Starting Out

10 Financial Commandments for Your 20s

Just starting out? Set yourself up for a lifetime of money success with these time-tested principles.

By Erin Burt, Contributing Editor, Kiplinger.com

January 8, 2009

When you're in your twenties, change is a way of life. You're choosing a career, paying your own bills, getting your own place to live and perhaps making decisions about marriage and family.

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The more things change, the more important a stable financial foundation becomes. We've listed ten principles that should be carved in stone for every twentysomething. No matter where you are on the pathway to independence, these time-tested guidelines will boost your odds of financial success.

1. Plan ahead. To get where you want to go in life, you need goals and a plan to reach them. Having neither is like driving a car without a steering wheel -- with your eyes closed.

Start by asking yourself what you want in your future. Think about the short term (five years or less), medium term (five to ten years) and long term (20-plus years). Now you're driving with your eyes open. Then take hold of the steering wheel to reach your goals. Budgeting is a great way to do this. It allows you to see where your money is going so you can make the necessary adjustments to get you where you want to go. Learn more about how to set up and use a budget.

2. Live within your means. Can't afford something? Don't buy it. Sounds simple, but too many people have a heck of a time following this one and get in over their heads in debt. Borrow sparingly, and only for those things that have lasting value, such as a home or an education. (To learn more, see When is it Worth Going Into Debt?) Learn to keep spending in check while you're young and you'll save thousands of dollars over the years -- and save yourself a lot of stress, too.

3. Make saving a habit. You work hard for your money, so when your paycheck arrives, why not make yourself the first person you pay? Arrange with your bank to automatically divert part of your paycheck every month into a savings account. That way, you won't have to remember to transfer the money manually, and you won't even miss it when it's gone. Out of sight, out of mind.

Your first savings priority is to amass an emergency fund. Eventually, you'll want enough cash on-hand to cover at least three months of your expenses in case of the unexpected, such as a job loss, medical emergency or car repairs. Once your emergency fund is well under way, you can divide your monthly savings deposit to go toward other goals too, such as buying your first home, getting a new car or taking a dream vacation.

4. Pay off your credit cards. If you have a credit-card balance, now's the time to rid yourself of that albatross around your neck. Set a goal to pay off all credit-card debt before you turn 30 and have other financial responsibilities to tend to.

A $2,000 balance at 18% interest would take nearly ten years to pay off if you made the minimum 4% payment each month and would cost you an extra $1,116 in interest. To pay it off in two years, you'd only need $100 per month to be rid of the debt. Use our calculator to find out what it'll take to pay off your balance. Then, commit to use your credit card only for expenses you can afford to pay off each month (see the 2nd commandment).

5. Start investing. The sooner you start investing for retirement, the less painful it will be and the more money you'll accumulate. Let's say a man starts socking away $200 a month at age 25 in an account earning an average annual return of 8%. By the time he turns 65, he'll have $703,000. But if he waits until he turns 30 to start saving, he'll end up with only $462,000. In other words, that five-year delay could cost him almost a quarter of a million dollars (see Behold the Miracle of Compounding).

A Roth IRA is a good place to start, because earnings on your investments will be tax-free. Your employer may also offer a workplace investment plan, such as a 401(k). If your employer matches some or all of your contributions, invest in your company plan first -- that's free money you shouldn't pass up. Check out our 30-Minute Investing Start-Up Kit for a step-by-step guide to start investing right away.

6. Establish credit. In order to qualify for the best interest rates on a credit card, auto loan or mortgage, you need to start building a solid credit history. In fact, a good history can also save you a bundle on your auto insurance or help you land an apartment or a job (see Why Your Credit Score Matters). Building a good credit history in your twenties will ensure it's ready when you need to use it.

If you didn't have a credit card in college, one way of getting credit now is to apply for a secured card: You make a deposit -- usually $300 to $500 -- in a savings account as collateral, and you can get the money back after one year of using the card responsibly. You can also start building a credit history through www.prbc.com, an alternative credit bureau that gathers data on regular payments for rent, cable and other recurring expenses. (See Rent Your Way to Good Credit to learn more.)

7. Have a marketable skill. "Your own earning power -- rooted in your education and job skills -- is the most valuable asset you'll ever own," says Knight Kiplinger, editor in chief of Kiplinger.com. Your twenties is the time to invest in yourself to acquire those skills that will start your career and boost your earnings.

It's also a good idea to start building and maintaining a network while you're young. Personal contacts can come in handy to further your career or even enhance your personal life.

8. Cut the financial umbilical cord. You have your own apartment and your own paycheck. You may even have your own spouse and children. Isn't it time you grew up? If Mom and Dad are still preparing your taxes, balancing your checkbook or managing your investments, consider this: Whoever controls your finances controls your life.

The desire for parents to help their kids is nothing new, as is the desire for kids to let them. Just don't let it get in the way of learning to succeed financially on your own. Your parents aren't going to be around forever to help you out. You may also reach a point in your life when you don't want your parents to know the intricate details of your finances. Start now to cut the cord. We've got four tips to help ease the transition.

9. Marry wisely. You and your spouse create the most important team in your life. You'll want to make sure your team works well -- and shares similar financial values -- so you can work together toward common goals. Money can drive a wedge between even the strongest of couples. So choose a spouse with whom you can keep communication open, avoid keeping money secrets from and regularly assess your goals and progress. (See 10 Questions to Ask Before Saying 'I Do' to make sure your union is on the right financial track.)

And, of course, it helps to base your marriage on something deeper than physical attraction. Divorce is costly and can derail even the best-laid financial plan.

10. Have some fun. Personal finance doesn't have to be boring. Taking the time to travel and have new experiences before you have a couple of cranky kids in tow is not only easier, it's cheaper. Consider a semester abroad in college. Seek out inexpensive entertainment close to home. Take a class just for fun. Or take advantage of cheap travel options such as youth hostels, camping and off-season travel deals.

Build some memories, meet new people and try new things. But please, don't go into debt to do it. Save up ahead of time and you'll be in prime position to make the most of your thirties...

SEE ALSO: 10 Financial Commandments for Your 30s

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