Top 5 Financial Moves in Your 20s and 30s

The key to financial success in your 20s and 30s is having the discipline to establish good financial habits, even before they seem absolutely necessary, and to avoid the trap of trying to “keep up with the Joneses” as you are just beginning to navigate the world of money management and make some major purchases on your own dime (a task which can be especially challenging in high cost areas, such as the DC metro area, where luxury cars and homes are abundant!).

#1 Establish an Emergency Fund.  While this may not seem essential for recent college grads still living at home, eating their parents’ food, and managing to skate by unnoticed on their parents’ cell phone plan, with each step of independence, the necessity of the emergency fund grows. After moving out, how will you pay rent if you lose your job? Or, after buying a home, how will you pay for your mortgage or unexpected home repairs? After starting a family, how will you provide food or healthcare for your spouse or young children if you experience an interruption in work? Starting to save toward an emergency fund, even before you desperately need one, could save a lot of money, stress, and heartache later on and help to establish a very good financial habit.

#2 Save for Retirement.  While saving for retirement when retirement may be 40+ years away clearly requires discipline, doing so will (literally and figuratively) pay dividends for the rest of your life. As we have discussed in prior posts, the earlier you begin saving for retirement, the less you need to save (as a percentage of income) throughout your working career to have a sufficient nest egg on which to live in retirement. Save at least 10% out of your paycheck from Day 1, and enjoy watching the benefits of compounding for years thereafter.

#3 Get Out of Debt (and Stay Out).  While it is very common in this phase of life to be saddled with school loans or credit card debt from college or graduate school, your ability to aggressively pay down this debt and remain debt-free (or at least free of bad debt) will significantly impact your financial success going forward. Try to balance goals #1 and #2 with dedicating extra cash flow to paying off debts. The relative weight that you give to tackling debts versus emergency fund and retirement savings should depend, among other factors, on the interest rate of your loans (e.g. paying off high-interest credit card debt should take high priority, whereas paying off lower-interest student loans could be done gradually while concurrently saving for emergencies and retirement). One method of how to tackle your debts is discussed in “Dealing with That Four Letter Word: DEBT.”

#4 Make Modest Choices on Big Ticket Items.  Your 20s and 30s may witness many “firsts” in terms of major expenditures–first car, first house, first vacation as an adult, first home furnishings, etc. As you wade into these untested waters, do yourself a favor and make modest choices, regardless of what salespeople, lenders, or even friends, say you can afford. Decisions about big ticket items significantly impact the amount of strain or flexibility in your monthly budget, and once committed to, are often difficult and costly to change. A mortgage lender, for instance, may say that you can afford mortgage payments for a first home equal to 28% of your gross income, but if that is a huge jump from your current rent payments and money is already tight, then you know better. Or, you may choose to keep payments at a comfortable level to enable flexibility in your job situation down the road (e.g. to switch to a lower paying job/career, to allow one spouse to stop working or to work part-time, etc.). Don’t expect to buy your dream car or home right off the bat. Start modestly, and give yourself something to look forward to in the future.

#5 Establish Good Habits on Small Ticket Items, Including Insurance. Renee often tells the story of having lunch with a friend after just a year of working in the “real world.”  She was enjoying a lunch at Baja Fresh, as opposed to her usual packed sandwich, while listening to her friend bemoan her tight budget. Comparing notes, they realized that their income, rent, and other major expenses were all very similar, but the friend ate lunch out (and often dinner too) almost every day at an average of $10/day while Renee ate $3 lunches from home. On their small salaries, that expense made a huge difference! If you are earning a PBJ salary, don’t buy the Ultimo Burrito every day. Again, make modest choices and establish good habits of living within your means early on, and look forward to greater flexibility when your salary grows in the future. Be sure not to cut corners though on prudent expenses, such as insurance. While 20- and 30-somethings are known for believing they are invincible, that belief could carry a significant cost if you are faced with, e.g., a serious illness without health insurance, a car accident without auto insurance, or, in the worst case, a significant injury or untimely death without disability or life insurance to protect your family.

Just remember, patience is a virtue that pays dividends as you get older.