Stressing over finances almost seems like a rite of passage. It’s a time when you’re trying to build credit, avoid bad debt, budget and pay off your student loans – all at once. Starting your career and trying to save money, all while trying to manage all the other expenses in your life is a balancing act that is almost always overwhelming. These tips can help with financial planning in your 20s and 30s and keep you on track.
One of the most important financial moves young adults can make is building good credit. Ellen Morvant, CFP®, APMA®, Ameriprise Financial Advisor with Waterfront Wealth Management, recommends focusing on building good credit and avoiding bad credit through making on-time payments and wisely using credit cards to pay bills.
“To build credit, you have to demonstrate an ability to manage debt responsibly. This means making at least the minimum payment on time every time for every debt you have, whether it’s a student loan, car loan, mortgage or credit card,” Moryant said.
An easy way to start building a credit history is to apply for a credit card, but you have to be smart about how you do it or else it can easily get you into trouble. “When you open your first credit card, commit to limiting your spending to an amount you know you will be able to pay off in full at the end of the month,” Moryant said. “I recommend picking a few bills you can use your credit card to autopay, and then signing up to have the credit card full statement balance paid automatically from your bank account each month.”
The B Word
With credit cards, student loans and other expenses, it’s easy to find yourself in some serious debt. Morvant recommends building a budget early in life and has some alternatives for those who may fear the word “budget.”
“One of the best defenses against debt is a realistic, proactive plan for spending and saving. Some people call this a budget. But I find most people hate their budgets, get overwhelmed by them, and stop following them,” Moryant said. She suggests a simpler system for how to manage money in your 20s, 30s – or any age – with just a few categories:
- Fixed must-haves.
- Variable must-haves.
- Discretionary spending money.
To avoid debt, Morvant also recommends having an emergency fund that’s at least three months’ worth of expenses saved in a bank account in case of the unexpected loss of a job, an injury or other unforeseen costs that may arise.
Start Saving for Retirement Now – Yes, Now
In addition to building credit and avoiding debt, when financial planning in your 20s and 30s, it’s also essential to start saving for retirement as soon as possible.
“The longer you wait to start investing for the future, the more years of compound investment growth you stand to miss out on. This means you will need to put away substantially more of your own dollars to end up with the same amount of money in retirement the longer you wait to start,” Morvant says.
There are multiple ways to go about saving, including IRAs and 401(k)s.
401(k)s and IRAs are tax-advantaged retirement plans. A 401(k) is sponsored by an employer, while an IRA is an account you open on your own.
“401(k)s tend to be the easiest ways for most people to start investing for their retirement because they allow you to contribute a portion of your paycheck directly, helping to build that ‘out of sight, out of mind’ systematic savings habit,” Moryant said. “Many companies will also match contributions you make to the plan up to a certain percentage of your pay. If your company does this, consider contributing at least enough to get the full match. It’s essentially free money – turning the match down is basically taking a voluntary pay cut.”
It’s also a good time to think about getting a life insurance policy. Age largely factors into your rate – the younger you are, the less you pay.
Repaying Student Loans
And then there’s the three words 20-somethings might dread more than any other in the English language: Student loan repayments. Given that student loans are taken out while students are in school and require no payments during that time but are still gaining interest, it’s easy to find yourself in over your head in debt when you graduate. But AAA Northeast Senior Manager, Student Lending, Donald Kerr, advises graduates not to lose hope just yet, as there are repayment plans and strategies that can help you.
“The amount of student debt younger people are graduating with can be overwhelming. One way to help is to explore consolidating and refinancing student loans. When you do this you will have more repayment plan options such as five, seven, ten, fifteen and twenty year loans as well as variable or fixed interest rates. Most importantly, you will be able to choose a monthly payment amount that fits your budget,” said Kerr.
Longer term loans will have lower monthly payments but cost more overall and short-term loans will have higher monthly payments but save you the most amount of money. Kerr advises evaluating your student loans on an annual basis to keep from getting overwhelmed. “You can refinance your loans multiple times so look at your budget, financial goals and refinance your loans to match.”
When it comes to understanding your options for repaying student loans, a financial professional can help you understand and work through your options.
“AAA student lending offers free advising and counseling to our members. We can help them understand the refinancing and consolidation options for all private student loans. We can also assist with exploring federal student loan repayment options such as income-based repayment plans, graduated repayment plans and others such as public service forgiveness. We help our members understand all the repayment options, the pros and cons of each, answer all their questions and give them the information they need to make the right choice for them to best manage the loans,” Kerr said.
Never fear, there are ways to help build credit, avoid debt, budget, manage student loans and set yourself up for success when financial planning in your 20s and 30s, even when it feels impossible.