Financial Planning Basics: for 20-Somethings
Some of you may not know this, but in addition to working as a full-time professor (and maintaining this blog), I am also a full-time student at the same college where I teach, working towards a Master's degree in Personal Financial Planning. Since my career path is taking me beyond the world of investments, and into broader financial planning, I thought I would create a new series of posts designed to help individuals in their own personal financial planning endeavors.
Many of our readers are currently in their 20s, and may not fully understand the importance of planning early for retirement and budgeting, especially since student loans are getting in the way. For these kids (I'm in my 30s now so y'all are kids to me), here are 10 tips that you can use to start your financial planning lives - and you can get more information on the planning process at Kiplinger. Good luck and enjoy!
1. Establish a Budget
Sounds like a no-brainer, but this step escapes a lot of young people: figure out how much money you have coming in, figure out where is needs to or can be spent, and always have some leftover. Easy. Not the case though. Making a budget is definitely something you can learn to do properly by reading GradMoney and our affiliate sites.
2. Discover Your Marketable Skills
For me, this definitely came in handy when I was struggling to pay my bills on a salary that was just no adequate to keep my head above water each month. I found that I could sing well enough that my church would pay me for each mass I cantored, and although I am not a trained artist, my paintings were able to bring in a few thousand dollars extra that helped me to pay my bills for a year. Figuring out marketable skills can not only help to supplement your income, but it can also serve as your primary source of income when you happen to find yourself in between jobs. Who knows? Maybe you'll make that your full-time job in the future!
3. Get Insurance
Most companies offer their employees some kind of life and disability insurance, and although you're young and healthy, you never know that you need insurance until you do. You may be young and single without any dependents now, but ensuring that your bills/student loans will get paid and your loves ones won't be stuck with that debt is important. Additionally, if you find yourself to be disabled, that is a LONG life that you'll have to go through with little-to-no income. Do you rent an apartment? Having renters insurance will make sure you can replace anything that is lost or stolen. Auto insurance is the law in most states, but make sure you understand what kind of coverage you have. Educate yourself on various types of insurance, and in your 20s you should buy only what you need. Generally whole life policies have cheaper premiums for those who are young and healthy.
4. Create a Debt-Repayment Plan
Accruing a ton of debt, mostly student loans, and having no way to pay it back is never a good idea. Banks view you as a student, similar to a small business. And YOU are the business. If you don't give a return on your investment, you're going to run into issues. No matter how huge the student loan bill, find a way to get it paid in a reasonable amount of time. Hustle, work your butt off and make sure that the plan is kept.
5. Build an Emergency Fund
In the event that you lose your job or something happens where you can't work or find new employment right away, you need to have an emergency fund. You are young now, but this will be extremely important down the line when you are married or have kids. Plan to save about 3-6 months worth of your current income so that you can still live comfortably and get your bills paid. But also note that a traditional emergency fund is not the best idea: if you want to learn why, revisit my article on the matter by CLICKING HERE.
6. Save for Retirement
Duh. I can't emphasize how important this is given that Social Security needs to be reformed or it won't be sustainable for the future. We offer plenty of tips here, but the biggest piece of advice I can give is to make sure that you open a Roth IRA, and take the maximum annual contribution, divide it by 12 months, and then contribute that amount every month. Make sure the month in the Roth IRA is invested in something long-term -- either mutual funds or ETFs so you know that the money is growing over the long-term. If your company offers a 401(k) plan and matches your contributions, do that TOO. Make sure you are saving on multiple fronts.
7. Build Good Credit History
Young people may find that their credit limits on their first credit cards are not that high simply because their credit history is so short. There isn't anything you can do about the time component of credit right now, but you can develop good credit habits now that will help for the future. Pay your bills on time, don't be late, be careful of your credit usage %, don't open too many credit cards, etc. Having good credit versus bad credit can mean the difference of thousands of dollars extra in interest when paying for a house or car. Keep it clean!
8. Stop Relying on Mom and Dad
Well, some of you may be thinking that this makes perfect sense, but just know that taking care of your own finances early will help you to develop much better personal finance skills in the future. So do them a favor and cut the cord already.
9. Clean up your online presence
How can this help you finances? Well, it isn't scientific, but getting loans from banks or getting employed at a competitive, high-paying job can be made a little more difficult if your Facebook feed is nothing but pictures of you getting drunk and attending parties won't gain you many real-life "likes" from adults. Clean up your act...not just in pictures, but also for real.
10. Collect and keep key documents in a safe place
Your birth certificate, Passport, Social Security card, etc. -- all need to be kept in a safe place. Make sure to keep copies of all your tax returns (except if you're the US President) because you never know when you'll need to present these documents for a loan.