STARTING OUT


10 Financial Commandments for Your 20s

Stacy Rapacon

Tend to these tasks now to achieve your financial independence later.



Thou shalt not be financially lost forever. It just may feel that way when you're in young adulthood. Managing your finances for the first time can be overwhelming—what with the daily expenses, big-ticket costs such as housing and health care, heavy debts and long-term goals, including your ridiculously distant retirement.

See Also: 10 Financial Commandments for Your 30s

The sooner you start making a financial plan for yourself, the brighter your future will be. "Building habits, especially in your twenties, is so important for long-term success," says John Deyeso, a financial planner in New York City, who works with a lot of younger people (and is 37 years old himself).

Here are the ten things you should do in your twenties to take control of your finances:

1. Develop a marketable skill.

Before you can start worrying about what to do with your money, you need to earn some.

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Think in terms of your career, not just a job. Because let's face it: You're probably not going to love your first job, and it won't be your last job. But you should try to make the best of it. My first job consisted mostly of fetching documents for colleagues and doing data entry. Ho-hum. But I learned all I could. Sure, sometimes the lesson of the day was: "I never want to do this again." But I also learned basic skills, such as the magic of Excel as well as proper office phone and e-mail etiquette, which are still extremely useful in my career.

Most importantly, I established a valuable skill (writing) and looked for and created opportunities to use it. I talked to my bosses about my writing, and they affirmed that I had a future in it. I wound up penning our press releases, editing an online column and writing anything that needed writing at our small company. Outside the office, I blogged and took on various freelance assignments—some for no money—to practice my craft and build my network.

Don't be afraid to experiment. "You may need to take risks when you're younger," says Erin Baehr, a financial planner in Stroudsburg, Pa., and author of Growing Up and Saving Up. "You may take one job over another and find it doesn't work out. But when you're younger, you have the ability to do that. And then that can parlay into a bigger return down the road."

2. Establish a budget.

Once you're bringing home the bacon, you'll have to figure out how to slice it up. Without a budget, you risk overspending on discretionary items and undersaving for important big-ticket purchases.

"The big thing is really to differentiate between your needs, your wants and your dreams," says Lauren Locker, a financial planner in Little Falls, N.J., who also teaches a personal finance course to undergraduate students at William Paterson University. First, lay out all your daily expenses (such as commuting costs and food bills) and recurring monthly payments (rent, utilities, debts). When you know where all your money is going, you can more easily see how to cut costs. For example, when I first made a budget, I was stunned to learn how much I was spending on take-out food. Being aware of the cost allowed me to trim it by ordering less food, less often. (See Money-Smart Ways to Eat Healthy for more.)

Next, factor in your short- and long-term savings goals, such as an emergency fund (see commandment #5) and retirement kitty (commandment #6). And if you ever expect to settle down and buy a house, you should probably start saving for the down payment as soon as possible.

A budgeting site such as Mint.com can be a big help if you want to digitize your budget. For more on how such sites work, see The Best Online Money-Management Tools.

3. Get insured.

Mayhem truly is everywhere (as Allstate has dramatized), and as an adult, you are responsible for protecting yourself and all your stuff from it. When horrible things happen to you—say, a trip to the emergency room or a fire in your apartment—insurance may save you from shelling out thousands of dollars all at once. For more on health care, see Obamacare for Twenty- and Thirtysomethings. If you rent your home, see Why Renters Need Insurance. And if you have a car, see our Smart Shopper's Guide to Auto Insurance.

4. Make a debt-repayment plan.

Debt is a reality for most young adults. But letting it linger—or, worse, grow—can set you back for years to come in the form of greater interest payments and lower credit scores.

For your student loans, be sure you have a good repayment plan in place—see Strategies for Repaying Student Loans—and consider some programs that can help reduce the burden, such as the Peace Corps or Americorps. A much easier way to trim this cost is to set up automatic payments for your federal student loans; doing so cuts 0.25% off your interest rate.

Work out a plan to tackle your credit card debt, too. Hopefully, being so young, you haven't had time to bury yourself in much. But if you've been quick on the swipe, your first step is to establish a budget (see commandment #2) and rein in your spending. You should then start paying down debt on your highest-rate cards first.

5. Build an emergency fund.

Insurance alone (see commandment #3) won't cover all of your problems. You still need to have liquid savings on hand as an added precaution.

Some call it a rainy day fund. I think of mine as a polar vortex fund. This past frigid winter, my house's heat pump gave up. A new HVAC unit cost me and my husband about $4,000. Home insurance was no help, but our emergency fund saved us from going into debt to cover the replacement or (ack!) asking our parents for the money.

Kiplinger's recommends stashing enough to pay three to six months' worth of expenses in a safe and easy-to-access savings account. Contributing to your fund should be a top priority in your budget. Aim to sock away at least 10% of each paycheck until you reach your goal, and add a boost any time you luck into some extra income, such as a bonus or birthday gift. To help speed up the process, see 7 Strategies to Build an Emergency Fund.



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