Your 20s is a time for exploration and new experiences, but also a time of emerging personal financial responsibility. And though times are certainly different now for young adults compared to 10 or 20 years ago (for example, more college students graduate with significant student loans and many return home to live with their parents), some advice never goes out of style.
- Live within your means
It may sound boring when the world is finally at your fingertips, but living within your means, even below your means, is one of the best things you can do to create a solid financial foundation. Your “means” is the income you have coming in. Living within your means involves not spending more than you have. This can be difficult for young adults when temptation often lurks around every corner–technology gadgets, gym memberships, free shipping and instant streaming services, daily coffee and smoothie runs, new clothes, outings with friends, traveling…you get the idea.
The key is to distinguish between your needs and wants. You need food, but you want to try that new restaurant downtown, and the other one across town, and the one that just opened right near your apartment. If your wants are leaving you broke, you need to curtail them.
Everyone’s income and expenses are different. At one end of the spectrum is someone living on her own paying 100% of rent and utilities, while at the other end is someone living at home with his parents and not paying any of those expenses. Analyze what you have coming in (income) each month and what you have going out (expenses), and keep track of where your money goes.
- Save, save, save
Living within your means doesn’t entail breaking even each month. It means making room for savings, too. If you have a job, sign up for direct deposit so your paycheck will be automatically funneled into your checking account. Then re-route some of that money on payday to a linked savings account. You’ll start to build a savings fund, but you’ll still have access to the money if you need it. Any savings method you can put on autopilot is ideal because it’s one less thing you’ll need to remember to do and one less dollar you’ll miss or otherwise be tempted to spend.
Once you make it a habit to save regularly, you’ll want to think ahead. Sure, retirement is a long way off. But when you start saving at a young age, you can benefit tremendously from compounding, which is when your dollars earn returns that are then reinvested back into your account, potentially earning returns themselves. Over time, the process can snowball.
For example, a 22-year-old who saves $200 per month and earns a 4% annual return will have $274,115 at age 65. By comparison, a 32-year-old who saves and earns the same amount will have $164,113 at age 65, and a 42-year-old will have $90,327. (Note that this is a hypothetical example of mathematical compounding and does not represent the performance of any specific investment; all investing involves risk, including the possibility of loss.)
- Borrow wisely
Looking to buy a car or a condo, or attend graduate school? These things typically involve debt, and debt is not your friend. Before you sign on the dotted line for a major purchase, ask yourself whether you’re overextending yourself, whether you’re getting the best possible deal, and whether borrowing is the only way to achieve your goals.
If you have student loans, make sure you’ve explored all your repayment options. Federal (but not private) student loans are eligible for the government’s Income-Based Repayment (IBR) plan, in which monthly payments are capped at 10% of your discretionary income (15% for loans made prior to July 1, 2014). If you don’t qualify for IBR, you might benefit from another income-sensitive repayment option or loan consolidation.
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