Finance By the Decade - Your 20s
This is the start of Liftoff’s Finance By the Decade series, in which we discuss good financial practices based on your age. Today, we look at your twenties.
By David Gorham, Liftoff Financial Planning
Your twenties are a time of tremendous change, and are when people typically make some of the most important decisions of their life. Almost everyone uses this decade to decide on education, choose a career, get married, and start a family just to name a few of the highlights. That said, it should come as no surprise that this is the most important time to lay a good financial foundation. How you handle your money in your twenties will affect you for the rest of your life!
Culturally, most of us use our twenties to explore. We spend our time meeting new friends, trying new experiences, and sampling a lot of what life has to offer. The invincible feeling of youth combined with the freedom of being an adult lead to many of our wildest stories (sadly, there are far fewer tales of brews and brawls being created by the elderly). Expanding your horizons has value beyond measure (as we’ll discuss), but far too many chase experiences while turning a blind eye to their financial future. Today, we are going to discuss how to apply five broad financial rules to those in their roaring 20s.
- Make a plan
I don’t care if you take anything else away from this article, as long as you get this: You need to sit down and write out a financial plan for the next 1, 3, and 5 years. It needs to include what expenses you expect to have, and how you’re going to pay for them. If you don’t, it will feel like you’re under a curse every time you have an unexpected expense. A trade secret among financial planners is that if you plan for things, you’ll have a lot fewer surprises in life. That said, I still don’t recommend angering gypsies.
Sarcasm aside, your plan will need to address a lot the following in your 20s:
- Where am I going to be living?
- What will I be doing?
- Will I be getting married or starting a family?
- Will I be getting more education or training?
- What goals do I need to accomplish while I’m young?
It can be tough to think through questions like these with so many variables, but I promise that if you do it, future you will be eternally grateful.
- Pick a career
Now that you have a plan, and at least a rough idea of where you want to go in life, it’s time to figure out how we’re going to fund it. In your twenties, you are either starting or preparing for your career. I’ve always thought that your career is what you use to make money, so that you can live the life you want. It’s awesome when those two coincide, but it doesn’t have to be the case. The upside to my philosophy is this: as long as the job will provide enough money to meet your budget, you can do whatever you’d like.
When looking at a career, there are obviously some other considerations. Chief among these is what qualifications are needed for you to do the job. There are obviously more hurdles to practicing as a neurosurgeon than as a truck driver. While the surgeon will enjoy incredible job security and a very high income, the truck driver will be able to have their CDL in hand after only a few months of training. Think carefully about what is required, because spending years in school only to find out you don’t enjoy the job is a great recipe for hating your life. In addition to the barriers of entry, another consideration is what effects the job will have on your body. Manual labor can be very lucrative, but years of lifting, moving, bending, and kneeling take their toll.
Before making any kind of a decision, I strongly recommend that you talk to people who are working in the field. That expert opinion can cement your choice, or it can let you know if it’s not a good fit.
This is a shocking principle, but it turns out that if you don’t save any money, you won’t have any money saved. The single most important component for any investor is time in the market. When you’re in your twenties, you have a lot of it left, so let’s take advantage of it.
To start, you need to have some kind of an emergency fund. Ideally, this will be 3-6 months of expenses. This is the core of your financial health, and will give you incredible freedom. Need to replace your tires? You can. Have to pay a security deposit? Cash is in the bank. One of your kids broke a window? Not the end of the world (though for them, it may be). Use your emergency fund for emergencies, and always make sure to regenerate it after using it!
Now that you have a stable financial platform, we are going to take advantage of the 8th wonder of the world: compound interest. Honestly, this is where the magic begins. Our first trick is going to be taking advantage of any employer match you have through a qualified plan, such as a 401(k) or 403(b). By contributing up to the match, you are not only adding to your own investments, your employer is literally doubling that addition (assuming full match). Once you’ve hit that match, it is essential to open up an Individual Retirement Account, or IRA. Once opened, start making regular contributions based on your paycheck. Even if it’s $20 a week, that will have you saving more than $1,000 a year.
There is obviously more depth to saving, but those two simple steps are in reach for almost everyone, and will change your life. Since you may not believe me (after all, I did say this was magic), let’s look at an example:
Assume that you are contributing $1,000 a year to your IRA (which is less than $20 a week), starting at the age of 20. You’re investing that money, which will hopefully grow (and historically, it tends to) at 4% every year. By the time you’re 65, you will have contributed only $45,000, but your account will have about $126,000 in it. You, having done nothing other than park your income in an account, have almost tripled your money. If that’s not world-class wizardry, I don’t know what is.
Bottom line: start saving, and start now.
- Minimize debt
We put debt right below savings for a reason. As miraculous as compound interest is when it works for you (as above), it is devastating when it works against you.
When you’re in your twenties, there are so many things to experience: travel, food, fast cars, concerts, the list goes on. The only drawback to most of these things is that they cost money, which is something that a lot of younger people don’t have much of. Most major loan providers take advantage of this, offering to lend 20-somethings money for anything and everything. Sadly, the thrill of the purchases fades, and many are left paying off their debts into their thirties and forties.
No matter what: if you can avoid debt, do so. Debt is a lot like trouble, in that it’s easy to get into, and hard to get out of. There are some times when going in to debt can be advantageous, such as getting an education that will lead to a sufficiently higher income. However, you need to look long and hard at whether or not that piece of paper and the skills you hopefully gained while getting it are going to be worth it. As I stated in the career section above, your job does not have to be your passion. Frankly, many people take on debt to go to school, not even knowing what they’re passionate about. Having a degree doesn’t make you a better person, so only take on educational debt that moves you closer to a goal.
- Improve yourself
It confuses me that this is not an often-discussed topic in the financial world. No matter who you are, there is something you can do to enrich yourself. Honestly, this is one of the things that people in their twenties tend to do better than almost any other age group.
Whether it’s reading a book, going to a museum, doing a sport, or any of the other myriad activities you could do, just make sure you’re doing something aside from school or work. As stated above, time is the most valuable thing you have, and it’s far too easy to spend it chasing tomorrow rather than enjoying today.
Looking more in the financial realm, there are two major benefits to self-improvement that we’ll discuss. The first is that by spending at something you love, you will probably master it. Once you’ve actually developed that skill to the point of expertise, people may actually pay you for it. While your career doesn’t need to be your passion, it is amazing when those two worlds merge. There is nothing like being paid to do something you would have been doing anyway! The second benefit is that enriching yourself will let you cross paths with people you otherwise would not have met. Every job I’ve had came as the result of a personal connection, rather than just a skillset or certification. While this certainly isn’t always the case, a relationship is more likely to get you a job than anything else.
So there you have it. Use your 20s to have fun and explore the world, but apply these five rules and you won’t regret it!
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