By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
Financial planning in your 20s involves lots of areas. Learning about personal financial topics, getting jobs and starting both the process of saving and paying off debts.
If you are lucky, you have just graduated and been lucky enough to get a job in your field of interest. For the first time, you are working for a company that pays benefits, but you may not be confident which of these you should use.
At this point, most people in their early 20s have two big money goals, to make enough to not have to live with their parents and to figure out how to begin to pay down their student loans so they can save for other long-term goals.
What personal financial decisions should you make to begin to work toward financial security while you are in your 20s? Here are ten that we came up with:
- Invest in yourself (part 1). Make sure that you participate in any retirement plan that your employer offers. Plan to defer 10% (or more) of your salary. Get comfortable with the idea of paying yourself first and working under the assumption that you can’t spend money that you don’t have. Turn this into a habit that you never break.
- Invest in yourself (part 2). If your employer doesn’t offer a retirement account, then plan to save 10% of your pay and use it to fund a Roth every year (up to $5,500 in 2017).
- Invest in yourself (part 3). In your 20s, you have the best opportunities to learn more about your area of interest. Try to think about your working life in terms of looking back at it when you are retired and asking yourself “what was the best money I ever spent?” Spending your earnings on education and training could easily be your most successful investment during this period.
- Determine if you are interested in learning about personal finance and making investment decisions. If you are, evaluate your options to educate yourself so you can make good long-term investment decisions. If you aren’t, work to develop a network of folks who understand personal investments and who might be able to help you. Find a friend, a co-worker or a relative that likes to make investment decisions. Ask that person to provide help with making the investments decisions for the retirement money that you are saving every month.
- Understand the other benefits that your company provides. Many firms use a “cafeteria” style benefit plan where each employee can choose from a variety of benefits that are offered. Not all of these benefits will be useful to you. For instance, you likely don’t need extra life insurance if you are in your 20s and don’t have dependents. If you have a spouse or significant other who is also covered by benefits, try to coordinate these benefits to increase your coverage.
- Realize that you will likely have good years and bad years for earnings, and it makes sense to have three to six months of cash in a checking or savings account to help smooth out the bumps in your career that you might face, or simply available for unexpected expenses
- Be careful when you change employers. Before you say “yes” to a new job offer, understand the benefits package and think about how long it will take to qualify to begin receiving benefits like participating in a retirement plan. If the waiting period is long (i.e. a year), make sure you save outside the plan.
- Manage windfalls carefully. If you receive a bonus, a tax refund or have extra money left over after paying your rent/bills/student loans and other expenses, then figure out how that money can best be used. For some, the best use might be to pay down a student loan. For others, paying for school expenses, saving for the down payment on a house or building an emergency fund might be the best choice.
- Realize that you will likely have four or more different careers during your working life. The only constant is change. But, if you can keep saving consistently, you can become financially secure. Think ‘long term’ and work toward your goals a little at a time.
- Set and celebrate your goals. Create informal goals for achieving financial objectives. One may be “pay off my student loans in three years.” If you achieve that goal, reward yourself with something important to you. We recommend life experiences, but the reward is up to you as long as it is important and modest enough to not break the bank.
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