Those who ignore money matters in their twenties often struggle to catch up. As they approach retirement age, some folks are forced to downsize, others must continue working longer than they would like, and a few make Hail-Mary investments that are too risky for their ages. Many live in fear of outliving their retirement savings.
All of this is avoidable by taking action when you land your first job. If you start saving and investing early, you can ride the ups and downs of your career and the markets and retire at a reasonable age.
Here are twenty things you should know about money in your twenties:
1. Wait to get married
Actually, divorce is the problem, and a mighty expensive one! Avoiding it will allow you to bypass one of the principal setbacks that affect retirements. Marrying later will increase your chances of having a stable relationship and enhance your odds of retiring on time.
2. Stay out of debt
With the exception of your mortgage, you should strive to be debt-free. Running up credit-card balances is foolish, and making payments on automobiles will set you back years. A better approach is to purchase your cars for cash and adjust your tastes to your ability to pay. Later in life, when your financial situation is more solid, you may have the resources to purchase the vehicle of your dreams.
3. Finish school
Planning to return to school after working for a few years is folly. Finish college as fast as possible, preferably in four years, and dive into the workforce with all the energy you can muster. If you need a graduate degree in order to land the position you seek, then obtain that immediately after completing your undergraduate degree.
4. Make a budget
Although creating a written budget is the accepted method, my personal style is simply to spend as little as possible on everything I purchase. For most people, though, constructing a budget on paper is the best policy. When putting your budget into practice, try to avoid shifting amounts from one category to another, unless of course, the transfer is to savings. 🙂
5. Get the math going in your favor
Financial planning is mathematical. At normal levels of income and reasonable returns on investment, reaching a net worth that allows a comfortable retirement takes 30+ years. If you save throughout your twenties, long-term compounding will favor you. Investing early will permit you to live well enough, retire comfortably, and if you’re lucky, pass much of the corpus of your estate to your heirs.
6. Plan to have two children
I love kids, especially the talkative cuties from 4 to 7 years old. That said, nothing breaks the financial back of a normal-income family like having a third child. The expense incurred on behalf of that little person is obviously an extra fiscal drain, but other factors weigh in as well:
First, the caretaker’s reentry into the labor force may be delayed for several more years, and upon returning, the gap may severely impair fitting back in. The pay loss is significant.
Second, salaries and social security are based on an assumed four-member family. If you saddle yourself with greater-than-average expenses and are unable to invest appropriately as you go, the result may be that you are unprepared to retire on time.
7. Understand how credit cards work
Use credit cards sparingly, and fully pay off the bills each month. Paying interest on credit-card debt is anathema to a solid financial plan. Only rarely have successful private-sector retirees maintained significant levels of credit-card indebtedness during their working years.
8. Liquidate student loans
Paying off student loans should be a high priority. Although low interest rates provide little incentive to pay rapidly, and the option to defer payments is sometimes available, you should take your obligation seriously and eliminate it expeditiously.
9. Be price-conscious
Always shop comparatively. I frequent several do-it-yourself stores and find deals in each of them that are not available at the others. The expression “a penny saved is a penny earned” is still sound financial advice.
10. Discuss money issues with your fiancé/fiancée
Getting married in your twenties is risky, and you compound that risk by not fully discussing spending, investment, and retirement with your prospective spouse. The two of you should be on the same page with regard to work ethic, spending, saving, and investment.
11. Start saving for retirement as soon as possible
The time to start saving for retirement is when you land your first job. As I mentioned earlier, reaching an advanced point on the compounding curve takes over 30 years. If you start on time, you should witness remarkable financial growth in your fifties, just before you retire.
12. Start saving for children’s educations
If your intention is to have children, you should begin saving for their college educations right away. Tax-advantaged plans may not be available until the tots are born, but you can create investment accounts for them. If you decide not to have kids, you can add these savings to your other investments and move forward.
13. Avoid shopping when you’re hungry
Shopping is best accomplished when the buyer’s need to buy is less urgent than the seller’s need to sell. Purchasing a car when you have no transportation is more difficult than when you have an adequate vehicle at your disposal. The ability to walk away from the deal is an important part of any negotiation. If you want something too much, you’ll probably pay a premium for it.
14. Don’t window shop
When you land your first job and finally have an income, you may be tempted to test your acquisitive powers. Buying unneeded items can take a surprising hunk out of your budget and put your financial future in jeopardy.
15. Create your own financial history
If you decide to get married, you should establish your own credit history and financial ID. Each party should be educated with respect to financial matters and functional in the absence of the other. Many events (premature death, severe illness, divorce, an unaccompanied tour of military duty, a prison term) can interrupt your time together. You should acquire the knowledge and ability to proceed alone to and through retirement.
16. Reduce your insurance premiums
Paying excessive insurance premiums can erode your ability to save. Work with your insurance agent to take advantage of the discounts that are available. With good planning and some compromises with respect to coverage and deductibles, you may save a surprising amount of money.
17. Play your own financial game
Observing your neighbor’s financial progress can be a poisonous practice. The best approach is to stick to your own game plan and refrain from comparing yourself to others. Although easier said than done, minding your own business brings the richest rewards and the most happiness.
18. Study finance
Throughout your life, you should diligently study the markets and try to understand new investment vehicles as financial institutions create them. Knowing all you need to know is impossible, but having some idea of what’s going on in the investment world will help you protect yourself when market-rocking monsters (terrorist attacks, wars, banking debacles, recessions, inflation) rear their ugly heads.
19. Invest in school and skills
Improving your skills should be a permanent part of your lifestyle. Being adaptable in the global workplace is more important than ever, and those who fail to update their abilities will likely lose in the end.
20. Pay off your mortgage
One of the best places to put your money is in your house. You will always need a place to live, and renting during retirement is an awful idea. Pay your house off, and do so as quickly as possible. Life has lots of twists and turns, and if someday you become unemployed or disabled, not having to pay rent will make a big difference.
Get started saving and investing while you are young and able to take full advantage of the power of compounding. When you near 60 (and believe it or not, someday you will), you’ll be glad you did.