Last week I hit a milestone in my life – I turned 30! I thought that this would be a good opportunity to look back on the last decade and recall some of the lessons that I’ve learned concerning my finances. Regardless of your age, I hope you find value in these ideas. Because the list was rather long, I decided to share 10 tips today and 10 more in my next post. Enjoy!
1. Live Like You’re Still in College
After graduating from college and getting a first job, there is a temptation to want to buy fancy things and spend all the money that you make. Don’t do it! If you continue to spend your money like you did when you were in college, while making a decent paycheck, you can begin to build a solid financial base. A number of the other tips I’ll share come out of this mindset.
2. Live with Roommates
By living with other people, you can easily cut your rent in half or more. Plus it’s more fun! My first year out of college I lived with three friends in a very nice apartment, in an awesome location for less than $375 per month. If I’d tried to live in the same apartment complex by myself, I’d have paid more than $1,000 per month.
3. Don’t Buy a New Car and Pay Cash if you Can
New cars can be nice because they sparkle and are reliable; however, what’s not nice about them is that their value declines significantly the second that you drive them off the lot. Additionally, it’s probably safe to assume that if you are buying a new car in your 20s you are taking on a car loan. I’ve decided to only pay cash for my vehicles up to this point, because I don’t like the idea of making monthly payments for something that is declining in value each year.
4. Bring your Own Lunch to Work
Packing your own lunch not only saves you money, but it is probably healthier as well. Generally the meals that I pack for lunch cost me about $2. If I were to go out I might spend $7 per day or a difference of $5. Assuming 240 working days in a year, I may have saved about $1,200 per year by brown bagging!
5. Take Time to Understand Employee Benefits
When starting a job that offers benefits, there may be many decisions to make. Take the time to understand your options when it comes to insurance, retirement savings, vacation, and other services that may be available. Each company that I’ve worked for has had very different benefits packages and it was valuable for me to understand. If you don’t understand something, talk to HR or someone else who does.
6. Protect Against the Unexpected
The most basic way to protect against the unexpected, is to have an emergency fund in place. This way you can cover unexpected car repairs or other surprises without using debt. It is also important to have auto, homeowners, renters, umbrella, health, life, disability, and long-term care insurance that fits your situation. Before my wife and I had our first child we significantly increased our life insurance because our situation was changing.
7. Open an HSA Account
A Health Savings Account or HSA is especially helpful for those who are healthy and don’t tend to go to the doctor much. An HSA can only be opened and contributed to if you have a High Deductible Health Plan. Any money that you put into an HSA is tax deductible, grows tax-free, and can be withdrawn tax free if used for qualified medical expenses. I used money that my employer contributed to my HSA to pay for Lasik Eye Surgery.
8. Start to Save for Retirement
Money that is saved for retirement in one’s 20’s can grow significantly prior to retirement because of the time value of money. Assuming an 8% growth rate, if someone were to save $300 into an account each month from their age 22-30 and then never save into the account again, their total savings of $28,800 would have grown to $593,788 by their age 65. Conversely, if a person waited until age 35 to start saving and saved $300 each month until their age 65, their total savings of $108,000 would be worth only $447,108. The moral of the story: start saving for retirement now!
9. Pay Down Debt
The most common kind of debt that people in their 20’s have is student loans but you also may have credit card debt, an auto loan, or a home loan. Come up with a plan for how you will pay of your debt. I choose to aggressively pay down my student loans with an interest rate above 5% in my 20’s. Paying down a loan with a 10% interest rate is equivalent to a guaranteed 10% rate of return on an investment. Make paying off any high interest rate loans a priority!
10. Understand your Accounts and Fees
Make sure to understand all of the fees on your checking and savings, investment, and insurance accounts. Some banks today may charge $4-5 per month if your balance is below a certain figure, while paying 0% interest. If this is the case, make sure to keep your balance above the minimum requirement or move your money to a bank that doesn’t charge these fees.