Financial planning in your 20’s

by Emily on November 22, 2011

Many 20 somethings are just starting out with jobs post college or graduate programs. Given the current economy a lot of those in that age bracket are facing low incomes and high debts. Although this does not seem like an ideal situation, there is a silver lining: Time. If you decide at an early age to organize your finances you can be years ahead of your friends and co workers your age when it comes to achieving financial independence.

For example, if you were able to put $4,000 a year into a retirement account starting at age 22 with an average annual return of 8% then you would have $1 million in your retirement account by age 62. If you waited until you were 32 to start putting this money into a retirement account you would have to contribute $8,800.00 a year to have $1 million by age 62. Or if you contributed the same amount $4,000.00 starting at age 32, you would not reach your goal until age 72. Although, this is just an example and may seem like a lot of money to contribute to a retirement fund at an early age, the sooner you start investing and planning your financial goals, the sooner you can achieve them. You should set your own personal finance goals and contribute an amount that is personally appropriate for you to achieve them- however big or small the amount is yearly, by starting to plan for retirement early will pay off in the long run.

When thinking about your financial plan for your 20’s you should consider your lifestyle. Getting that first big pay check after college or graduate school you may think that your money will go further than it will. Many people in their 20’s get those checks and go spend crazy. They get a new car, new expensive clothes, electronics, dine out too frequently and pay high rents. You are an adult and you feel you should be living that lifestyle, but can you really afford it?  One tip on choosing an apartment to rent is that your monthly rent for your apartment should be less than 1 weeks pay of your salary.  This will ensure that you are not living in a place that is beyond your means. If your apartment costs 2 weeks worth of your monthly salary, then you are spending half a months pay on rent alone and leaving little room for other expenses and little room in case an emergency situation occurs like your car breaking down and you incur expenses you did not plan for. You don’t have to still live like a broke college student eating ramen noodles and easy mac, but you should still try to live cheaply for as long as you can. You can upgrade from your college apartment, but don’t go to the extreme. Use coupons, dine out less frequently, choose a gym or fitness classes that are reasonably priced and most importantly live within your means.

Whether or not your job provides health benefits you need to get health insurance. Many 20 somethings are able to be on their parents insurance, or are going through a transitional stage where they just left school and no longer have insurance. You need to buy an individual policy, this is an area where you cannot cut out the expense completely. You need to get an individual policy so that a single accident will not put you into medical debt. Most 20 somethings have no real idea how much health care providers charge for each visit without insurance, and you need to realize that you could be paying for a slip and fall where you broke your arm for years to come without insurance. If you choose a plan with a high deductible, this can help you keep your monthly premium cost low and offers you protection for major medical bills. If you choose a plan with a lower deductible, your monthly premium will be higher. Make sure you research your plan and know what doctors you can visit, and what your plan covers. There are many options when it comes to choosing private individual health insurance and ask the company lots of questions and do your homework regarding the policy you are choosing in order to get the health coverage you need.

If you work for an employer that offers a 401k plan or another type of retirement plan, be sure you sign up for the plan and contribute to it. If your employer does not offer these benefits to you make sure you set up your own individual retirement account. You can set up either a traditional or Roth IRA, individual retirement account. By contributing as much as you can now, it will pay off when you are older. Contributing now can lead to an earlier retirement. You can also be aggressive when it comes to your retirement portfolio. You can invest more of your retirement accounts funds into stocks and mutual funds because you have  long time to let your account grow with the volatile ups and downs of the stock market. As you get older, you may be more conservative with your investments, but for now you have time to be aggressive and take advantage of swings in the stock market. Of course when it comes to your investments, you need to make sure you are paying off your obligations as well. If you have student loans, you can follow our advice by referring to the Pay as you Earn article on our website.

Even with this new paycheck, living expenses, and retirement planning, you need to make sure you are saving money each month.  Set up a savings account and set aside money from your paycheck each month. This can be an emergency fund in case your car breaks down, or your roommate bails on you and you are stuck paying a higher portion of the rent. Things happen all the time in life that we cannot plan for, but they do not have to put you in debt. Make sure you are putting away money each month and not spending everything you earn.

Graduating from college or graduate school and landing that first job is an exciting time in your life when you are a 20 something. With this new found freedom from school and full time work, you need to make sure you are being financially responsible and planning for your future. By planning now and taking some risks with your investments, you can be financially secure at an earlier age and maybe even afford all those luxuries you dream of.

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  • This is interesting and good article. I myself am in my twenties and in college.
    I started a 401k a few years back but haven’t been at a job since to where I can contribute to this account. I was stoked on getting it started and its just been sitting there.
    I don’t think we are taught much about saving for retirement or anything. We are such a consumer driven society people don’t know what ‘saving’ is. I personally have hardly anything in my savings account, but this is soon to change soon.

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