Pimp Your Finances

If you haven’t checked it out, Kiplinger has a great section for young adults called “Starting Out”.  They recently featured a list of 10 Financial Commandments for Your 20s.

Being 27 years old, I have experience in this area.  I want to share their list, and also some insights about how well I’ve followed their instructions.

1. Plan Ahead

You need to have plans and goals that account for the short term (less than 5 years), medium term (5-10 years), and long term (20+ years).

I didn’t do this, but wish I would have.  I have goals now, but that’s after I’ve bought a car and house – the two biggest financial decisions I’ve made.  I would’ve saved a lot of money by planning for them more than a few months in advance. 

If I had a bigger down payment for my house, I could have gotten a better rate on the mortgage.  Even a down payment of $10,450 would have saved me close to $60 a month, and more than $22,000 in interest over the course of my mortgage.

2. Live within your means

Another one I ignored at my own expense.  When I first got a job, I actually increased my credit card debt.  Not an uncommon story, but its an expensive one.

The best time to get ahead is our early years…you don’t want to be burdened with debt from the beginning.

3. Make Savings a Habit

A swing and a miss!  My money goes to pay off debt now, so I still don’t have any savings to speak of.  But what I should have done – even before my first paycheck – is set up an automatic deposit from my paycheck that goes right into a high-yield savings account.  I never would’ve missed the money, and I would’ve gotten used to living off of 10% less than I was earning.

4. Pay off your credit cards

Credit cards are expensive.  I did a great job of paying off my credit card debt after I got a job.  Then I wracked up more debt because I didn’t have savings.  Granted its on 0% interest cards, and I should be able to pay it back before the rate expires, but still…its a bad feeling to have credit card debt.  The sooner you pay it off, the better you (and your bank account) will feel.

5. Start investing

The beauty of investing is compound interest.  It has a greater effect if you start early.

The article gives an example of a 25 year old who invests $200 a month, and earns an 8% return on it.  By the time he turns 65, he’ll have $703,000 in his account.  However, if he waited to start until he was thirty, he’d have only $462,000.  By starting 5 years earlier, he makes $241,000 more off of only $12,000.

This is one of the few things I’m doing.  I’m contributing a decent amount to retirement, but it could be more.  I plan on opening a Roth IRA on top of the money I’m already investing in my 401K.

6. Establish Credit

This is something that should be done in your teens if possible (and if done responsibly).

Length of credit is a big part of your credit score, and its the only thing you can’t do anything to change.  By getting a credit card ASAP – and paying it off each month – you build credit, and your credit score will be in a much better place when you start applying for car loans or mortgages.

I got a credit card soon after I started college, which helped me build great credit.  Unfortunately I also used the card irresponsibly.

7. Have a marketable skill

Before you start working, you should think about where you want your career to be in 10-20 years.  Everything you do in your 20s should be building the skill set you need to achieve your goals.

It’s never too early to start specializing or networking.  If you know what you want to do for a living, start working towards that in college by building real-life, applicable experience.  It will give you an edge over other entry level employees.

This is another commandment I’m following, but I could be specializing better.  I feel like I have a good skill set, but its too broad and not deep enough in any one area.

8. Cut the financial umbilical cord

If you want to be treated like an adult, you have to act like one.  You need to balance your own checkbook, do your taxes, and manage your investments.

You have to take responsibility for your finances as early as possible.  No one else will care about your money as much as you do.

9. Marry Wisely

Although it sounds vulgar to think about marriage and money in the same sentence, money causes more divorces than anything else.  Before you get married, make sure that you talk about finances and share a similar mindset, including goals and priorities.  If you don’t, make sure you take the time to work out your differences, because it could blow up later.

10. Have some fun

This is the only thing on the list I’ve really done well.  It’s important to have fun, and it’s important to be responsible.  The trick is to keep it balanced.

I thought this was a great list.  The unfortunate thing is that many people – myself included – learn by doing the wrong things when it comes to money.  I wish that more parents, colleges, and even entry level employers would make a point to discuss finances.  It would put countless people in a better position on the road to wealth.

If you liked this, make sure to check out some of my other posts like 12 Easy Ways to Sabotage Your Finances in College or Twenty Reasons You’re Not Rich.