What You Need to Know About Money Between the Ages of 20 and 30
So, you’re on your own in the real world, with a steady job and 401 (k) to match. You’ve built yourself a decent credit score , keep an eye on your student loans, and wonder what else you can do to maximize your finances.
This is the second article in the latest TwoCents series, What You Need to Know About Money at Any Age . You can also read about what you need to know before you turn 20 and stay tuned for more tips for 30s, 40s, 50s and older.
You even start thinking about saving for retirement and maybe one day even buying a home. But how do you actually do it all at the same time? Here are some tips to help you achieve financial success.
Make a debt repayment plan
Ideally, you should have a loan repayment plan before you leave school, but if you don’t, now is the time to get serious about it.
First, don’t be a money ostrich : face your debt. Find out how much money you owe to which lenders and at what interest rate, and write it down on one piece of paper (or in an Excel spreadsheet). For student loans, this can usually be done through the National Student Loan Data System . If you have credit card debt, visit your bank’s website.
Then sit down with your spouse or partner , if you have one, and set your financial priorities. You need to make sure you are on the same page when it comes to aggressively paying off debt or concurrently saving for something else.
Then, rank your debt by the interest rate. Credit card debt is likely to have the highest interest and therefore paying off should be your highest priority.
“If you find yourself in debt on multiple accounts, consider how you pay off,” says John Ganotis, founder of CreditCardInsider.com . “You minimize the amount you pay in interest and you get out of debt faster if you pay from the account with the highest interest rate first.”
If you just have a student loan in arrears, consider what you need to do to pay off faster, or if you are on the path to forgiveness (note that this is an option for federal loans only). If you are accumulating credit card debt, see if you can transfer the balance to the card with an initial rate of 0 percent. And check all of your loan agreements to see if there is a prepayment penalty that could negate the benefits of paying off your debt early.
You may also decide that it is better to pay the smallest bill first, regardless of the interest rate, to give yourself confidence that you have paid something in full. And that’s okay if you have a plan and know your priorities.
Master these personal finance clichés
There are several fallback personal finance tools you will want to master. First: automation .
Savings automation is the easiest way to make sure you are doing what you “should” do financially. People are prone to mistakes and myopia; Automating your monthly 401 (k) and savings account deposits is a simple and proven way to bypass your instinct to spend money as soon as you receive it.
You should also keep your commission as low as possible. By the way, automation can help you avoid late payment fees on various products, but banking and investment fees are your biggest enemy here. Banking fees are easy enough to avoid ( more on that here ), but things can get complicated with your investment. Roy Tavor, CEO of Nummo.com , a financial management platform, advises looking at the following:
- Transaction Fees : Trading fees associated with buying and selling securities.
- Trailer Fees : An annual “commission” paid by a fund manager to the firm that manages your money as a permanent “thank you” for putting your assets into their fund.
- Order routing fees : How the fund manager places trades affects the cost. While some routes are cheaper than others, this cost may be refunded to you.
- Currency exchange fees: The fees that are charged when exchanging dollars for another currency, such as euros or pounds.
- Mark-ups : The investment manager can round up the price of a security while trading, making the trade more expensive than it should be.
- Account Inactivity Fee : May apply if your account has less than a certain minimum balance.
- Account maintenance fee : for services such as tax reporting and contribution accounting.
- Late Payment Fees : May apply if payments are late.
- Preload : Commissions or sales fees that are applied on the initial purchase of an investment, usually mutual funds.
- Exit Costs : The fees that are charged when you close your account.
All of them cannot be avoided, but investments should have an expense ratio of no more than 0.5 percent. Many excellent funds are much cheaper.
Next, know your worth. What you earn now will affect what you earn for the rest of your career. As noted by Money Magazine ,
According to a study by the Federal Reserve Bank of New York, the wages of the typical worker rise the most between the ages of 25 and 35. A $ 5,000 pay rise in 25 years increases lifetime earnings by $ 634,000, according to a study by researchers at Temple and George Mason Universities.
