Those first couple of years after college are an intensely exciting time.
You've finished school, you've made plans to move out of your parents’ house, and you've started a career and are getting paid. Maybe not as much as you'd like, and maybe not as much as some of your friends are making, but you're finally starting to see some cash roll in.
You're at the start of your life as an adult, and you're finally in control of your money.
It’s been said that "a beginning is a very delicate time," and the beginning of your financial life is no different: your wealth in your 30s and 40s will be largely determined by the financial decisions make right after college.
The pressure is on for you to make decisions that will ensure your security and independence later in life.
Read on find out how to lay the foundation for financial independence, how your social life affects your personal savings, and how you could enter your thirties with a fair bit of wealth and equity under your belt.
Of all the monthly bills you'll have, putting a roof over your head will probably take the biggest bite out of your paycheck -- the average person spends about a third of his or her income on housing.
So how can you make your housing costs benefit you? Your best bet is to live at home for a while.
After the freedom of college and the independence of living in student or residential housing, the idea of living with Mom and Pop seems… kind of awful, really!
But other than tent-living or apartment-squatting, you'll never have it better as a tenant: your parents may ask for a couple hundred dollars in rent every month, but that rent usually comes with a fully-furnished house, paid utilities and stocked cabinets.
Parents may make tough roommates, but over a few months you'll be able to save a couple thousand dollars and get your own place... right?
Right on the saving, wrong on getting your own place!
Paying full-price for housing can be a paycheck-killer. One-bedroom apartments in any major city are a major expense -- usually starting around $1,000 a month -- and that can be brutal for someone just out of school.
If you make between $40,000 and $50,000, that rent would be about half of your monthly paycheck. Having privacy is nice; having money is nicer.
If you're moving to an area where you know people, make some calls and find out if any of your old friends are looking for housing.
If you're moving to an area where you don't know a soul, hit up Craigslist and start looking -- but be very, very selective. It's better to wait a month or two and find an ideal roommate than to spend a year-long lease with a maniac. If you're the "in bed early" type, a roommate with a band may be a bad idea for you.
As for what neighborhood to live in, here's my favorite strategy for finding great rent prices: avoid the hip neighborhoods. If there are nice restaurants, art galleries, and realtors on every block, it's too late -- that neighborhood has moved north of your price range.
Instead, look for the telltale signs of up-and-coming neighborhoods. Look for a growing artist community (starving artists usually know how to stretch a dollar until it's thinner than a thread, and they usually find great places to live); a few new, but highly rated, restaurants (less than two years old) that people in your city's Time Out magazine are mentioning; and 99-cent stores on the neighborhood's main strip (these often signify that families live in the neighborhood and that it’s generally safe).
If you can find those three factors, you may have found the next hot spot, and you can find a cheap-but-charming apartment for a great price.
Finally, if the idea of saving money isn't enough to motivate you, keep in mind the social value of having roommates. The creators of the sitcom "Friends," Marta Kauffman and David Crane, summed it up nicely: your 20s are about "sex, love, relationships, careers, a time in your life when everything's possible. And it's about friendship, because when you're single and in the city, your friends are your family."
When people are trying to tweak their budgets so that they can save more, they tend to look at items on the spreadsheet -- housing, car payments, food, entertainment -- and figure out how to spend less on that particular line item.
What most people forget is that those line items are the effect, and not the cause. When you want to change your spending habits, you need to consider what is motivating you to spend that money.
For twentysomethings, the area of runaway spending is usually the entertainment category. Spending related to social events can be startlingly high for people in their 20s, and any attempts to save money usually sound like this: "Last month I spent $450 on concerts, restaurants and road trips; this month I'll try to spend half that."
The instinct is right -- to find the high-cost budget areas that can be trimmed, and try to lower them -- but the execution often fails, because the budgeter doesn't usually look at why so much money is being spent on entertainment: because during your 20s, your social calendar is largely planned by those around you.
Does the following sound familiar? "We just got tickets to see [band that everybody loves]. $100 each. Jim, Ted, and [everybody else you love] are going to be there. Are you in?" Who wouldn't want to do that? That sounds like a ton of fun!
