Unfortunately, I’ve noticed a disturbing trend: the lack of financial literacy amongst adults. High schools, or colleges and universities, should make some kind of financial planning 101 course. Heck, make it mandatory to graduate! People need some financial foundations in place to help them avoid costly mistakes, especially as they enter their working years. Currently, this curriculum doesn’t exist. In the meantime; however, here are 11 tips to help begin that financial foundation – for someone in their 20’s (or even later).
Tip 1 – Enroll in your company retirement plan.
If you do nothing else, make sure you sign up for your company sponsored retirement plan as soon as possible. If they don’t have one, open up a Traditional (or Roth) IRA and contribute monthly. Aim for 10% of your salary if you can. But at very least do as much as your company will match. Try to increase that percentage every year until you hit the IRS maximum. The impact of paying yourself first while young will be enormous to your financial health in later years.
Tip 2 – Automate everything (and I mean everything).
Pay your investments, credit card payments, and bills automatically. By doing this, you’ll never miss a bill. You’ll feel good knowing the essentials are paid for and you can spend the rest as you wish. This helps appropriately prioritize your finances in your younger years. Then as you get older, managing your increasingly complex finances become substantially easier.
Tip 3 – Establish credit.
Credit is an important part of everyday finances. It helps in the purchase of a house, a car, and a business amongst other things. As a way to start establishing credit, I recommend getting one credit card. Use it each month for several expenses, but you must pay it off each month. This starts to build a credit profile with the three major credit bureaus. Having a good credit score, and accessibility to someone else’s cash if needed, is a crucial tool to proper financial planning.
Tip 4 – Rent, don’t buy.
While it may carry a sense of independence to buy a house right after you graduate, I say don’t! You have no idea what life will throw your way. Wait until a time in your life when you have more certainty. You’ll appreciate the freedom of home ownership more when things are more stable.
Tip 5 – The “fancy” can wait.
We all want “stuff” – fancy stuff, expensive stuff. It all can wait! I’m not suggesting you save each penny you earn, but use your money wisely. Remember, you’ll have a chance in the future to purchase that dream gift for yourself. In the meantime, build a solid financial foundation to spring board you into the future.
Tip 6 – Manage your student loans.
More than ever, graduates are hitting the work force with insane amounts of student debt. Don’t let it get away from you. Work with an institution to refinance whatever you can to the lowest rate available. You’ll need a repayment schedule which fits within your budget. If you can build this expense into your monthly bills so you can focus your attention elsewhere.
Tip 7 – Avoid credit card debt.
Credit card debt is a horrible habit. It can get you into trouble and literally break your financial plan. With interest rates often in the 15%-20% range, this debt can be like trying to dig out of a hole with a spoon. Avoid it at all costs. If you can’t pay it off immediately, you are living above your means.
Tip 8 – Take risks.
It is never too late to take risks in life, but your 20’s is the optimal time to take that “big” risk. You’ll learn a ton about yourself; and with fewer obligations, you can only fall so far. In my experience, persevering teaches amazing life lessons and typically lands you in a greater position when the dust settles.
Tip 9 – Take the time to understand everything.
You don’t have to be an expert on financial planning, but it is important to understand some basics: products you purchase, taxes, work benefits, insurances, and investment programs. It helps you feel at ease when making decisions and confident that the people you choose to work with have your best interest at heart.
Tip 10 – Create a rainy day fund.
The loose rule of thumb is keep between 3-6 months expenses saved in an easily accessible cash account. This helps against unforeseen expense, such as a job loss. The last thing you want to do is start piling up a bunch of credit card debts because you didn’t have proper savings readily available.
Tip 11 – Have fun!
Enjoy the struggle, the journey, the failure, and the heartache. Take that vacation; enjoy sleeping on friend’s couches in different cities; enjoy these carefree years. You are young enough to make a mistake and recover. You are just beginning to learn who you really want to be and how you want to contribute to society. Take your time. Recognize these potentially frustrating moments as building character, and be happy for what you have. In the infamous words of one Ferris Bueller, “life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.”
In his role as Financial Planner, Andrew forges lifelong relationships with clients. He coaches them through all stages of life and guides them to better achieve their life goals. For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.