20 Somethings Financial Benchmark
Your financial habits in your 20s set the tone for your financial health throughout your lifetime. I know a lot of 20 somethings look at their friends as a benchmark for rather or not they are on track financially. They think if they are doing at least as well as them then they are okay. The truth is that it depends on what kind of friends you have rather they should use them as your benchmark or not. (Please see my All Star Team blog for more information on your friends.) After reading this blog you should have a clear understanding of what you should accomplish before you leave your 20s. If you are able to do all of these things before your 30th birthday, you have laid the foundation for a successful financial future.
Make and Stick to a Budget
You need a written plan for how all your money will be spent before it even hits your bank account. Living on a budget takes the mystery out of your finances. If you are married do the budget with your spouse. If you are single and are not good with managing your money, you should get an accountability partner. This partner should be someone who has good money management skills or actively developing good money management skills. If you are good with managing your money then you do not need an accountability partner. (Please see my Financial Plan aka Budget blog for more details.)
Pay of Debt
If you had student loans, balances on your credit cards or any other kind of debt you need to make sure you don’t carry this into 30s. So many people make what I call the “minimum mistake” which is only paying the minimums on their debt. This causes you to pay thousands in interest and carry the debt into your 30s, 40s and sometimes 50s. This is setting yourself up for financial failure because you will end up sending money that you should be saving and investing in yourself to bank in interest payments. It’s best if you eliminated any debt ASAP so that you will learn how to live without debt early.
Don’t make the mistake of thinking that you have a lifetime to save for retirement so you blow all your money instead of saving and investing. Since you most likely do not have a lot of financial responsibilities (i.e. family expenses) you should use this time to save as much as possible. You should be maxing out your employer’s retirement accounts at work (up to the match) and building up to the maximum contribution in a Roth IRA (if you cannot afford to fully max it out from the beginning). The key is setting up your life (from the beginning) to live without the money you will need to invest for retirement. It’s easier this way than trying to readjust later in life. In addition, the earlier you start saving the more money you will have at retirement because of compounding interest.
Develop your Passion
You may have a job now that you don’t necessarily like but it pays the bills. You should start a side business in something that you love to do. You can invest your spare time and money into building this business so that one day this business will be your main job. There is nothing worse than spending your entire life at a job doing something you hate just because you need the money.
Build your Credit
Having good credit will save you thousands throughout your lifetime. Showing that you can and will pay your bills on time looks good to landlords, creditors and future employer. In order to build and maintain good credit you should get a credit card that you pay in full every month; however, before you get a credit card you need to understand that credit cards are for convenience- not a license to overspend. If you are not paying your balance in full every month you are overspending; thus, you are not ready to have a credit card.
Become Completely Independent from your Parents
In the African American community living your parents until you are 80 seems to be the norm; however, this hurts (both the parent and the child) more than it helps. As I stated before getting yourself use to real life as soon as you can helps you build a bright financial future. Staying with your parents until your upper 20s (and sometimes your 30s) is like wearing a training bra when you are a DD cup. It’s time to grow up. You are making it harder for yourself to branch out and leave the nest when if you just do it right after college you would adjust a lot easier. Staying with your parents so that you can afford to party, eat out excessively and pay for a car that you could not afford if you had rent and utilities is setting yourself up for failure.
Build an Emergency Fund
Your parents are no longer your safety net. It’s time to stand on your own two feet. One way that you can stop yourself from relying on your parents is to build an emergency fund. Unexpected expenses happen and as an adult you need to be prepared for this. Calling your parents for help every time you have an emergency hurts you and is not fair to your parents. Some people think they will just use a credit card, but as I said before your credit card is not a good answer because it must be paid off every month. If you don’t have the money to pay it as soon as you charge it don’t put it on a credit card.
Get Properly Insured
A lot of 20 somethings tend to overlook and undervalue insurance as they think they are inevitable. They only think about insurance when it’s too late. Don’t wait to something happens! Get the proper insurance ASAP. This includes health, auto, disability and homeowners/renters insurances. If you have dependents (kids, elderly family members or spouse) you need to get life insurance. You should be able to secure all these through your job and independent insurance agent for a relatively low price (as long as your driving record and credit a fairly decent). Once you are covered if something happens you will be thankful you had insurance.
1) Have you mastered everything here? If not, get it done ASAP.
2) Share this with your friends.
3) 30 something join me later this week for you Financial Benchmark.