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Creating your financial foundation while you are still young

By Lauren Elkins

For the Deseret News

Published: Wednesday, June 18 2014 12:00 a.m. MDT

Some things I’ve learned the hard way, some I learned by doing it right, and some things I wish I would have done before I eased into my 30s. This article will focus on 7 areas to set up your financial foundation while you're still in your 20s.

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Some things I’ve learned the hard way, some I learned by doing it right and some things I wish I would have done before I eased into my 30s. The following are excellent pointers for setting yourself up for financial success while you’re still living in your 20s:

Credit cards

When I started college, the junk mail started rolling in from the credit card companies. Everybody had an offer for me with varying ranges of APRs, fees or no fees, reward programs and personalized with your picture. There are no roadblocks to creating debt. You have to set them up yourself.

It’s tempting to put a backpacking trip through Europe or a Mexican vacation on a credit card, or to buy furniture and electronics for your first apartment on a store card. These quickly turn into haunting debts, especially when you only touch the minimum payments and let the interest pile on.

Instead, try to set up a spending plan, based on your actual income, as suggested on the Daily Worth: “Get used to saving for the things you want with the money you earn and avoid using credit cards except to build credit—and only if you can pay the balance off within the month.”

At first, I learned this the hard way and carried a balance on my credit card, but thankfully, it was only one card and I focused on paying that down when I had steadier employment. Then I learned to set money aside for that Mexican Riviera cruise I wanted to take. The funny thing? When it was time to buy the cruise, I had a hard time parting with the money and therefore forced myself to stay within a tight budget for the vacation.

Student loans

Be smart about your education.

Do you really need to double major (or to add that certain minor)?

Can you satisfy your generals by attending a community college?

Can you get a job with the school and get a tuition reduction?

Have you applied for scholarships?

Make a student loan your last option, and make a student loan from a private institution your very last option because they are harder to pay back as they offer less flexibility.

If you don’t have the ability to get through school without taking out loans, following this advice from Forbes:

Avoid taking on deb that exceeds your expected first year's salary. (If you're going to be a school teacher in Utah, don't take out loans great than $30,000.)

When you have to borrow, go with federal loans before private loans. (Federal loans are fixed, private loans are variable which means next month they could jump the interest rate; federal loans offer deferment if you go back to school, are unemployed, or serve in the military, but private loans do not.)

If you decide you have to take out private loans, do so only after you have maximized your federal loans.

If you attend school on student loans, live as cheaply as possible.

Don't forget the various education tax benefits: American Opportunity Tax Credit, Lifetime Learning Tax Redit, Tuition and Fees Deduction.

The cost of university-level education in the United States has risen 1,120 percent since 1978, according to Blooomberg. This has created the student loan crisis in which the average 2014 college graduate owes $33,000, the Wall Street Journal indicates. Compare that to the 1993 graduating class that took out, on average, $10,000 in loans. Americans today owe $1.1 trillion in student loan debt, according to CNN.

Through scholarships, a year at community college, working through much of school, help from family (and a little on the credit card at the end), I was able to graduate with a bachelor's of arts from a university without a single student loan. When I went on to graduate school, I then paid for all of my tuition costs by working full time and receiving tuition reimbursement from my employer.

Retirement

You may be paying off those student loans and your credit card debt, so what about your retirement? When you’re just starting your career, the thought of retiring — decades away — is the last thing on your mind on payday. But the difference starting now can make is astounding. An article on CNBC explains the numbers.

“A 25-year-old, for example, who makes $40,000 and contributes 10 percent of his salary to a 401(k) plan annually will amass $3.9 million by the time he retires at age 67. That figure assumes a 50 percent employer contribution match, a 5 percent estimated salary increase rate annually and an 8 percent investment rate of return.”

And with the same situation, but starting at the age of 30, that person would save $2.5 million. That’s a difference of $1.4 million. Take that to your grave.

I made my first contribution to my retirement account when I was 25. I feel pretty good about my future.

Emergency fund

Similar to saving for retirement, it’s hard to set aside money for savings when you’re paying off debts or staying on top of your bills. If you have unexpected expenses (car repairs, medical bills, unemployment), an emergency fund will help you get through the financial trauma without forcing yourself into more debt. Your goal should be to eventually save three to six months of expenses, but start with a reasonable goal of $1,000 or $2,000.

Pay yourself first, even if you’re just setting up an automatic deposit from your checking to a savings account of $20. If you don’t pay that first, you’ll spend the money without realizing it.

When I started earning a decent income, I was able to set up an automatic payment to my money market fund. Eventually, because of the habit, over years of continued deposits, the emergency fund expanded into a fund for a down payment on a condo. It was a nice bonus for sacrificing that extra spending money.

Charity

Making donations to charity a financial habit will also help set you up with a strong, economic foundation. Harvard Business School published an article about a study on charitable giving, “Feeling Good about Giving: The Benefits (and Costs) of Self-Interested Charitable Behavior." The study concluded the following information:

Happier people give more and giving makes people happier, such that happiness and giving may operate in a positive feedback loop (with happier people giving more, getting happier, and giving even more).

Other benefits of donating to charity include:

Charitable donations are tax deductible

When charitable given is driven by religious conviction, it will strengthen your spiritual life

Giving makes donors happier, improves their self-esteem and helps them feel more connected to the rest of the world

One of the jobs I had while I was in college was working for United Way of Salt Lake during its fundraising season. I saw first hand the good work it did and was constantly impressed by the number of charitable people I met. Sometimes, it was a blue-collar, hourly employee who contributed $1,000 in a year through payroll deductions. My faith in humanity that year was exceptionally high.

Investing

All of these financial goals may seem overwhelming so starting to invest may not be realistic while you’re still getting a career started, but now is a great time to learn. Start by learning some tips from a true expert, Warren Buffet:

Investing should be simple and steady. Begin with index funds that support your financial goals

Keep your focus at a high level, the big picture and not the day-to-day ups and downs of the market

With the interest rates as low as they are today, this also affects the return you may receive on your savings account. It won’t be able to keep up with rising inflation so it may be worth it to take the risk of investing so that your money can at least keep up, and perhaps, even grow faster.

While I did invest in my retirement account, I didn’t start investing in index funds and individual stocks until my 30s, but I spent time learning by asking the experts, reading online and reading financial books. Since my first stock purchase, it’s been exciting and terrifying to check my investments and thankfully, watch them grow.

Setting goals

Know what your financial goals are. Experts suggest assigning them into three categories: needs, wants and dreams.

Needs: These are non-negotiable costs: rent or mortgage, utilities, building your emergency fund, paying off student loans, paying off credit cards and saving for retirement. If you’re planning for or have started a family, you may also include insurance (health, home, life and auto), and saving for children’s educations.

Wants: These are important, but they don’t have a due date: vacation, a nice car, buying a home, or remodeling the kitchen.

Dreams: These are further out in time: early retirement, a cabin, a boat, or an elaborate vacation.

Understanding your financial goals will help you put together a picture of your financial life and set up a plan to meet your goals. If you don’t have that plan, you won’t know the correct steps to take, you won’t see whether you’re moving towards or away from it, and you won’t be successful.

Then, once you have the plan set up, the hard part really starts: sticking to it.

Lauren writes randomly on her blog, tweets periodically about who knows what, and spends her regular days conversing with computer programmers. By the time she gets home at night, she is mighty happy to see her husband and son.

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