Be Young, Be Happy, But Be Smart
When you're young, you have seemingly few obligations and the freedom to change jobs, move across the country and start life anew. While you might be repaying student loans, this is the optimal time to start retirement planning and set your sights on buying your first home.
Take these easy steps to help keep your financial life on track.
1. Saving in your 20s can be easy.
"It's often easier for the young working set to save for retirement than it is for their older peers," says Scott Halliwell, a certified financial planner ™ professional with USAA. "They often have fewer obligations, and any cutbacks that need to be done in order to save may only impact them, not a spouse or a family."
2. Build up an emergency stash.
A common rule of thumb says to keep an emergency fund equal to three to six months of expenses. Everyone needs to keep cash in the bank for life's unexpected financial challenges.
3. Heed the wisdom of mom and dad.
"When you're young, there's no one to hold you accountable for bad financial decisions, so don't be afraid to reach out to mom, dad or a friend to help keep you on a solid path," Halliwell says.
4. Don't skip paying your school loans.While interest rates on federal student loans are often extremely low, don't obtain a forbearance unless absolutely necessary. Interest will continue to accrue during the forbearance period.
5. Consider disability insurance.
You're not invincible. If something unfortunate happens that leaves you unable to work, you must have disability insurance to help cover your daily and monthly expenses.
6. Don't be afraid to use credit cards.
Using two to three reputable credit cards is "a great way to build credit," says John Ulzheimer, president of consumer education for the website Credit Sesame. "They provide a large amount of buying power with almost no exposure to fraud losses, thanks to the Fair Credit Billing Act."
7. But know how they can hurt you.
Yes, credit cards help build credit, but they also can wreak havoc if not managed responsibly. "One late payment won't ruin your credit as long as it's not past 60 days and you catch up on payments," Ulzheimer says. But he warns: "Late payments do stay on your credit reports for up to seven years."
8. Keep your hands off your retirement funds.
Dipping into your nest egg can be costly. "If you pull money out of your 401(k), IRA or other retirement accounts before you hit age 59 1/2, you may have to pay income taxes as well as a 10% penalty," says Jean Chatzky, author of "Money Rules: The Simple Path to Lifelong Security."
9. Understand the basics of finance.
401(k), Roth, IRA, TSP: These terms can be a bit overwhelming for a first-time saver. Don't get left in the dark. "Frankly, it's not rocket science but more about basic understanding and the discipline to follow through with the right moves," says JJ Montanaro, a certified financial planner ™ with USAA.
10. Educate yourself on tax deductions.
Knowing what can save you money come April 15 is crucial, says Amanda Steinberg, founder of DailyWorth, a personal finance site. "A lot of people pay too much in taxes because they don't understand why deductions matter."
11. Maintain a relocation fund.
Tim Kiesow, director of military life advice at USAA, suggests keeping $1,000 to $3,000 at all times to cover out-of-pocket expenses related to PCS moves, such as truck rentals and security deposits.
12. Apply tuition assistance first.
"Once you separate from the military, you no longer have access to it, whereas with the Post-9/11 GI Bill you do," Kiesow says. Both cover most tuition-related expenses for college-enrolled service members.
13. Know the Savings Deposit Program.
Service members deployed to a qualifying combat zone can sock away up to $10,000 and earn 10% in this Defense Department program. But there are a few restrictions on withdrawals while deployed.
14. Use the Servicemembers Civil Relief Act.
Protections include a 6% interest cap on credit card debt incurred before entering service.
15. Don't overspend on rent.
"The No. 1 thing young adults do wrong is paying way too much for their housing," Steinberg says. USAA suggests that your housing should cost no more than 25-36% of your after-tax, after-savings income.
16. Get a roommate.
Splitting the cost of utilities, furnishings and rent can help save money, says Kristen Euretig, a certified financial planner ™ who specializes in advising young adults at her blog, youngbrokeawesome.com. "Some people want to live alone, but the reality is that their income just doesn't support that lifestyle. If you can't afford your own place, then you have to face roomie reality."
17. Find your financial values.
"What do you want money to do for you in your life?" asks Amanda Clayman, a New York City money coach. Do you want to save it for the future, enjoy it now or give it to charity?
18. Live within your means.
"You've got to figure out how to spend less than you make. This starts with the very adult realization that budgeting and managing your cash flow is a must," Halliwell says.
19. It pays to buy used.
"Your vehicle should really just be a means of getting around," Halliwell says. He suggests budgeting 10-15% of your pay after taxes and savings for auto expenses.
20. Use your raise wisely.
An extra couple thousand dollars might feel like Christmas came early, but "make sure you incorporate at least a part of your raise for financial good before it seeps into your everyday spending," Montanaro says.
21. First comes savings, then comes marriage.
"Before you find Mr. or Mrs. Right, it can be difficult to imagine your golden years," says Halliwell. "The sooner you start saving, the better chance you have of accumulating enough money to enjoy your later years."
22. When it's time to get serious, talk money.
Finances are often viewed as an off-limits topic while dating. Don't wait too long, Euretig says. "Once a couple starts making plans together for the future, then it makes sense to bring money into that conversation as well."
23. Plan ahead for trips, holidays and gift-giving.
Each of these can take a toll on your wallet, but all are doable if you think ahead. Montanaro suggests setting aside a preset amount of money each month for these expenses. "And when it's gone, you're done."
24. A financially savvy life is a good one.
"Being careful with your money doesn't mean being boring with your life," Halliwell says. "In many cases, it's just doing a little less today so that you can do a lot more tomorrow."