Financial Tips for Twentysomethings
As you head into the workforce, here are some things to keep in mind about that new paycheck.
For most people, your twenties represent a decade of unprecedented change and increased responsibility.
Graduating from college, beginning a career and ending dependence upon parents for financial support are all major milestones. The list may even grow to purchasing a first home, getting married and starting a family.
With no formal training on how to successfully navigate the financial implications of these events, many young adults flounder during this crucial phase of their lives.
Start a Career Path
Most college graduates remain uncertain about exactly what type of career they will ultimately pursue. This does not mean that it is OK to float around wherever the employment current may push you, however.
The earlier in your career that you can commit to a certain track, the easier it is to build the job skills necessary for the future. Large employers usually have internal training programs to help young new hires learn about different career paths and prepare them for the one they may find especially interesting.
Finding a professional mentor with significantly more experience in your field can be incredibly useful in the planning process.
An equally important strategy is to build a network of professional connections. Like it or not, in our business world, “who you know” is often more important than “what you know.”
Take the time to build a profile on LinkedIn and connect with people with whom you have had a genuine business relationship. With 88 percent of workers age 23 to 27 staying with their employer for fewer than five years, you will be depending on your network outside of your current company to help with your next move.
Manage Your Debt
For most people in this age bracket, efficient handling of their debt is often more critical than investing. According to Sallie Mae, college graduates leave school with an average credit card debt of $4,100, not to mention the average student loan debt of $23,200!
Debt is a unique beast in that it can either become increasingly easier to manage or snowball out-of-control. If you have a plan in place and diligently work to tackle debt, starting with the highest interest rate, each month less interest will accrue and more principal can be paid down, until there is nothing left.
However, if you sporadically make debt payments and continue to use credit cards for lifestyle expenses, more and more interest will accrue and debt balances will skyrocket until they are largely unmanageable.
Take Control of Your Credit Score
For the remainder of your adult life, it will be very important to have a high credit score in order to obtain favorable interest rates on mortgages or auto loans. Your 20s are a good time to build a positive credit history.
Begin by requesting a full credit report for free at annualcreditreport.com. This report will reveal any past events that are negatively impacting your credit score, including late payments. If there are any inconsistencies or errors, you can contact the credit rating agencies to dispute.
Another good step is to sign up for a free account at creditkarma.com. This site will actually display your credit score as calculated by TransUnion, and drill down into the specific factors that affect this score. At minimum, you want to have a credit card in your name with as high a credit limit as possible, and always make on-time payments.
Build an Emergency Fund
In case the unexpected happens, it is wise to have readily available funds to cover at least three to six months’ worth of expenses, preferably in a savings account that is separate from the checking account you use for daily cash management.
Getting laid off, a car breaking down, or unexpected medical expenses are just a few examples of very real risks that could quickly bankrupt an unprepared twentysomething.
Control Your Cash Flow
Every adult remembers receiving their first paycheck (or direct deposit pay stub) from a full-time job. With so much money coming in, visions began to swirl in your brain about all the luxuries you could now afford.
The best advice for this transition is that of moderation. Striking a balance between living a comfortable lifestyle in the present and setting aside a reasonable portion of your income for the future is a prudent choice.
Reserving 15 percent of your salary towards retirement or another future goal (such as a wedding or down payment on a house) is ideal. Many budgeting tools are available–one excellent and free recommendation is mint.com.
Having a budget in place helps to actively manage your cash flow, identify potential areas of waste and overspending, and efficiently capture excess income into a savings vehicle. The easiest way to accomplish this is to have a portion of your direct deposited paycheck automatically transferred into long-term savings vehicles.
Save for Retirement
It is human nature to focus attention on what is in front of you. This explains why it is so difficult to choose to direct $100 into an account designed for a benefit 40 years away as opposed to spending a night out on the town with friends.
If we could travel through time, however, your future selves would be eternally grateful for the responsibility you display early in your working years because that $100 will likely now provide the equivalent of a few nights out on the town in purchasing power.
To illustrate the power of compound interest and how important it is to save early, let’s look at what it takes to reach $1,000,000 by age 65. Starting at age 25, you would need to save only $3,860 per year with an 8 percent annual return. Delaying retirement saving until age 45, however, requires yearly contributions of $21,852! Which is an easier pill to swallow?
Step one is to take advantage of your employer’s 401(k) or 403(b) plan. At minimum, contribute at least enough to receive any match offered by the company.
If you have the means and the discipline for further savings, step two is to contribute the maximum $5,000 per year into a Roth IRA.
As you increase your earnings power as you progress through the workforce, it is recommended to pay the taxes now at relatively lower rates and then build an account whose distributions will eventually be completely tax-free.
Not many people of any age enjoy financial management. Few have the personal discipline to maintain budgets.
Fewer still have the confidence to make appropriate financial and investing decisions, especially when the stock market is as volatile as it has been over the past few years.
Engaging the services of a qualified financial planner is a sound decision to help strike the balance between enjoying life now and accomplishing future goals.
Jeff Jones is a certified financial planner and founder of Cypress Financial Planning.