Or, "Kristin just got promoted, and we're all thinking about a girl's weekend in Vegas. You in?" Sounds epic! Of course you're in!
So how can you exercise more control over your entertainment expenses? One simple strategy: be the one who determines the plans for your group of friends and make reasonably-priced plans.
Instead of Saturday nights at a bar -- where buying a round for everyone will cost at least $50 -- have a house party and have everyone bring a six-pack or a bottle of wine or liquor.
Instead of going to a hot new restaurant, plan a BBQ in the park and have everyone bring a dish.
In short, devise your social calendar, so that you're not hijacked by your social calendar.
The trick is to schedule everything ahead of time, and that can take a little bit of effort. But the nice part is that you'll always have something to do!
There will always -- always -- be high-priced, fun obligations that you'll have to pay for. You will have friends who get married and insist on having a destination wedding, and you will be invited on high-priced vacations planned by a friend.
But you can budget for those, and they'll be affordable if you're making the schedule the rest of the time.
If you’ve just graduated from a four-year college, you have the right to feel proud. You’ve spent thousands of hours studying (and an equal number of hours cramming), you’ve dealt with finicky professors and squabbled over grades, and you’ve been part of more group projects than you’d care to remember.
And, if you’re like many new grads, you’ll want to celebrate that accomplishment by getting yourself a gift.
For many people, that “present to yourself” is a car. Sadly, many new grads make terrible decisions when it comes to that first purchase of an automobile, and lease -- rather than buy -- their first vehicles.
The mistake makes sense: the post-college car purchase is often the first large-scale, independent financial decision you make, and it’s usually conducted in the spirit of celebration, and with a dash of naivete about how much car you really need. Car salesmen pray for that combination of circumstances.
So if you’re in your 20s and you’re buying your first car, here’s how you want to play it:
If your parents have offered to buy you a car as a graduation gift, do your homework and find a secondhand car whose previous owner was meticulous about its care. Scour Craigslist, talk to family and friends, and look on MSN Autos.
In the words of Mr. Money Mustache, you’re looking for “a meticulous-sounding, wealthy person who has babied their used car and done all scheduled maintenance, yet is selling it cheap because they don’t really need the money.”
It may take some time, and you may want to hurry things up and find something you like (especially as you see your friends getting cars). But your patience will pay off in the end, when you’re driving around in a paid-in-full vehicle that is sure to last many years.
If you don’t have enough money to buy a car outright, you’ll need to save enough for a sizable down payment, and then follow the same process: look on Craigslist, talk to family and friends, and look at MSN Autos.
If you can’t buy a car outright from a reliable and known source, go to a reputable used car dealer and finance an automobile -- no leases.
So why is it so important to finance a car, as opposed to leasing it? Because when you finance a car, at the end of your payment period, you have a tangible asset that you own outright. It is 100% yours, and it will probably be the first big-ticket item you can fully claim.
But more importantly, when you own your car, you will have zero monthly payments to make, and the power of your paycheck increases. Having an expense disappear like that is kind of the same thing as getting a raise.
When you lease a car, at the end of your lease period -- you’re right back where you started, and you’ll need to begin a new set of monthly payments.
If you’re in your mid-20s and have earned a raise or promotion, the same principle applies: you’ll be tempted to reward yourself with something big. Fight the urge and buy something that will benefit you financially, rather than harm your budget.
If you graduated college in the last five to eight years, you likely have a tremendous amount of student loans. Without some deliberate action, you're going to be paying those off for twice the amount of time you originally planned. Here’s why:
Most loans have a payment period of 10 years and a required payment every month. The average debt for college grads is almost $30,000, and monthly payments are often between $350 and $500 (depending on the interest rate). That $350 or $500 can be pretty steep, so lenders allow borrowers the option of extending the length of the loan to 20 or 25 years, and lowering the monthly payments to about $200.
Because the budget of a twentysomething is usually pretty tight, that sounds like an excellent idea. The lower payment makes it more likely that a new grad can live within his or her means.
The trade-off, of course, is that the longer you're paying off your loans, the more interest you're paying. So what should you do?
