Young and Smart about Money

Those first couple of years after college are unbelievably exhilarating.

After finishing school I had many decisions about what to do. Move out into an apartment, get a day job, get a car, etc. I’m finally at the start of my life as an adult, and I have full control of my money.

How to Manage Money in Your 20s

My wealth in my 30s and 40s will be largely determined by the financial decisions I make right after college.

The pressure is always on me to make decisions that will ensure security and independence later in life.

Living at Home to Accumulate a Treasure Trove

Of all the monthly bills, putting a roof over my head will probably take the biggest bite out of my paycheck — the average person spends about a third of his or her income on housing.

So how can I make my housing costs beneficial? My best choice is to live at home for a while.

After the freedom of college and the independence of living in student or residential housing, the idea of living with Mom and Pop seems… kind of awful, really!

But other than tent-living or apartment-squatting, I’ll never have it better as a tenant: My parents may ask for a couple hundred dollars in rent every month, but that rent usually comes with a fully-furnished house, paid utilities and stocked cabinets.

Luckily after a long while, I can save up money for my own place.

Finding Some (Good) Roommates

Right on the saving, wrong on getting my own place!

Paying full-price for housing can be a paycheck-dismantler. One-bedroom apartments in any major city are a major expense — usually starting around $1,000 a month — and that can be brutal for someone just out of school!

If I make between $40,000 and $50,000, that rent would be about half of my monthly paycheck. Having privacy is nice; having money is nicer.

If I move to an area where I don’t know a soul, I can always hit up Craigslist and start looking. It’s better to wait a month or two and find an ideal roommate than to spend a year-long lease with a maniac.

As for what neighborhood to live in, here’s my favorite strategy for finding great rent prices: avoid the hip neighborhoods.

If there are nice restaurants, art galleries, and realtors on every block, it’s too late — that neighborhood has moved north of your price range.

Instead, look for the telltale signs of up-and-coming neighborhoods.

Managing My Entertainment Budget

Related imageWhen people are trying to tweak their budgets so that they can save more, they tend to look at items on the spreadsheet — housing, car payments, food, entertainment — and figure out how to spend less on that particular line item.

What most people forget is that those line items are the effect, and not the cause. Entertainment is one of the biggest money siphons.

Does the following sound familiar? “We just got tickets to see [band that everybody loves]. $100 each. everybody you love is going to be there. Are you in?” Who wouldn’t want to do that? That sounds like a ton of fun!

So how can I exercise more control over your entertainment expenses? One simple strategy: be the one who determines the plans for your group of friends and make reasonably-priced plans.

Instead of Saturday nights at a bar — where buying a round for everyone will cost at least $50 — have a house party and have everyone bring a six-pack or a bottle of wine or liquor.

In short, devise your social calendar, so that you’re not hijacked by your social calendar.

The trick is to schedule everything ahead of time, and that can take a little bit of effort. But the nice part is that you’ll always have something to do!

I can budget for all these, and they’ll be affordable if I’m making the schedule the rest of the time.

Buying a Reliable Car

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Let’s say I’ve just graduated from a four-year college, so I’ve earned the right to be proud. I spent thousands of hours studying (and an equal number of hours cramming), I’ve dealt with finicky professors and squabbled over grades, and been part of more group projects than I’d care to remember.

And, like many new grads, I’ll want to celebrate that accomplishment by getting a gift.

For many people, that “present to yourself” is a car. Sadly, many new grads make terrible decisions when it comes to that first purchase of an automobile, and lease — rather than buy — their first vehicles.

The mistake makes sense: the post-college car purchase is often the first large-scale, independent financial decision you make, and it’s usually conducted in the spirit of celebration, and with a dash of naiveté about how much car I really need.

Car salesmen pray for that combination of circumstances. So if I’m in my 20s and buying my first car, it may take some time, and I may want to hurry things up and find something I like.

But my patience will pay off in the end: when I’m driving around in a paid-in-full vehicle that is sure to last many years.

If I don’t have enough money to buy a car outright, I’ll need to save enough for a sizable down payment, and then follow the same process: look on Craigslist, talk to family and friends, and look at MSN Autos.

I need to get an idea of what I’m looking for in a car — space, gas mileage, miles driven. Figure out a monthly amount that I can pay, and don’t forget to figure in car insurance, gas, tolls and upkeep.

So why is it so important to finance a car, as opposed to leasing it? Because when I finance a car, at the end of my payment period, I’ll have a tangible asset that I own outright. It is 100% mine, and it will probably be the first big-ticket item I can fully claim.

But more importantly, when I own my car, I’ll have zero monthly payments to make, and the power of my paycheck increases. Having an expense disappear like that is kind of the same thing as getting a raise.

