10 Financial Commandments for Your 20s

Thou shalt not be financially lost forever. It just may feel that way when you're in young adulthood. Managing your finances for the first time can be overwhelming—what with the daily expenses, big-ticket costs such as housing and health care, heavy debts and long-term goals, including your ridiculously distant retirement.

The sooner you start making a financial plan for yourself, the brighter your future will be. "Building habits, especially in your twenties, is so important for long-term success," says John Deyeso, a financial planner in New York City, who works with a lot of younger people (and is 37 years old himself).

Here are the ten things you should do in your twenties to take control of your finances:

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1. Develop a marketable skill.

Before you can start worrying about what to do with your money, you need to earn some.

Think in terms of your career, not just a job. Because let's face it: You're probably not going to love your first job, and it won't be your last job. But you should try to make the best of it. My first job consisted mostly of fetching documents for colleagues and doing data entry. Ho-hum. But I learned all I could. Sure, sometimes the lesson of the day was: "I never want to do this again." But I also learned basic skills, such as the magic of Excel as well as proper office phone and e-mail etiquette, which are still extremely useful in my career.

Most importantly, I established a valuable skill (writing) and looked for and created opportunities to use it. I talked to my bosses about my writing, and they affirmed that I had a future in it. I wound up penning our press releases, editing an online column and writing anything that needed writing at our small company. Outside the office, I blogged and took on various freelance assignments—some for no money—to practice my craft and build my network.

Don't be afraid to experiment. "You may need to take risks when you're younger," says Erin Baehr, a financial planner in Stroudsburg, Pa., and author of Growing Up and Saving Up. "You may take one job over another and find it doesn't work out. But when you're younger, you have the ability to do that. And then that can parlay into a bigger return down the road."

2. Establish a budget.

Once you're bringing home the bacon, you'll have to figure out how to slice it up. Without a budget, you risk overspending on discretionary items and undersaving for important big-ticket purchases.

"The big thing is really to differentiate between your needs, your wants and your dreams," says Lauren Locker, a financial planner in Little Falls, N.J., who also teaches a personal finance course to undergraduate students at William Paterson University. First, lay out all your daily expenses (such as commuting costs and food bills) and recurring monthly payments (rent, utilities, debts). When you know where all your money is going, you can more easily see how to cut costs. For example, when I first made a budget, I was stunned to learn how much I was spending on take-out food. Being aware of the cost allowed me to trim it by ordering less food, less often. (See Money-Smart Ways to Eat Healthy for more.)

Next, factor in your short- and long-term savings goals, such as an emergency fund (see commandment #5) and retirement kitty (commandment #6). And if you ever expect to settle down and buy a house, you should probably start saving for the down payment as soon as possible.

A budgeting site such as Mint.com can be a big help if you want to digitize your budget. For more on how such sites work, see The Best Online Money-Management Tools.

3. Get insured.

Mayhem truly is everywhere (as Allstate has dramatized), and as an adult, you are responsible for protecting yourself and all your stuff from it. When horrible things happen to you—say, a trip to the emergency room or a fire in your apartment—insurance may save you from shelling out thousands of dollars all at once. For more on health care, see Obamacare for Twenty- and Thirtysomethings. If you rent your home, see Why Renters Need Insurance. And if you have a car, see our Smart Shopper's Guide to Auto Insurance.

4. Make a debt-repayment plan.

Debt is a reality for most young adults. But letting it linger—or, worse, grow—can set you back for years to come in the form of greater interest payments and lower credit scores.

For your student loans, be sure you have a good repayment plan in place—see Strategies for Repaying Student Loans—and consider some programs that can help reduce the burden, such as the Peace Corps or Americorps. A much easier way to trim this cost is to set up automatic payments for your federal student loans; doing so cuts 0.25% off your interest rate.

Work out a plan to tackle your credit card debt, too. Hopefully, being so young, you haven't had time to bury yourself in much. But if you've been quick on the swipe, your first step is to establish a budget (see commandment #2) and rein in your spending. You should then start paying down debt on your highest-rate cards first.

5. Build an emergency fund.

Insurance alone (see commandment #3) won't cover all of your problems. You still need to have liquid savings on hand as an added precaution.

Some call it a rainy day fund. I think of mine as a polar vortex fund. This past frigid winter, my house's heat pump gave up. A new HVAC unit cost me and my husband about $4,000. Home insurance was no help, but our emergency fund saved us from going into debt to cover the replacement or (ack!) asking our parents for the money.

