AN EASY FINANCE GUIDE FOR 20 SOMETHINGS
A huge part of being a responsible adult is managing your finances. The problem is, the world of finance can seem overwhelming and full of secrets, and depending on how you were raised or what you studied in college, it can be pretty intimidating. That’s why I decided to write this post about the easiest habits to get in to for young people.
While I think I have a decent grasp, I know that I’m not an expert on financial matters. So, I recruited some help from an actual expert.
This is a bit of a dense post, but there’s SO MUCH good stuff in here, I’d encourage you to read it all!
Tim Higgins is a certified financial planner professional and chartered financial consultant at Flagship Harbor Advisors. He graduated from Wesleyan University with a degree in economics and has written two financial books since. In addition, he has appeared on MSNMoney, CNNMoney, in the Wall Street Journal, Money Magazine, Smart Money Magazine, and was named a five star wealth manager in Boston. (sheesh)
I asked Tim a few questions about developing good financial habits in your 20s, managing debt, and making luxury purchases. Whether you’re in your 20s or not, it’s always good to know more about best practices, and right now is still better than later!
The first thing we talked about was long term savings (aka retirement). It is never too early to start!!! When it comes to long term savings, the only thing that you can never get back is time. Starting to save early, or right out of college, could end up making six figure differences.
According to Tim, the first really important thing (but not the #1 thing!) you can do is to set up monthly automatic contributions to your dedicated (savings or investment) accounts. If the money you’re contributing gets automatically moved out of your account as soon as you have it, it’s, “out of sight out of mind,” said Tim.
“Everyone adjusts their lifestyles to what’s left over, so save first.”
Tim added that saving regularly, through a system like automatic deposits, provides the benefit of dollar cost averaging and takes the pressure off of investing. This is because if you save on a regular basis, and the same amount of money is going in all the time, if the market dips you end up buying more shares. This helps ensure you buy when they market is low, and is more efficient.
What might be the #1 thing you can do, according to Tim, is take advantage of your employers’ matching retirement plan, if it’s offered.
“If your employer is going to contribute 3% if you contribute 3% that equates to a 100% return on your savings,” said Tim. “It’s instantly doubled, you don’t get that anywhere! In addition, there are tax benefits when you contribute to a work based retirement plan.”
After 401K or work based retirement savings, it’s good to consider a Roth IRA. You can contribute up to $5,500 per year into a Roth IRA, and if that money is used for retirement, the account will be tax free. Plus, a Roth IRA can mean some liquidity for first time home buyers, or can be used for future college expenses.
As far as the difference between investing long term savings for retirement, and short term savings, Tim advises to “overall, be more aggressive with longer term money and more conservative with short term money. If you are going to need the money in less than 5 years, don't take a lot of risk.”
In the same vein, Tim suggests compartmentalize your accounts to reflect your goals. Essentially, Your retirement money, your everyday money, and your savings for a new car should not be in the same account.
Speaking of cars, they’re depreciating assets. That means as soon as you drive a car off the lot, its value decreases, and will continue to decrease until you get rid of it. Therefore, don’t buy a car you don’t need, or a more expensive car than you can afford.
If you do have car debt, Tim suggests setting up payments directly from your checking account, automating the process.
Car debt isn’t the only kind of debt you might find yourself in, and other kinds can be much more tempting.
“Don't rack up credit card debt!” said Tim. “Investors are happy to make 4-8% on the positive side. -10 to -18% working against you on the negative side is the worst investment. Pay off credit cards on a monthly basis.”
When it comes to student loans, Tim suggests only paying off student loans faster than required (aka overpaying) after having contributed to your work based retirement plan to the match, and funding your other accounts like an IRA.
If you have student loans and you are saving up to the match in your company’s work plan and contributing to an IRA, then overpaying is a good approach, but only then.
Again, the key is saving first.
Finally, I asked Tim about making luxury purchases, and the best way to do that. He told me that If there’s something that you really want that’s out of your everyday budget, “compartmentalize an account (keep it separate) and know that you won't touch it for any reason other than the luxury purchase you are working towards.”
I’ll give you an elementary example here. My junior year of college I bought a pair of black Christian Louboutin pumps I had been eyeing for years. I started saving for those shoes about 4 years earlier, because I told myself that I was only going to buy them with “extra” money that wasn’t accounted for before I had it (for example, babysitting cash or cash tips I got at work, not my paycheck).
While it seems a little silly, that was the way I knew I could make it happen as a 17 to 21 year old, and it helped me form a really good habit. Plus, it felt so good to buy something I knew I had spent a long time saving for.
Personal finance is such an important skill that I think a lot of people are intimidated by. At the end of the day, what it comes down to is forming good habits and making savings a priority.
Thanks again to Tim Higgins for helping me out with this! He is a truly excellent resource and was kind enough to share his expertise.
I hope you found this helpful! If anyone has any other questions feel free to reach out! I will do my best to answer them, or consult someone who can!