9 Money Things You Should Do in Your 20s
The post-college depression is well documented. Having to navigate a world where stuff starts before 11am and where people don’t hand you beer when you walk into a room is the acutely distressing time known as your 20s. But that is no match for the depression you will face in your 30s and 40s and 50s if you don’t make smart financial choices in your 20s.
Here are 9 important money things you should do in your 20s. Read the list and go do them.
1. Create a budget and stick to it
As we have covered in previous posts, the only way you will be able to do any of these magic money tricks is by first creating a budget and sticking to it. Creating your budget may seem daunting but it’s actually quite simple. All you need to do is figure out how much money you are making and what your expenses are.
There are a lot of templates and forms for budget tracking, but there is only one way to do the math: (income) minus (expenses). Quick note, you don’t have to tell your friends about the money your parents give you every month, but you do have to include it in the income section of your budget.
Also, we’ve created a simple budget tracking template. You can check it out here.
2. Pay off your student loan debt
In case you haven’t heard, a recent study by a credible institution found that there are a lot of young people graduating from college with tons of student loan debt. It is being characterized as a crisis of sorts.
And while those student loans helped you tremendously – letting you buy beer and Indian food while you were in college – they have the potential to ruin your financial future by preventing you from buying slightly less important things like a house or a car.
One of the best things you can do for yourself in your 20s is to pay off your student loan debt. Try to pay more than the minimum payment every month. And find out how your interest rate compares to current rates because you might be able to refinance your loans and reduce the amount of interest you have to pay on those late night Taco Bell runs of yesteryear.
3. Contribute to your 401k
“Pay you self first,” the financial wizards would say. Make sure you are funding your 401k and start as early in your career as you can.
In case you were wondering what a 401k is, it’s that retirement thing your parents don’t have enough money in because of the financial crisis. Lucky for you though because you have time on your side and will be able amass a small fortune and certainly enough money to retire with – assuming you start, like, now.
And if your employer offers a match, make sure you are at least taking all that free money. Seriously, it’s free money. This is literally the only time in life (save for your relationship with your parents) where there is actually going to be free money. Take it.
In 2015, you can contribute up to $18,000 of “pre-tax” money to your 401k. I know that seems like a ton of money, and it is, but if you can’t max out that is okay. The key is to start as early as possible in life and save as much as you can. Make sure you are taking into account stuff like paying down debt, your emergency fund and saving for a down payment on a house.
And in case you are wondering what “pre-tax” means, it is exactly what it sounds like. You may have noticed that when you get your paycheck Uncle Sam has already taken his cut. 401k contributions are pre-tax, which means that the money you put in your 401k gets deposited before the taxes get taken out. It’s basically the legal version of what Wesley Snipes was trying to do.
4. Open and fund a Roth IRA
A Roth IRA is different from other retirement accounts in a few key ways. Whereas a traditional IRA and a 401k allow you to make pre-tax contributions, Roth IRA contributions are “after tax” meaning that the government taxes your paycheck and you make a contribution to your Roth IRA with your after tax income. However – and this is where it gets good – because you paid taxes when you contributed the money the government allows you to withdraw from your Roth IRA starting at the age of 59.5 tax free. That means that all the capital gains and dividends that you earn in your Roth IRA will all be tax-free income. In 2015, you can contribute $5,500 to your Roth IRA. You should probably go out and do that.
5. Create an emergency fund
Have you ever wondered what would happen if your parents lost their jobs and could no longer afford to send you money every month? I know scary, right? Well now that you are properly concerned, channel that nervous energy into starting an emergency fund that can help you pay your bills and keep you stocked in Sriracha and Kimchi in case the unthinkable happens.
We have covered the importance of having an emergency fund before. Take a look and get started on your emergency fund.
6. Have goals for your money
Want to buy a house one day? How about take a trip to Europe without asking your parents for money? Setting saving and investing goals are a very important part of building wealth and getting your financial house in order. Buying a house is a real and tangible thing and setting that as a goal will both motivate and focus you.
Goal setting also helps you answer questions like: How much money do I need to save? At my current income, how long will it take me to save that much? Is life really worth living? And what rate of return do I need to achieve to be able to meet my goal?
7. Make sure you have the proper amount of insurance
Young people are notorious for thinking they don’t need to buy insurance. In fact there is even an adorable name for it People between 18 and 29 who don’t buy health insurance because they think nothing bad will happen to them are called “young invincibles.” Well to that I say, if you could spend an entire week at Burning Man doing iowaska in the dessert all while taking perfect Instagram photos and still make it back in one piece, wouldn’t you think you were invincible too?
Insurance isn’t an investment; you are not going to make money on it. It is a way for you to shift the risk of something catastrophic happening off of you. Generally speaking, you want to buy insurance events that you couldn’t comfortably afford to fix or replace.
For example, if you have a car that is worth $20,000 and that car gets stolen, car insurance will replace your car. Without insurance you would likely be in a pretty crummy spot if someone stole your car, unless of course you are Beyoncé and you can afford a new $20,000 car. If you are in fact Beyoncé, first thank you very much for reading The Starving Graduate. And second what were you doing with a $20,000 car? Step up your game, girl!
8. If you have to buy a car, buy a used car
Haven’t you heard? Shabby is the new chic. Dumpy is the new dapper. And used is the new… um new! Seriously folks, the best thing about the Great Recession is that it institutionalized the notion that bargains are cool and flashy new things are just a little passé.
If you are in your 20s and living in a city with decent public transit, then don’t buy a car, they are a huge money suck. Take the bus or train and if you need a car use Zipcar or Uber. And if you absolutely have to buy a car, then make sure to buy used. You will save thousands of dollars that you can put to work on stuff like your 401k, emergency fund or saving up to go college so you can relive the dream.
9. Stop buying stupid sh*t
Seriously, stop wasting your [parents] money on stupid stuff like 8 mimosa brunches every weekend. Make some sacrifices and go to brunch once a month instead of once a week and use the money you save to meet your financial goals.
