For most people, their twenties represent a decade of unprecedented change and increased responsibility. Graduating from college, beginning a career, and ending dependence upon parents for financial support are all common, major milestones at this age. The list may even grow to include purchasing a first home, getting married, and starting a family.
With no formal training on how to successfully navigate the financial implications of these events, however, many young adults flounder during this crucial phase of their lives. Here are some tips that can help young people avoid some common pitfalls.
Start a career path
Most college graduates remain uncertain about their ultimate career pursuit; however, it's not okay to float along wherever the employment current pushes them.
The earlier a young person commits to a job track, the easier it is for him or her to build the skills necessary to succeed for the future. Large employers usually offer internal training programs to help their young hires learn about different careers and find those that match their interests.
Professional mentorships can also be incredibly useful in this planning process, as can building a network of professional contacts. Since 88 percent of workers aged 23 to 27 remain with their employers for fewer than five years, networking webites like LinkedIn can help launch professional careers, firm up business relationships, and lay the ground work for a likely change of employment.
Manage your debt
For most twentysomethings, efficient debt-handling is more important than investing. According to Sallie Mae, college graduates leave school with an average credit card debt of $4,100 on top of an average student loan debt of $23,200.
Debt is a unique beast: it can become increasingly managable or just as easily snowball out of control. By diligently tackling the highest-interest-rate loans first, borrowers can limit the interest accrued each month and pay down the principal amounts faster. Making sporadic debt payments or using credit cards for lifestyle expenses will accrue higher interest rates and debt balances that can become unmanageable.
Take control of your credit score
A high credit score can help young borrowers obtain favorable interest rates on major purchases like mortgages or auto loans. Building a positive credit history early in life makes this easier.
Young adults should establish credit cards in their own names with as high credit limits as possible and make on-time payments.
By requesting a full credit report for free at annualcreditreport.com, they can stay on top of factors that negatively affect credit scores, including late payments, and dispute any inconsistencies or errors with credit agencies. The website Creditkarma.com offers people the chance to see their TransUnion score and drill down into the specific factors that affect it.
Build an emergency fund
Twentysomethings should not neglect to plan for the unexpected--a job layoff, broken-down car, or sudden medical expense can dramatically alter anyone's financial landscape. Save at least three to six months’ worth of expense coverage in a separate account.
Control your cash flow
Every adult remembers receiving his or her first paycheck (or direct deposit pay stub) from a full-time job. With so much money coming in, visions began to swirl about new luxuries that are now seemingly affordable.
Remember: everything in moderation. Strike a balance between living a comfortable lifestyle now and setting aside a reasonable portion of hat income for the future.
Many online budgeting tools are available, including the excellent, free mint.com, can help young earners reserve a recommended 15 percent of their salaries for retirement, a wedding, or the down payment on a house.
Budgeting helps actively manage cash flow, identify potential areas of waste and overspending, and efficiently capture excess income. Depositing a portion of every paycheck into long-term savings vehicles can make this a painless and automatic exercise.
Save for retirement
Spend $100 on a night out today, or invest it in a retirement asset that will yield several nights out in the future?
To become a millionaire by age 65, a 25-year-old must save only $3,860 per year at an 8 percent annual return. Delaying retirement saving until age 45, however, requires yearly contributions of $21,852! Which is an easier pill to swallow?
Employer-sponsored 401(k) or 403(b) plans are valuable retirement tools. At minimum, contribute at least enough to receive any match offered by the company. For further savings, contribute the maximum $5,000 per year into a Roth IRA. Paying taxes on those savings at relatively lower rates now can spare earners these costs as their careers advance and their earning power increases.
Get help
Not many people of any age enjoy financial management. Few have the personal discipline to maintain budgets; fewer still have the confidence to make appropriate financial and investing decisions, especially when the stock market is as volatile as it has been in the past few years.
Engaging the services of a qualified financial planner is a sound decision to help strike the balance between enjoying life now and accomplishing future goals.
Jeff Jones is a certified financial planner and founder of Cypress Financial Planning. Tomorrow, Jones offers his financial planning tips for thirtysomethings.
