Financial Planning When You are 20 Something

This is first post in the Financial Planning series, over the weeks we will help plan for finances across different age groups. I am starting with an age which sees maximum changes in your life. From college to job, from being single to be in a relationship, from dorm to your first home, and, from student loan to mortgage.

This is also the most challenging time for your finances. First getting a job for living. Then, you start paying off student loans, while using your credit cards and probably also looking for a new home. This is most challenging more so because you are almost inexperienced at managing your finances. Since personal finances are not taught at schools, most in their 20s simply don’t have a financial plan.

Don’t worry I am not going to talk about hiring finance experts, spending tons of money on them. I’ll not ask you to prioritize retirement over Budweiser.

Budweiser is good, irrespective of your age.

I will advice those in their 30’s, not to you guys in your 20’s, so read on!

I went through 20s not very long ago. I didn’t have a budget, I didn’t know where my money was going and most pathetically, I didn’t save a single penny in retirement.

So what Financial Plan you should have in your 20’s?

The average 20’s old that this article is written for has a stable job with student loan burden and is single. Some of the points may not fit for everyone. Apply your judgement while going over the ideas. And remember I am not an expert, I do not have a degree in personal finance.

1. Have a vision for the future

Enjoy your days, I know how it feels to earn your first pay check, your first bonus. This is the time you’ll build friendships and relationships that’ll last long. You will build bridges, you’ll leave your first impression on people who’ll pick you up in your career eventually.

So, no need to sacrifice the things you love to do and have a passion about doing for the sake of coupon clipping ans sacrificing morning latte or even brown bagging your lunch at work.

Even while enjoying your freedom and spending power, chalk down your goals, your vision. Write them down.

Write what you want to do, where you want to be and with whom. When you want to retire, where in career you want to be in. make short-term and long-term goals. I don’t hear 20 somethings do financial goal planning. I didn’t do it when I was in 20’s.

Do not neglect this important step. Only goals can keep you on track, keep you motivated and focused. Write them down and put it on freeze magnet, if possible.

Goal examples 

i) Paying off student loan debt in 2 years

ii) Saving $100,000 in 5 years

iii) To earn $10,000 a month by mid 30’s

iv) Accumulate mortgage down payment money in 5 years.

2. Try to lock in your home

My leader once said that the best advice he had ever received was to buy the first affordable house after joining workforce. We got our first home when I was in my late 30’s. It was late and probably I’ll pay mortgage even after I retire, else I’ll never be able to take retirement.

Becoming a home owner arguably makes you financially more responsible, it happened to me, it is very likely to happen to you.

Buying your home early also mean you buy your home at probably its least price for you, going by the fact that real estate is an appreciating asset.

Buying home also put responsibilities in us. Things like DIY home projects, maintaining yard, safekeeping of house and household items and paying bills require a lot of time, energy and responsibilities. Qualities that help you in managing your finances over the years, till you pass away.

3. Live below your means

Apply only one restriction on your money habits, do not live beyond your means. Do not try to impress upon others on borrowed money. Pay all your dues on time, do not carry a balance. Paying with credit card and not paying off the balance in full – is living on borrowed money.

It’s OK to splurge, I don’t see anything wrong. this is the age to live life. To be free from Ramen noodle days and fighting over pennies days.

But, that doesn’t mean you spend more than you earn, that’s recipe for disaster at any age.

4. Have emergency cash

Whatever it takes, have something saved up in a checking/saving account that can be spent only when you have an emergency. A simple goal of growing the fund by $1,000 a year is fine as well. This will prevent you from going in to debt in future. Little effort to get maximum gain.

5. Invest your first surplus

Whatever remains after building your emergency cushion, may be just $100, may be $1,000 or may be more than that. Talk to your parents or someone whom you consider a good investor. Take the guidance and invest surplus amount you accumulated.

Believe me, seeing your money grow, without you doing any work is extremely satisfying. The little step towards investment can open a Pandora’s box for you.

Don’t sweat about it, get your first $100 and invest somewhere, very simple. Then, let your senses take over from you.

6. Don’t ignore employer match in 401(k)

Employer match is a free money. The easiest way to sacrifice a little bit for retirement and not having a pinch about it is by contributing to 401(k) to the least amount so that you can avail entire company match.

Example – My employer offers 100% match up to 5% of my base salary. So I contribute at least 5% of my salary in 401(k) to get same amount of free money from my employer.

7. Challenge yourself to pay off student loan debt

Make it a challenge and win it from yourself. I know a blogger who paid of student loan within first year with average salary from his job. Whatever you are capable of doing, whether by mastering a better salary or indulging in side hustles, just challenge yourself to make a few extra bucks and pour it in to student loan debt.

8. Have insurance

I don’t like the idea of having a life insurance without a family. But your home, your car and your health should be insured. Make sure you have enough money left to pay your insurance bill before end of the month.

Remember I’ll not be so liberal for 30 somethings. While you wait for that article why don’t you comment on the shine and dirt of this article?