First, if it is at all possible for you to choose the 10-year repayment plan, do so. It may sting a little, but getting out of debt sooner, rather than later, is always a good idea.
Second, prepare your budget so that you make an extra payment every month toward the principal amount on your loan (the amount you initially borrowed). It doesn't have to be much -- some weeks, it could be $50; other weeks, it could be $10 -- but send it in and decrease the amount that you've borrowed. Faithfully making extra payments can cut the length of your payment plan by years.
But here's the most important part: make sure your extra payment is being applied to the principal of your loan. Your lender has calculated the amount of money you borrowed, and then calculated the amount of interest you owe them over the life of the loan.
Some lenders will take any extra payments you make and apply it to your future interest payments, instead of applying it to the principal -- a lesson I learned the hard way. When you send in your extra payments, follow up with a phone call to make sure that money is being applied to the principal you owe, and not to the interest.
Saving for retirement in your 20s -- when retirement is an entire lifetime away -- almost seems like a waste, right? You've got four decades to begin putting money away. Why make that effort now, when your budget is so tight?
In a cruel twist of fate, the most effective time to contribute to your retirement fund is between the ages of 22 and 30 -- when you are most likely to be earning the least. When you start saving for retirement in your twenties, your money has years -- those four decades I mentioned -- to grow.
Albert Einstein called compound interest “the eighth wonder of the world," and he was right -- dutiful saving in your twenties can be the difference between hundreds of thousands of dollars in the bank at retirement, or millions. So you need to start saving for retirement, and soon. How soon?
It may sound silly, but you need to start thinking about the last day of your career on the first day of your career.
During your first week at your job, head over to your HR department and learn everything you can about the programs they offer. What's their 401(k) plan like? Will they match your contributions? Many companies do. Does the company have a pension plan? If so, what do you need to do to become fully vested?
Most companies require a tenure of five to 10 years. Take the time, make the effort and learn everything you can about your options.
If you follow none of the other suggestions in this post, follow this one. Start saving for your retirement as soon as you can. The most powerful investment tool is time, and when you're in your twenties, you may be poor in cash, but you're rich in time. Use it wisely.
Some twentysomethings get lucky: they have a parent or a family friend who has shown them how to get the most out of every dollar that comes their way.
Or, even better, their high school or college offered classes in personal finance. Those people are the lucky ones.
The rest of us often feel totally overwhelmed in our early career years and have to piece everything together as we go along.
So get to work! With the understanding that time is money and you are in your twenties (and therefore rich with time), start building a financial knowledge base so that you can maximize every dollar that comes your way. Learn about the big financial tasks, such as:
You’ll also want to consider the more granular items, such as:
It may sound a little intimidating, and it may sound like a lot of work. But remember, the more effort you put in, the more wealth you'll get from it.
While not everyone agrees, many personal finance experts point to buying a home as a major personal finance goal for twentysomethings.
Whether you have your eye on a one-story rancher in the suburbs, an apartment downtown or a house in the country, you'll need to start a fund and begin the long journey towards buying a home.
Why is buying a house so great? I could list a ton of reasons (including tax deductions, appreciation, equity and borrowing power, just to name a few), but the one that seems to resonate most deeply with people is the stability that owning a home can offer.
With a mortgage, you essentially lock in the same housing payment for thirty years, while renters will likely have to pay higher and higher costs for housing. Then, after your mortgage is finally paid off, your housing payments decrease significantly! (Note that I said your housing payments decrease, not necessarily your housing costs, since you’re responsible for home insurance, repairs, landscaping and general upkeep.)
For more on the decision between buying and renting, check out this article from Time Magazine.
Your 20s are an exciting time: you create career opportunities, build relationships and embrace new financial responsibilities.
The sooner you master those responsibilities, the closer you are to financial independence. Follow the guidelines above, and watch as your wealth grows!
Your Turn: If you’re in your 20s, what’s your biggest financial consideration? If you’re older, what’s your best financial advice for today’s twentysomethings?
Matthew Burke is a social worker and career counselor who is very happy he started saving early. In his free time, he mountain bikes, fashions bird houses, and runs a site that helps people pick a barber school and start their own barber shops.