If I’m in my mid-20s and have earned a raise or promotion, the same principle applies: I’ll be tempted to reward myself with something big. I should always fight the urge and buy something that will benefit me financially, rather than harm my budget.

Making Extra Payments on My Student Loans\

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If I graduated college in the last five to eight years, I’m likely to have an exponential amount of student loans. Without some deliberate action, I’m going to be paying those off for twice the amount of time I originally planned. Here’s why:

Most loans have a payment period of 10 years and a required payment every month. The average debt for college grads is almost $30,000, and monthly payments are often between $350 and $500 (depending on the interest rate). That $350 or $500 can be pretty steep, so lenders allow borrowers the option of extending the length of the loan to 20 or 25 years, and lowering the monthly payments to about $200.

The trade-off, of course, is that the longer I’m paying off my loans, the more interest I’m paying. So what do I do?

First, if it is at all possible for me to choose the 10-year repayment plan, that’s what I’ll do. It may sting a little, but getting out of debt sooner, rather than later, is always a good idea.

Second, I need to prepare my budget so that I make an extra payment every month toward the principal amount on my loan (the amount I initially borrowed). It doesn’t have to be much — some weeks, it could be $50; other weeks, it could be $10 — but I would send it in and decrease the amount that I’ve borrowed.

Faithfully making extra payments can cut the length of my payment plan by years. But here comes the most essential part: making sure my extra payment is being applied to the principal of my loan.
My lender has calculated the amount of money I borrowed, and then calculated the amount of interest you owe them over the life of the loan.

Some lenders will take any extra payments I make and apply it to my future interest payments, instead of applying it to the principal — a lesson I learned the hard way. When I send in my extra payments, I’ll follow it up with a phone call to make sure that money is being applied to the principal I owe, and not to the interest.

Planning Retirement

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Saving for retirement in my 20s — when retirement is an entire lifetime away — almost seems like a waste, right? I’ve got four decades to begin putting money away.

Why make that effort now, when the budget is so tight?

In a cruel twist of fate, the most effective time to contribute to retirement fund is between the ages of 22 and 30. This is of course when I am most likely to be earning the least.

When I start saving for retirement in my twenties, my money has years — those four decades I mentioned — to grow.

Saving in my twenties can be the difference between hundreds of thousands of dollars in the bank at retirement, or millions. So I need to start saving for retirement, and soon. How soon?

It may sound silly, but I need to start thinking about the last day of my career on the first day of my career.

During my first week at the job, I’d head over to the HR department and learn everything I can about the programs they offer. What’s their 401(k) plan like? Will they match my contributions? Many companies do. Does the company have a pension plan? If so, what do I need to do to become fully vested?

The most important thing is starting to save for my retirement as soon as I can. The most powerful investment tool is time, and in that young age, I may be poor in cash, but rich in time.

Developing Financial Knowledge

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I might get lucky and I could take college classes in personal finance through high school or college.

At the same time, I could feel totally overwhelmed in my early career years and have to piece everything together as I go along.

With the understanding that time is money and I am young (and therefore rich with time), starting to build a financial knowledge base is smart, so that I can maximize every dollar that comes my way. Learning about the big financial tasks, such as:

  • How to invest and build wealth through stocks, mutual funds, index funds and bonds
  • How to set and keep a budget: how to keep track of where money went last month, and how to plan where it’ll go next month
  • How to live on the cheap and decrease each individual expense

Might also consider the more granular items, such as:

  • How to plan a vacation on the cheap by finding affordable hotel deals and guest packages
  • How to use credit card rewards programs and miles programs, so that even buying groceries or making other small purchases becomes an investment
  • How to save for the big life events that are coming my way, such as weddings, birthdays, and holiday spending

It may sound a little intimidating, and it may sound like a lot of work. But the more effort I put in, the more wealth I’ll get from it.

Considering Buying a House

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While not everyone agrees, many personal finance experts point to buying a home as a major personal finance goal for young’uns.

Whether I have my eye on a one-story rancher in the suburbs, an apartment downtown or a house in the country, I’ll need to start a fund and begin the long journey towards buying a home.

Why is buying a house so great? I could list a ton of reasons (including tax deductions, appreciation, equity and borrowing power, just to name a few), but the one that seems to resonate most deeply with people is the stability that owning a home can offer.

With a mortgage, I can essentially lock in the same housing payment for thirty years, while renters will likely have to pay higher and higher costs for housing. Then, after my mortgage is finally paid off, my housing payments decrease significantly! (Note that I said my housing payments decrease, not necessarily my housing costs, since I’m responsible for home insurance, repairs, landscaping and general upkeep.)