If I could go back in time, I’d tell my younger self three things: 1. Don’t look in the window of that pet store, 2. Put down the tweezers and 3. Stop spending money on so much stupid stuff. But since I just spent $65 on squeaky toys and am on target to retire at 183, it’s obvious no one has figured out this time travel thing just yet.
But instead of dwelling on my past, let’s focus on the future – your future. So readers, listen up: Just keeping walking right past that pet store, throw your tweezers in the trash and pay attention to what I have to say about saving money in your 20s.
1. Maxing out your credit cardsHaving a good credit score is a sign you are doing this adulating thing right. And a great way to build your credit history is using a credit card – responsibly. So if you regularly carry a credit card balance or rely on credit to make your financial ends meet, now is the time to break the cycle.
Consider this: According to a study done by iQuantifi, the average debt for people between 21 and 25 years old is $13,116. By the time these people hit their late 20’s, that number more than triples to $46,622. Just let that number sink in for a minute. With nearly $50k you could make a down payment on a house, get a graduate degree or even have Tyga perform at your birthday party (Kylie Jenner not included).
If you’re carrying a balance on your credit card now or find yourself reaching for it a little more than you’re comfortable with, consider starting a basic budget so you can learn how to live on what you’re earning now. There are tons of free tools out there to help you get started and create a payoff plan, like Level Money or Mint. It takes some practice to get the whole budgeting thing right and your 20s are the perfect time to make it happen. Related: How to pay off credit card debt quickly
Saving money in your 20s: Credit card tips
- Only apply for credit cards you financially qualify for. Every time you get denied credit, your score takes a hit. So just because you receive a “pre-approval” letter in the mail, that doesn’t mean you actually qualify for that card. Do some research on which credit cards are right for you and apply sparingly – no more than once every six months.
- Have at least one credit card. About 31% of of Millennials avoid credit cards altogether. This also hurts your credit score because you don’t have much credit history for lenders to look at. This may not matter much to you now, but when it comes time to take out a car loan, shop for insurance or even rent your next apartment, your limited credit history could hurt your chances of getting approved.
- Use less than 30% of your available credit. So, you just got approved for a credit card with a $1,000 limit. Congrats! Your financial know-how is really starting to pay off. I don’t know if you’ve had a chance to read the fine print yet, but the more credit you use on that bad boy, the more you pay in interest. And if you max out that card, you’ll not only trigger a penalty APR, which averages about 28%, but you’ll also do some serious damage to your credit score. A good rule of thumb is to use less than 30% of your available credit. This shows you’re a responsible borrower and will keep you from racking up a bill you can’t pay. Related: How to avoid credit card fees
2. Deferring Student Loan PaymentsThe class of 2015 has more student loan debt than any other graduates in history – a whopping $35,051 average in student loans. If you have five years to pay that off at a 6% interest rate, you’re looking at a $676 monthly payment. Ouch. Now, under certain circumstances, you can temporarily postpone or reduce your student loan payments.
When money is tight or work is hard to come by it’s tempting to take advantage of this option, but it’s not a decision you should take lightly and here’s why: Even when you defer your payments, your student loan will continue to rack up interest. And since you won’t be paying the loan down, the interest will compound and your total payoff amount will continue to grow. You could end up owing more money after deferment than you did in the first place!
I’m in the student loan debt club myself and I know those payments are a drag, but every dollar you pay now is a dollar less you’ll owe later. If you’re having a hard time making your student loan payments, talk to you lender and see if there are options besides deferment: maybe you can make partial payments or refinance to a lower interest rate.
Saving money in your 20s: Student loan tips
- Make interest payments during deferment. If you really need to defer your student loan payments, then ask about paying interest only during deferment. This way you can avoid racking up even more debt during a tough financial transition.
- Make two half payments a month instead of one. If it hurts your pocketbook a little too much to make one large student loan payment a month, try making two half payments instead. If you get paid biweekly, you can have the money taken directly from your checking account so you don’t even have to think about mailing the check. This should help soften the blow to your bank account and keep the payments coming in on time.
- Start paying your student loans off before you graduate. It’s hard to balance school and life during college, but if you can work a few part time shifts and start making student loan payments now, you’ll be in much better financial shape when you graduate. Say you work part time and make $500 a month, which goes toward student loans. At the end of four years, you’ll have made $24,000 in payments!
3. Ignoring Retirement PlansIf you really want to start saving money in your 20s, investing in a retirement plan is one of the best ways to get ahead. According to a poll released by Young Invincibles, a millennial advocacy group, just 43% of millennials without access to employer-sponsored retirement plans say they are saving money consistently for retirement. By contrast, three-quarters of millennials with a 401k or other employer-sponsored plan save for retirement.
As you start to build your career in your 20s, you should seek employers with a wide range of perks, including 401(k) plan with. The most common type of matching plan is a fixed match, where the employer pays $.50 per $1.00 you contribute, up to a specific percentage of your total pay (usually 6%).
Basically, this is free money – your employer is matching your contributions, as long as you keep working for them, of course. So if you are 25 years old, make $30,000 a year and get a dollar-for-dollar match for up to 6% of your pay, assuming average returns and consistent contributions, you’ll have close to $1 million by the time you reach retirement age.
Saving in your 20s: Retirement plan tipsIncrease your contributions as your pay goes up. Did you just get a raise? Nice work! Instead of rewarding yourself with a spendy splurge, sock away that extra money into a IRA or mutual fund. You can also ask your employer to make regular 401(k) contribution increases automatically and on a regular basis to keep your savings on the upswing. Remember: you can always make an adjustment later in life if your financial circumstances change.
Open an IRA. An IRA is a retirement account you can set up on your own – you don’t need to have your employer do it. There are two types of IRAs: traditional and ROTH. With a ROTH IRA, the taxes are taken out as you contribute. With a traditional IRA, the taxes are taken out when you make withdrawals. If you aren’t sure which one is right for you, a financial expert can help you decide. There are also rules as to how much you can contribute each year and how long the money needs to stay in there without an early withdrawal penalty, so make sure you get the details before you set your account up. Then, all you have to do is put a little from each paycheck away.
Invest in mutual funds. Jumping into the stock market doesn’t have to be scary – there are easy and inexpensive ways to get started. You can try an app like Acorns, which rounds your purchases up to the nearest dollar and invests the difference, or you can put a little money into a mutual fund. Unlike an individual stock, mutual funds let you purchase a little stock in hundreds of companies. It’s an inexpensive and easy way to start a diversified portfolio. The minimum investment is usually around $2,500, but some providers offer access to funds for as little as $100. Even if you can only start with a small amount, something is better than nothing. Related: How to prepare for retirement in your 20s, 30s and 40s