10 Financial Commandments for Your 20s: Part 1

The other day, I was reading Give Me Back My Five Bucks, one of my favorite personal finance blogs on the web, and came across a series on 10 Financial Commandments for Your 20s, based off a Kiplinger article written a few years back. As Krystal, author of GMBMYB, detailed how she’s doing with the commandments in a two-part series, I thought I’d do the same. If you’re in your 20s, you should too!

1. Plan ahead. To get where you want to go in life, you need goals and a plan to reach them. Having neither is like driving a car without a steering wheel — with your eyes closed.  Start by asking yourself what you want in your future. Think about the short term (five years or less), medium term (five to ten years) and long term (20-plus years). Now you’re driving with your eyes open. Then take hold of the steering wheel to reach your goals.

Score: C. My idea of planning ahead is trying to not spend all of my income for the month. Some months I succeed, some months I don’t. My planning is less itemized as it is general, ie “hit $150k in networth this year.” That isn’t a bad goal for someone who is 27, but when I look at the big-picture purchases/expenses (house, new car, retirement, etc) nothing seems possible without some big exit at my current company. While I have faith my company is going to be huge and feel very fortunate for the opportunity to be a part of it, nothing is certain, and I’m doing terrible at having a real plan for my 30s and beyond.

2. Live within your means. Can’t afford something? Don’t buy it. Sounds simple, but too many people have a heck of a time following this one and get in over their heads in debt. Borrow sparingly, and only for those things that have lasting value, such as a home or an education.

Score A-. Even though I make a lot of money mistakes, I also manage to increase my networth every year. I’m fortunate that I have no loans so this is possible. But I also choose to live with two roommates and pay $630 a month in rent when I could live on my own and pay $1500+, I choose to drive a car that is on its last legs instead of buying a new one that I paid $7000 outright for six years ago, and I choose not to take big, fancy vacations (the one real vacation I did take to Chicago included a really affordable stay that I found on Craigslist). One thing I’ve always wondered is if living within your means limits your means. I always want to trick myself into thinking I need more money to live within my means so my career goals and additional income adds up to more than I really need to live, and matches what I’ll probably need to live a few years down the line when I have a family, etc, etc.

3. Make saving a habit. You work hard for your money, so when your paycheck arrives, why not make yourself the first person you pay? Arrange with your bank to automatically divert part of your paycheck every month into a savings account. That way, you won’t have to remember to transfer the money manually, and you won’t even miss it when it’s gone. Out of sight, out of mind. Your first savings priority is to amass an emergency fund. Eventually, you’ll want enough cash on-hand to cover at least three months of your expenses in case of the unexpected, such as a job loss, medical emergency or car repairs. Once your emergency fund is well under way, you can divide your monthly savings deposit to go toward other goals too, such as buying your first home, getting a new car or taking a dream vacation.

Score: B+. Although I have $130k in networth, I’ve managed to bounce a few payments when I accidentally pay off a credit card before my expenses clear. I do know if I lost my job and couldn’t get one for a while, I’d be ok. My emergency fund right now is my CD, which is a stupid emergency fund given it’s only making .35% in interest, but if I need to pull out $8,000 at any time I could. Savings is a habit, I guess, as I just try to keep increasing my salary and I never spend like I did. I recently was offered a new bonus plan at work which basically provides the opportunity to make an additional $20k a year, divided by $5k quarterly achievement opportunities. Not only does that really help me focus on getting shit done with a clear goal, it also means that I have a chance in 2012 to max out my 401k and pretend it didn’t happen. As a single person, I like to pretend I still make $60k… if I happen to splurge or do something stupid (ahem, like get a DUI), it won’t kill me.

4. Pay off your credit cards. If you have a credit-card balance, now’s the time to rid yourself of that albatross around your neck. Set a goal to pay off all credit-card debt before you turn 30 and have other financial responsibilities to tend to.A $2,000 balance at 18% interest would take nearly ten years to pay off if you made the minimum 4% payment each month and would cost you an extra $1,116 in interest. To pay it off in two years, you’d only need $100 per month to be rid of the debt. Use our calculator to find out what it’ll take to pay off your balance. Then, commit to use your credit card only for expenses you can afford to pay off each month (see the 2nd commandment).

Score: A-. Outside of work expenses, which I put on my credit cards and add up due to all my work travel, I don’t really keep a balance on my credit cards. I sometimes have $5k or more on my cards at any given time, but as long as I file my expenses in a timely manner I can pay that off monthly. Interest pisses me off, so I try my best to avoid it. Even when there’s an opportunity to get “12 months of free interest” for a big purchase I tend to opt to pay it up front — because I know myself — I know I’m terribly ADD and would mess up and owe a lot more than the item’s worth. And if I can’t afford to pay for it up front, then I just don’t buy it.

5. Start investing. The sooner you start investing for retirement, the less painful it will be and the more money you’ll accumulate. Let’s say a man starts socking away $200 a month at age 25 in an account earning an average annual return of 8%. By the time he turns 65, he’ll have $703,000. But if he waits until he turns 30 to start saving, he’ll end up with only $462,000. In other words, that five-year delay could cost him almost a quarter of a million dollars (see Behold the Miracle of Compounding).

Score B+: I’ve been “investing” for the past six years now, since I was 21. I’m not sure my investments have been smart, though, and the stock market is so shitty that it’s hard to say right now. As I wrote in an earlier post, I lost $4,000 on one stock I invested in, and overall my returns have been far from 5% per year. I need to go back and do some serious calculations to see just how ahead I am, but it’s no where near what all the compound interest calculators say. If I’m going to actually make my money start working for me, I need to be a lot smarter about investing going forward. I might sell off all my individual stocks and just go back to index funds. Not that they are doing well either, but at least then I’m just riding the market, instead of hop scotching around it.

Part 2 coming up tomorrow…

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