Real World Finances: How To Manage Your Funds And Avoid Going Broke In Your 20s
When I was younger I couldn't wait to drive. It seemed like having a license was the ultimate key to freedom. After accomplishing that goal, I wanted to be on my own in college, able to do what I wanted when I wanted.
In college, I couldn’t wait to have job, be paying all of my own bills and able to afford lavish vacations. That all happens after you graduate college, right?
Let me start this off by saying I have always been financially stable, with additional considerable savings in my bank account.
However, now halfway through my 20s, with one undergraduate and graduate degree completed, and a second master's looming in the fall, I find myself two years into my career with debt, in need of a new car, living back at home (thanks, Mom) and reevaluating my financial plan.
Never have I ever been poorer or happier. However, I do realize now that the key to freedom is having a stable bank account. Here are some tips to guide your planning and hopefully to lead you to a more fiscally sound status:
1. It is about choices.
Yes, you are now responsible for your own finances -- present and future. The choices you make will impact your finances positively or negatively. You have to weigh the impact of what you say yes to -- aka what you invest money in.
Do you always eat out at nice restaurants, say yes to every outing that comes your way and participate in every friend-cation? These are all great experiences and positives for your social life, but they will eventually impact your financial stability. Whether we like it or not, we must take that into account when making commitments.
2. Everyone’s favorite "B" word -- budget -- is the key.
Yes, it's the solution to all financial problems. Mint.com offers a free analysis of how you spend your money each month, and it might be a good way to start creating a budget.
You need to start off by budgeting bills, then any daily needs, such as food, gas and savings, and lastly, you should allot for any wants, like clothing or vacation splurges. I suggest creating a rainy day fund for each month so you have a little wiggle room.
3. The credit card and debt dilemma is real.
You should only spend 35 percent of your limit and make monthly payments that are manageable. Credit cards should only be used in emergencies or for big purchases.
If you are using a credit card monthly, you are not living within your means. Just because it's there doesn’t mean you should use it.
Don't fall into the trap of signing up for cards at every store you frequent. Clothing cards and accounts will negatively impact your credit score no matter what the reason.
Make sure if you also have any student loans that you make payments in a timely manner. I would suggest setting up a payment plan with a lower monthly payment.
That way, if you plan to pay $50 each month and maybe pay $100 one month, you will pay it off faster than expected and have wiggle room in case of an emergency.
4. Birthdays and holidays will sneak up on you; keep them in mind.
Set aside money monthly for birthdays of friends and family, in addition to any holidays you celebrate. Not planning for these expenses can leave you suffering one month and having trouble remaining within budget, which will cause you to rack up your credit card bill unnecessarily.
Anticipate some of these expenses and you will be in a better place.
5. Know your credit score.
CreditKarma.com will allow you to check your credit score for free. Checking your credit score too frequently actually negatively impacts the score -- who knew?
So many variables factor into your number, including age of accounts, number of accounts, credit utilization, reliability of bill payment and debt.
Be aware of what factors have contributed negatively to your score so that you can be more aware of them in the future.
6. Save. Save. Save.
Unfortunately, the cultural norm is that once you "start your life" by getting married, your friends and family will gift you with money to finance this new start.
However, if you are not getting married or throwing a party to celebrate your future, you will need some help to finance your own "start," including putting a down payment on a home (3 percent for first time home buyers, 20 percent regular).
You should shoot for putting away 20 percent of your income each month in order to grow your piggy bank.
7. Things not to skimp on include the following:
Oh, retirement, how you elude me. I have at least 28 years to go, but hey, who's counting?
Although retirement seems to be way off in the future, it is actually something we need to start planning now.
The more you invest at a young age, the more time that money has to accrue interest and grow in your investment portfolio.
Pensions are few and far between in the private sector, so be aware of what your company offers and if you are maxing contributions. If you max your contribution for a few years, you can always change that contribution if a life event comes up and you need to see more money in your paycheck.
Many companies also partner with different investment firms so that you can set up 403(b)'s or Roth IRA's, both of which I highly encourage you to explore.
Depending on your personal health status, explore which options are best for you. Make sure you invest where needed as per your personal needs. For example, I have a lot of medical expenses related to asthma, so I prefer to have a HMO, as it covers many of my prescriptions so that I won't have to pay as much out of pocket.
However, PPO's often meet many of the needs of customers as providers. You can switch during your company's enrollment period, so don't be afraid to shop around.
It's hard to rationalize spending money on the "what ifs," but if you ever find yourself in one of those situations for which insurance is necessary, such as life or auto insurance, you will be grateful that you invested in the appropriate coverage.
Check out insurance companies that offer multi-policy discounts so that you can save on your coverage.
Phew. It’s a lot to think about, but also a lot to be excited about, as you have control over how you spend and manage your finances.
This is never something I considered as I anticipated adulthood, but it's something we all must deal with.
This may seem like quite a bit to take in, but you'll get the hang of it. Remember, a little personal splurge every now and then is completely acceptable and definitely necessary! You deserve it!
Photo via We Heart It