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Financial Literacy in your 20s10 Financial Moves You Need to Make When You're 25

Even if you don't want to do them, your future self will thank you

by Stephen J. McQueen, CPA

The early to mid 20s is likely to be a period of adventure, exploration, and settling into one’s individuality. This is a time when most people get the chance to be a little crazy before transitioning into committed relationships, mortgages, and career building. In throwing caution to the wind, it is also important to begin making the financial decisions that will prepare you for your 30s, 40s, and beyond.  Below is a list of ten financial moves to consider before entering the next stages of life.  

1. Emergency savings

Establishing an emergency savings of six to twelve months living expenses is imperative for any individual. This is important for periods of unexpected unemployment, health issues, or major expenses. One of the best ways to build a savings account is to always pay yourself first. This means that any discretionary funds are deposited into savings before purchasing non-essentials. By doing this, it is possible to quickly accumulate a fund that will help during any periods of uncertainty.

2. Contributions to a 401k/IRA

Contributing to a 401k / IRA at a young age is so very important given the concept of time value of money.  A small monthly contribution can really add up to a very big nest egg over a 40-year career.  In addition, it is important to not lose out on any employer matching funds, which comes down to free money that is simply added to the account. 

3. Insurance

 Insurance is necessary, especially for 20-somethings who are snow-boarding, hiking, biking, or enjoying any other sporting activity. A serious accident, or an unexpected health issue, can quickly derail anyone’s plans. To prevent this, it is important to have the right amount of health insurance to pay for potentially expensive medical care.

4. Establishing & maintaining your credit

Good credit is like having a warm blanket on a cold winter night. It provides access to the best interest rates, favorable treatment by retailers, and generally a better life. Bad credit is like a cold winter night without a blanket, or even pajamas. Purchases such as homes, autos, and insurance will likely cost more due to the higher credit risk. In addition, employers are more often running a credit check on prospective employees, so poor credit can effectively limit your career potential. In order to monitor credit, it is important to run a report, for free, once per year at www.annualcreditreport.com.  This is one of the best tools to ensure everything on your credit report is accurate.

5. Student loans

Student loans were likely a valuable tool for many who attended college.  If you are still in school, or considering graduate school, it is important to remember that all funds borrowed will eventually need to be paid back. This is something to consider when evaluating how much to borrow for items above and beyond tuition, like living expenses, etc.  The loans can add up quickly and the repayment schedule can be daunting at a time when you are just beginning a career.

6. Auto-payment for bills

A simple way to ensure all of the bills get paid on time is to set-up auto-pay, which can be done with almost any vendor (mortgage, utilities, auto, etc.), for free. The bill will automatically be deducted from a bank account, or charged to a credit card, on the due date, helping to build a solid payment history on your credit report. Missed payments are one of the biggest items that can contribute to bad credit, so setting up auto-pay is a simple step that can help build a strong credit history.

7. Maintaining a small monthly "nut"

You can quickly build a significant debt portfolio (Monthly Nut) when only thinking in terms of the monthly payment for purchases. This large monthly nut can quickly become overwhelming and contribute to a great deal of stress.  Something to seriously consider before taking the plunge by spending more on a home than necessary or purchasing more car than can be afforded. Payments can rapidly exceed monthly expenditures which can be close to, or more than, your income.

8. Keeping track of your overall financial picture (net worth)

Being aware of how much you have or do not have can be an invaluable tool on the financial path to prosperity.  There are many online tools, such as Fidelity “Full View” or Mint.com that allow you to easily track assets (401k, home value, savings) and liabilities (mortgage, credit cards, auto loans) and present the information in an easy to use format. This is a simple method to ensure you are on track with financial goals or identify areas for improvement.

9. Charitable endeavors

One move that will be good for an individual and society in general, is to consider charitable endeavors in a financial plan. Simply make regular payments or donate time to a charity of choice.  

10. Balancing wants vs. needs

While planning financial moves that prepare for the years ahead, it is necessary to strike a balance of wants vs. needs. Although it is a good idea to plan and save on a regular basis, it is also important to have fun and enjoy your youth. Prioritize experiences, items, or travel that will enrich your life to ensure you are “living” your life.    

Stephen J. McQueen, CPA, is a member of the Colorado Society of CPAs Financial Literacy Committee. He is the Director of Finance & Controller with HomeAmerican Mortgage Corporation, Denver.