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8 Financial Rules for your 20’s

Face it, you’re out of college, or about to be, and, it’s time to start thinking about many parts of your future. Not only are you thinking about building your career, but, you should start thinking about building your wealth.

Not everyone has the same idea of what they call “wealth” for one person it may be having nice cars, for another is may be the freedom to travel, and for many, it’s knowing that you are set for the future and can make most financial decisions without worry.  Whatever your idea of wealth is, you undoubtedly need a plan to get there and some rules about handling your finances that will help. Here are the top 8 things to accomplish in your twenties to get you on the path to your version financial success.

Live within your means while:

1. Taking over all of those bills your parents paid for you

While you were still in school your parents probably paid your cell phone bill, car insurance and cable bill. Well, you’ve got a job now and it’s time to understand what the cost of living really is and how you fit into it. It’s true that you may not be able to afford as many other things if you take back these bills, but, your parents need to save for retirement, too.

2. Keep housing expenses to 25% – 30% of your take-home pay

Find a great place to live, get a roommate, do whatever it takes to keep your total housing costs – rent/mortgage plus taxes and homeowner association fees to 25% – 30% of your monthly paycheck. This will leave you some money to spend on:

3. Transportation to work

You need to get to work so it’s important to have a vehicle. Don’t let anyone talk you into more car than you can afford – negotiate based on the price of the car, not the length of the loan, so that you don’t get talked into a long-term loan that you’ll be paying off for years to come. With gas and upkeep, this could be about 10% of your take-home pay.

4. Start payments on your student loans

It’s time to read the fine print and understand exactly what type of student debt you have and what your options are to pay them off. Do not make one of the options to continue to not pay (put it in forbearance). This type of decision will only cost you more in the end as the interest fees are continually added back into the loan and increase it each month. There are many options to pay off your loan, find out which one works for you.

5. Save for retirement (which reduces your take-home pay)

If your employer offers a match through their retirement program then you are losing free money if you don’t join. I know it seems so far away and it reduces your paycheck, but, start small and you’ll hardly notice it at all. Start with the company match and, if the plan has low fees and good investments, increase your deferral each year by 1%.

6. Have at least $5,000 in a checking or savings account for emergencies

If your car or fridge breaks down and you don’t have enough to cover it, you do not have financial freedom. Financial independence is about personal finance issues not creeping into your day-to-day life; not worrying about how you’ll pay that next bill, but, instead, planning for the day-to-day so that you can focus on other important things in your life.

7. No credit card debt

If you’re living within your means, then there is no reason to have credit card debt. Your credit cards are a cash-flow tool, not a (very expensive) money machine. Use it for what it is: don’t put purchases on it that you cannot pay-off at the end of the month. If you do have credit card debt, find areas of your budget to cut back on so that you can pay this down as quickly as possible.

8. Know your credit score and report

If you want to get the best rates when it’s time to apply for a mortgage or car loan, you need to build your credit. This means making payments on-time, keeping the ratio of outstanding debt to amount allowable on your card below 30%, and not opening too many cards. The higher your credit score, the lower your loan rate can go and this will save you thousands, possibly tens or hundreds of thousands over your lifetime.

If you move home: Don’t forget that your parents also need to save for retirement, pay-off their credit cards and build their wealth. Be an adult about it an pay them for rent and food. Also, make sure you put and end-date on your stay at home – even if you don’t share it with your parents – it’s nice to know that soon you’ll be out on your own (and you’ll have accrued the financial skills to do it the right way).

 

You may also be interested in:

Financial Checklist for New College Grads

Now That You’re Making Money

Save Now…Life Gets More Complicated

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