Becoming a working adult after college or graduate school is exciting… and can be modestly terrifying if you’re supporting yourself for the first time.
One way to curb fears is to take control of your finances. No matter how much you earn or how much you owe, adopting a few good money habits now puts you in good stead not only in your 20s but for the rest of your life.
“It will take a lot of stress off future decisions,” said Shari Greco Reiches, a behavioral finance expert, financial adviser and author of “Maximize Your Return on Life.”
Here are just a few smart money moves that can help you get started.
1. Aim to live within your means
Ideally, you should spend less than you make and save the rest.
Doing so gives you more freedom to invest your energy in what’s most important to you — such as where and how you live, work and travel.
But living within your means involves making choices based on your priorities (not those of your friends who may be living larger than you can afford).
“You can have anything you want, but not everything. So pick what’s most important,” Reiches said.
2. Know what your means are
Figure out how much money you bring in, how much you spend and how much you save. Know, too, what you spend on things that you like but don’t actually need. That way you’ll know where you can trim spending if necessary.
As a guideline, Reiches suggests the 50/20/30 rule. Take your gross income and subtract from it all federal, state and local income taxes plus Social Security and Medicare taxes withheld from your pay. (If you’re doing this on the basis of one paycheck, and you’re paid every two weeks, multiply this result by 26 to get an annual after-tax figure because you will receive 26 paychecks in a year.)
From that after-tax income, allocate no more than 50% to essential expenses (rent, utilities, groceries, transportation, etc.). Another 20% goes to saving for short- and long-term goals and to paying down high-interest debt. And the remaining 30% can go to discretionary spending (clothing, entertainment, eating out, travel, gifts, etc.).
The 50/20/30 rule isn’t fixed. If you live in a high-cost area, for instance, your rent could push you over the 50% mark for essentials. In that case, you can choose where to cut back in other areas or reduce your housing costs by living with roommates, for example.
Your employee benefits at work can help defray some costs too — such as subsidized gym memberships or free, on-site medical services, subsidized transportation costs and other discounts.
3. Don’t count on money you don’t have yet
You’ve heard you’ll be paid a bonus. You’re expecting a raise. Someone in your family may send you birthday money. And a friend still has to pay you back for last year’s vacation. All of that money may materialize. But until it does, don’t spend it in advance because you have no control over when it will come or how much you’ll get.
4. Spend a little for a lot of protection
If you’re young, healthy and financially stretched, it’s tempting to forgo health insurance because you figure your chances of getting seriously ill are low. True, but they’re not zero. And your youth and good looks will not protect you from getting (expensively) injured in a bike or car accident.
Since a health crisis can easily cost you $50,000 or more if you’re uninsured, having health insurance can protect you from an unhealthy debt load for years to come.
“It is the No. 1 safety net you need,” said Jonathan Clements, founder of the site HumbleDollar, and editor of the new book “My Money Journey: How 30 People Found Financial Freedom — and You Can Too.”
If you’re under 26 and can remain on a parent’s employer-subsidized health plan, that will save you money.
If you’re not on a parent’s plan and are a freelancer or contractor, get catastrophic coverage or a bronze-level plan on the health insurance marketplace. (If your income is low enough, you may even qualify for a tax credit to offset the cost.) If you make $40,000, for example, the average bronze plan premium is $103 a month for a non-smoker, according to this calculator from KFF.
If you work full-time for one employer, pick an affordable option from the subsidized plans on offer.
5. Keep things simple
Tracking all your purchases and other expenses gets hairy when you use multiple payment methods (bank debit cards, credit cards, payment apps, etc.)
If possible, streamline what you use to make payments.
Clements recommends having just two credit cards: One with a low credit limit (e.g., $1,000 to $2,000) that you use as your “walking around” card for purchases. The second, with a higher limit (e.g., $5,000), should be kept at home and used only for emergencies and when you travel.
That way you limit how much you charge (thereby making it easier to pay your monthly bills so you don’t get hit with late fees and punitive interest rates). Plus it helps your credit score because you will never charge too high a percentage of your total credit limit. (Clements notes that for the higher limit card to continue counting toward your total credit limit, you should use it occasionally for a small purchase so that some activity on that card is reported to the credit bureaus. Paying off more than one line of credit in full and on time every month also helps establish your creditworthiness.)
If you use payment apps, pick one to use, not several. If you have an iPhone and use Apple Pay that can double as your “walking around” card, he said.
6. Pay your future self
With any luck you will get older — much older. (No, not your 30s. More like your 60s, 70s and 80s.)
“Spare a thought for your future self because one day you will be that person,” Clements said.
And that person will very much appreciate having enough money to pay for the housing, health care and lifestyle you want after working hard for decades.
You may not be making very much now but you have the best resource for amassing wealth: Decades of time to save.
That means even saving very small amounts now can grow into real money over the years.
For example, say you save just $100 a month — that’s roughly $3.33 a day. If you earn an average return of 7% a year over 40 years (which assumes a more conservative investing strategy than someone your age should have), you could have $264,112 by the time you hit your early 60s, thanks to the power of compounding.
Of course, your paycheck — and ability to save more — will likely grow over time.
And bonus: If your employer offers a 401(k) plan, some of your contributions will be matched by your company. That additional “free” money will pay off in spades over time, so be sure to contribute enough to your plan so you get the full match.
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