.
If you’re single or married with no kids, be aggressive with your student repayment; being a bachelor is a great time to learn how to live spartanly and simply. Slash your expenses, earn extra money through side hustles, and divert your savings and income towards paying off your debt as quickly as possible.
If you’re not in a position to be super aggressive with your loan repayment because you have kids, or you’re just not making enough money right now, at least aim to put 10% of your gross income towards student loan debt. As you make more money, increase the amount of money you use to pay down your debt.
9. Start a side hustle. Besides finding ways to save money while in your 20s, start looking for ways to earn more moola. Getting in the habit of creating multiple income streams will not only build your personal wealth, but serve you well as you get older. With today’s volatile and competitive job market, you can’t rely on a steady paycheck from a corporate gig. Don’t put all your eggs in one basket — have other sources of cash coming in. An easy way to increase your income is through a side hustle. Side-hustles are little micro-businesses that you can run when you’re not doing your day job. It could be something as simple as mowing lawns on the weekends or proofreading resumes. If you’ve got a skill, there will be someone willing to pay you for it.
For more information about starting a side hustle, read our several articles on the topic.
10. Practice negotiating. If there’s one skill I wish I spent more time developing in my 20s, it’s negotiating. I suck at it. I’ve probably left thousands of dollars on the table because of my haggling deficiency. That stings. By being comfortable with negotiating, you’ll save and earn more money in the long run. So start mastering this art today. You can negotiate the price of everything — homes, cars, appliances, phone bill, car insurance. Practice makes perfect. You also make more money by negotiating for a higher salary or hourly rate. With a few hours of preparation and a bit of confidence, you can increase your income by thousands of dollars in just a few minutes time.
11. Set long-term financial goals. If you can accomplish the above ten financial goals, you’re going to be in a great position financially compared to other 20-somethings. It’s now time to start thinking about longer-term financial goals. It could be saving up a certain amount for a down payment on a home or getting a certain net worth in your 40s. Whatever those goals are, write them down and start plugging away at them.
Stay tuned for our next installment: personal finance goals for 30-somethings.