Let’s face it, getting your financial life together in your early twenties can be crazy intimidating. Your entry level salary likely does not cover your new bills as much as you would like and when you try to get answers, you are unsure of where to turn and met with intimidating jargon. While salaries and market conditions change, here are five pieces of advice that will stay true.
1. Ask Questions: Started a new job and don’t understand what you’re supposed to do with your 401(k)? Heck, unsure what a 401(k) is? Ask HR, call the 800 number on your plan documents and talk to your plan administrator. Keep asking until your questions are answered. This is your money and your future, so you should feel informed, ecstatic, and empowered by it. The same rule applies when opening a bank account, applying for loans, credit cards, etc. All of these businesses exist to serve you, which makes you the boss. Own it!
2. Pay Yourself First: Savings should be your number one priority now. You should have 3-6 months of living expenses sitting in cash. Of course this figure is a goal for when you’re starting out but you can get there in two years by putting at least 10% of your paycheck into a savings account, preferably through automatic deposit into an account not linked to your checking account. Once you do that, then figure out what lifestyle you can afford on 90% of your take home pay. This may mean making sacrifices but having savings will be well worth it.
3. Avoid Credit Card Debt: Really, avoid all debt, but let’s focus on credit cards. Your plastic should only leave your wallet for the following circumstances:
Medical or family emergency – ER visit, emergency flight home
Booking travel – but only if you can pay off the balance within 1-3 payments. It is okay to use a card here because if there is a discrepancy during your travels, your credit card is more inclined to fight on your behalf than your bank.
One bill a month – to establish good credit, pay one bill a month on your card and then pay off your card.
Reimbursable work expenses
Your credit card should not leave your wallet for vacations you can’t pay off, unreimbursable expenses, shopping, or lattes. The rule of thumb is this: if you’ll be paying for it longer than you’ll be using it, don’t put it on your card.
4. Live Within Your Means: Understand your cash flow. We’ve talked about the first 10% of your paycheck, as for the rest, no more that 28% should go to rent. You may be able to get away with 35% if you live in a city and do not have a car. Your salary should be split according to LearnVest’s 50/20/30 rule:
50% of your paycheck goes to fixed needs: rent, utilities, transportation, groceries
20% of your paycheck goes to financial priorities: say 10% savings, 10% student loans
30% is reserved for lifestyle choices: internet, cable, gym memberships, shopping, restaurants
5. Live According to Your Goals and Values: Now that you know what your means are, try to understand what your financial goals and values are. Your twenties are an exciting and expensive time in your life, be deliberate in how you spend them. If you see yourself traveling a lot, realize that to afford it you may need roommates or a studio apartment instead of a high rise building. Also, be realistic with yourself about the demands others put on you. We all jokingly groan about the flood of wedding invitations we get in our 20s. They come at a cost and do not feel that you “have to” go to something if it causes a serious financial hardship for you. Good friends will understand and will want you to succeed in your life and affection isn’t shown solely by flying cross-country to a destination wedding. Be smart with your money now and enjoy your life
Best wishes to you and your financial health!