Therefore, if you are starting a new job, ask for $ 5,000 more than you are offered, especially if you are a woman. If you ask respectfully, they won’t turn down the offer – and you could end up with $ 634,000 richer. It might be embarrassing, but consider this: An awkward five-minute conversation could net you over $ 600,000. It’s definitely worth it.
Finally, your lifestyle will really make a big difference in your bottom line. Sure, a higher starting salary will be far more beneficial than cutting down on fancy coffee drinks , but where you live, what you buy, and who you surround yourself with will also play an important role. Try your best to limit your impulsive spending and be more aware of where your money is going.
Get a comfortable investment
According to recent polls by financial companies, people in their 20s and 30s hold too much money. But as I wrote in my newsletter about money , now is the time to take the risk: you are young enough to weather any downturns the market may take, and the younger you are, the further your money will go because your earnings will increase.
If you’re just starting out, this would mean depositing funds into your 401 (k) or pre-retirement IRA. Experts recommend contributing 10 percent or more to your retirement savings each month, but if that’s not realistic, “start saving whatever you can, but commit to increasing your savings by one percent a year until you deposit 10-15 percent.” – Suggests Jolene Workman, vice president of director of retirement decisions and income. Here’s even more about striving to be one percent better .
Candice Sherman, vice president of product development at Lexington Law, believes savings can be viewed as just another monthly bill that needs to be paid. If you have a 401 (k) at work, try to contribute at least in line with the employer. If it’s unmanageable at first, “something like $ 25 a month will grow exponentially over time, and the sooner the better,” Sherman says. Then gradually increase the amount every few months. “The longer you keep your retirement money invested, the more it can grow with the magic of compound interest.” (Hey, I just wrote about this .)
If you don’t have a 401 (k) (or your investment options are inadequate ), open an IRA or Roth . And when you invest, keep it simple and boring : focus on minimizing commissions, maximizing your deposits, and diversifying what you invest your money in. Low ( or zero ) cost index funds will get the job done.
Define your priorities
It’s time to get serious about your goals and financial stability. This means increasing your emergency fund and considering your other priorities. Do you want to become a home owner someday? Have children? You’d better start saving money for a down payment and / or invest in a 529 college savings account .
“There will never be a ‘right time’ to start saving, so if you wait, you will wait a very long time,” says Director Workman. “Life is only getting busier and more challenging, so take some time to set yourself up for success.”
Again, if you have a partner, sit down together and set your priorities. You may be fine, but you want to help your future kids pay for college, so you open 529. Maybe you want to pay off your debt and then send the excess to your retirement fund or in a lump sum. vacation of a lifetime. Maybe you would rather give up on a lavish wedding .
Estimates of how much you should have saved at one time vary and will of course depend on your income and personal situation. I’m not going to advise you, for example, to save half your income by age 35 . But your kids’ home, retirement, college – it will all be worth something, and the money won’t just appear in your bank account. So sit down and take the time to figure out what you want out of life and how much it will cost. Then start making a plan, realizing that compromises are inevitable. You are going to give up something in order to get something else, because for most of us, the amount of money in our bank account is limited.
Decide if buying a home is right for you
You’ve probably already thought about it when you tackled the section on goals above, but for many people, a home is the biggest purchase you’ve ever made, and it has a major impact on our lifestyle and well-being. This deserves special attention.
In the high-end housing market, home ownership has become a less attractive investment than it once was. In fact, a study published last year argues that home ownership is not the path to the wealth it once was, and that people investing money that would have been invested as a down payment can create more wealth than those who buy the house. In addition, many homes are not valued enough to handle or even keep pace with inflation.
“I’m not sure I would use the word ‘investment’ in relation to buying a home. If you buy a home simply as an investment, the stock market will provide a much higher return than your home based on historical data, ”says Oscar Vives Ortiz, Certified Financial Planner and Strategic Wealth Management at PNC Wealth Management. “But if we look at it from a different perspective, it looks like a forced economy. The more money you have to pay on your mortgage, the more you earn on equity. It can be a good investment in terms of behavior. “
However, for many people, home is not only about accumulating wealth. Many of us dream of a white picket fence, a large backyard, and a three-bedroom home to raise our children in, no matter how bleak the prospects are. You will have privacy, stability, and a place where you can call yourself. Like many other financial decisions, buying a home isn’t just about bottom line (and shouldn’t be).
