You're young, and your two biggest goals in life are to build a career and have fun. That's fine, but if you forget about starting a nest egg, you could be setting yourself up for a very hard, stressful time down the road.
Right now, the last thing on your mind is retirement -- we get that. It'll happen eventually, though, and the money you put back in your youth has the longest time to be earning interest. Best of all, the interest you earn is money that you didn't have to work for -- who can beat that?
A little financial education and a few changes here and there will put you on the right track to be sipping mai tais on the beach during your golden years instead of struggling just to make ends meet.
The first step to a secure future is to beware of plastic -- read on to learn the truth about credit cards.
Avoid Credit Cards
It's a beautiful day, and you're walking across campus to your Econ 101 class when you see a group of people gathered on the quad. A smiling, young man sitting behind a table offers you a free T-shirt, and all you have to do is fill out an application for a credit card.
If you sign on the dotted line, you may wind up learning a long, painful economics lesson that the professor never mentioned in lectures. According to USA Today, the amount of revolving debt -- which includes credit card debt -- held by twenty-somethings went up 24 percent between 2001 and 2006. The same study also showed that more young people are making late payments on their credit cards, which makes the balances grow even faster.
If you want to save money instead of grow debt, forget the free T-shirt and keep on walking. You'll be glad you did.
You're not rolling in dough, so how do you come up with money to put in the bank? Next we'll look at trimming expenses.
One way to increase your saving ability is to make the money you earn work harder for you. First, start a notebook or online spreadsheet to keep track of your spending for a month. At the end of the month, do the math to see where your money is going. You might just be surprised. For example, buying lunch every day at work can easily add up to more than $100 a month.
Changing your shopping patterns can help, too. Frugal young professional Nikki Rogers told us she's found a way to save money on daily essentials. "I buy toilet paper, laundry soap, allergy pills, razors and other basics only when they are on sale and stock up -- that way I never need to buy a basic necessity at full price."
Rogers also found another painless way to increase her savings. Every time she gets a raise, instead of thinking of ways to spend the "extra" money, she continues to live off the smaller amount and puts the money from the raise into savings.
How can you save money when some expensive catastrophe always seems to land on you when you least expect it? Read on to learn about emergency funds.
Create an Emergency Fund
Life is full of surprises, both nice and not-so-nice. An unexpected illness or major car repair can cost big bucks, and when you buy your first home you face even more sudden, unexpected expenses. You could keep a credit card to use in a pinch, but an emergency fund is an even better idea.
One easy way to start one of these handy funds is to pick one source of money and put that cash into an "emergency" savings account. For example, Emily waited tables during college. She used the paper money from her tips to pay her expenses and put all of the change she made in tips in a coffee can. When the coins built up, she rolled them and deposited them in a savings account. She assigned the savings account as the backup to her checking account, so if she had an emergency expense, she could pay with her debit card. Not only did she avoid paying interest on expenses like car repairs, she earned interest on the savings account.
Can technology improve your financial willpower? Next we'll look at automatic deposit.
Use Automatic Deposit
Your computer is good for a lot more than just surfing the Web and keeping up with your social network -- it can also help you save money.
Most employers use direct deposit to pay their workers and will deposit the money into more than one bank account if you want them to. This makes it much easier to save. If the money is never in your hand, you're less likely to spend it. Decide how much you can spare from each paycheck -- most financial planners recommend at least 10 percent of your total income if you're in your 20s -- and have that amount automatically deposited into savings. You can also make technology work for you by taking advantage of online bill pay. Most banks offer this service free of charge. You can also get the online bill pay system to remind you when your bills are coming due, to avoid those massive late fees.
Read on to learn about tempering risk with age.
Temper Risk with Age
Car insurance companies charge young people extra because they have a reputation of taking more risks on the road, and therefore having more accidents. One part of your life where you can afford a little risk, though, is in your retirement savings.
If you're in your 20s, you probably have 40 years or more before you'll retire and start depending on your savings. This gives you a lot of time to ride out dips in the market and still come out on top. Many employers offer target-date funds, which allow you to pick the year when you think you'll retire. The investment manager invests your money in a way that takes some risk now and plays it safe as you get closer to retirement. Read the plan's prospectus to see if it's right for you, and consider hiring a certified financial planner (CFP) to advise you if you're not sure. Your friends might think you're taking things too seriously, but they won't be there to pay the mortgage when you retire.
Manage your money wisely, and you can make your 60s just as much fun as your 20s.
Student loans are great for tuition, but are they also good for buying a car? Find out if you can use student loans to buy a used car.
- Bankrate.com. "Age-Specific Investment Advice." (Jan. 20, 2011.)http://www.bankrate.com/finance/financial-literacy/age-specific-investment-advice-1.aspx
- Consumers Union. "Credit Card Tips for College Students." (Jan. 14, 2011.)http://www.westchestergov.com/pdfs/PARENTSKIDS_CreditCardTips.pdf
- Monster Money. "How Much Should You Save?" 2007. (Jan. 17, 2011.)http://resources.monster.com/money/money-saving-tips.asp
- Orman, Suze. "Emergency Planning Remains Job # 1." May 1, 2009. (Jan. 17, 2011.)http://www.suzeorman.com/igsbase/igstemplate.cfm?SRC=SP&SRCN=suzescoop&GnavID=1&SnavID=134&NewsID=183
- PBS. "Young People Taking on More Debt." May 25, 2005. (Jan. 14, 2011.)http://www.pbs.org/newshour/extra/features/jan-june05/debt_5-25.html
- Rogers, Nikki. Personal interview. Jan. 16, 2011.
- USA Today. "Young People Struggle to Deal with Kiss of Debt." Nov. 22, 2006. (Jan. 16, 2011.)http://www.usatoday.com/money/perfi/credit/2006-11-19-young-and-in-debt-cover_x.htm