Kiplinger's recommends stashing enough to pay three to six months' worth of expenses in a safe and easy-to-access savings account. Contributing to your fund should be a top priority in your budget. Aim to sock away at least 10% of each paycheck until you reach your goal, and add a boost any time you luck into some extra income, such as a bonus or birthday gift. To help speed up the process, see 7 Strategies to Build an Emergency Fund.

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6. Start saving for retirement.

I know, I know, retirement seems like forever from now. But it's more important than ever for us to focus on this savings goal as soon as possible. "Our generation, the twenty- and thirtysomethings, may be the first to have to save for retirement for as long as your work career," says Deyeso. (See The New Retirement Realities for Generations X and Y.)

The sooner you start saving, the better. Because of the magic of compounding, time will fatten up your retirement kitty. For example, if a 25-year-old saves just $100 a month, assuming an 8% return and quarterly compounding, she'll have $346,039 by the time she turns 65.

Don't think of saving for retirement as subtracting money from your paycheck or checking account. Rather, consider them automatic payments to your future self. If you participate in your company's 401(k)—as you should—your contribution can be automatically deducted from each paycheck before taxes. If you have a Roth IRA (also highly recommended), you can set up automatic transfers through your bank or brokerage. "It hurts at first, but people adapt," says Deyeso. "That money gets forgotten about."

7. Build up your credit history.

You'll need to take on some debt ("having no credit is as bad as having bad credit," says Locker) and show that you know how to manage it well (see commandment #4) in order to build up your credit history and earn a good credit score. This number, along with the credit report on which it's based, is the key to many milestones in your financial life. A good score means lower rates on credit cards and loans. Landlords may consider your score before offering you a lease. And employers might take a look at your credit report during the hiring process.

Unfortunately, because you're young, you're at a disadvantage. The length of your credit history counts for 10% of your FICO score, the most widely used model. But a lot of your score, 35%, depends on your payment history. So you can easily raise your financial grade by paying all your bills on time. Another 30% of your score is based on how much you owe, calculated as a percentage of your available credit. In other words, maxing out your credit card every month is bad, even if you always pay off the entire balance. Be sure to use your card sparingly. "FICO high achievers," who score at least 750 on a scale of 300 to 850, typically use just 7% of their available credit. For more information, see Boost Your Credit Score in 2 Easy Steps.

8. Quit the Bank of Mom and Dad.

You love your parents, and what better way to show them than to set them free of your financial responsibilities? "In your twenties, the main goal is becoming self-sufficient," says Baehr. "Look to get off of your parents' payroll and onto your own."

Obviously, financial independence starts with a job (see commandment #1). You also ought to cut the cord by getting your own insurance (commandment #3), car, cell-phone plan, home, everything. Slightly less obvious, you don't want to resort to getting help from Mom and Dad even in a pinch—hence, the need for an emergency fund (commandment #5).

Of course, all of this is easier said than done. If you do need financial assistance from your parents, approach them maturely and responsibly. See How to Establish Financial Independence (With Some Help From Mom and Dad).

9. Clean up your online presence.

Time to put down the red cups, folks, or at least scrub them from your public image. Like it or not, your social media activity is viewable by the entire Web-surfing world, including all your current or potential employers. Get your digital act together by searching for yourself online. Check Spokeo.com and Pipl.com, as well as the obvious Google, to see what's already out there, and double-check your privacy settings on Facebook, Instagram and other networks to make sure you're not adding to the mix unintentionally.

Add to your positive persona by pumping up the good stuff in cyberspace. For example, your LinkedIn account should be a glowing representation of your professional potential. And if you're an expert on a certain subject, you can show off your knowledge via Twitter, Tumblr, WordPress or other sites. See Polish Your Online Image for more.

10. Get your key financial documents in order.

You—not your parents—should have your birth certificate, Social Security card and other official IDs in your possession. Also keep a list of all your banking and investment accounts, household bills and insurance policies, along with any online usernames and passwords.

Be sure to get details on any funds your parents might have administered for you, such as custodial accounts, as well as any lingering savings bonds. Store all this important information in a secure place, such as an actual safe, and make sure someone you trust knows where it's located. Other documents you might need to keep in mind: your apartment lease, roommate agreement, and car registration and title.