“Your house is for life, and your investment – by saving for the future”, – says Holden Lewis, an expert on housing NerdWallet . “If you have to choose between living in a home that makes you happy, but with low investment potential, or in a home that you don’t like but is a great investment, choose happiness. Your home is not a means to an end; it is an end in itself. “
So think about it : where do you want to live in the next decade or longer? How much money do you need for a down payment and how can you save it? Will you be able to cover the maintenance costs after retirement? Could renting a more attractive location be a better investment?
Also, find out how home affects your career and life aspirations. “If you settle down and buy a home, it can limit the career opportunities available to you. You are less likely to want or be able to move to work, ”says Ortiz. “If you are someone who knows where you want to live and you have a family, then it makes more sense to buy a house.”
Take more risks if you have a solid foundation
Once you have accumulated savings and retirement investments, you can start to have fun.
Rodrigo Guara, CEO of co-founder of StockPitch , a value investing research tool, says his best advice for young investors is to “go against their youthful tendency to take only risk.” Stability is important.
“Of course you can take the risk that innovative companies that are just entering the market you think will be here for a while, but in reality you should only do this after you have built a well-diversified portfolio.” – says Guara. “That’s why, as boring as it sounds, the path from a young investor to an adult wealthy person is to invest most of your resources in stable mechanisms that will slowly grow over time.”
It might sound counterintuitive when you consider that many millennials hold too much money, but Guara says you shouldn’t make huge hesitations until you have a solid foundation. For example, you don’t want to raid your 401 (k) to invest in your real estate second cousin’s helpful advice. Once you get a decent salary and save a hefty amount for a rainy day, you can start experimenting with investing in individual stocks and the like if you’re interested.
“Don’t try anything out of the ordinary,” he adds. “Unless you’re trying to outsmart everyone, you are already ahead of most people.”
Make a financial plan for having children
The cost of raising a child from birth to 17 years old is $ 233,610, according to the USDA , and that’s not counting antenatal care or childbirth (not to mention college tuition). Of course, having kids isn’t just a financial decision, but you don’t want to start a family without a plan if you can help.
First, plan your healthcare costs. Even with employer insurance, having a baby costs a lot of money. You will want to review your on-net options and call your hospital ahead of time to inquire about costs and payment terms. Know the details of your insurance terms: what is your deductible and what is your maximum cash cost? See if you can eventually set up bill payment with your service providers.
You will also want to factor in the cost of taking time off to actually have a baby, as America still hasn’t figured out how to provide paid leave to its citizens like virtually any other country in the world.
And while it shouldn’t be, for women it matters more. Research shows that women’s wages differ significantly from those of men around the age of 32 , which coincides with the period when many women leave their jobs to have children. After you leave your job to have a baby, and perhaps take maternity leave or a few years to take care of your baby, your income will never recover. This has a huge impact not only on your annual income, but also on your retirement savings, social security payments, overall investment, and more. Childcare is also very expensive, in some states it averages over $ 2,000 per month .
This is not to dissuade anyone from starting a family – and of course, financially, there is no magic number that makes having a child easier – it is simply to get you thinking about how a child will change your financial life.
Learn to forgive yourself and move on
Everyone makes mistakes, especially when it comes to money: they wait to invest, get into debt, get jobs that bring us less than we are worth. But if you don’t show compassion when you’re wrong, you’ll never get on the right track.
In truth, there are so many things you can only plan, and even the most financially responsible and wealthy of us get confused. Given that there is no repetition in life, it’s best to admit your mistake, try to fix it, and keep going. If you’re in your 30s and don’t have retirement savings, the best place to start is now. If your student loans are defaulted, it is best to pay them off now and try to make payments on time in the future. If you overspent on something in the last month, or sold an investment too early, or had to get money out of your 401 (k) – forgive yourself and move on.
And that will lead us to the next installation of the book What You Need to Know About Money at Any Age . Be aware of.