I often get asked what money actions people should take by certain ages. In this excerpt from my upcoming book, Good Money Habits in 17 Minutes A Day, I discuss what young adults should accomplish by age 30.
The first or Adulting Stage of your financial life lasts until an individual reaches age 30. In their first 30 years, individuals need to create the foundation for a successful financial life. This foundation needs to include learning good money habits and taking actions that revolve around creating a livable cash income, managing cash expenses, managing debt and beginning to prepare for the future. Individuals in this stage begin managing their finances for the first time. This can be overwhelming; but, if they keep their focus on the key actions, they can achieve success. Here are the key actions that should be taken:
1. Get an education that develops into a living-wage paycheck. The ability to earn a satisfactory income should be the result of getting an education. Focus should be on pursuing a profession or trade skill and not just getting a job. The cost/benefit of the all-in educational costs versus income should be carefully weighed. An education is only as good as the income stream it produces.
2. Establish a cash plan and use it. The key to financial security is positive cash flow–having your cash income exceed your expenses. A properly constructed and used cash budget is your cash plan. The cash budget should cover your income, living expenses, debt service, savings needs and putting money away for when you stop full-time work. It will enable you to see if you are making progress towards your goals. We will discuss cash budgets in detail later.
3. Take full advantage of work-related benefits such as matching 401(k) contributions. Once you get a job, the work-related benefits received can add up to as much as 40% of salary. Taking advantage of the benefits offered should be a focus. That 40% includes matching retirement contributions, tuition reimbursement, tax-advantaged accounts for childcare expenses, health insurance and pre-tax transportation benefits. Determine what your company offers and take advantage of it as you build your cash flow.
4. Put insurance coverages in place. Get insured. As an adult, you are responsible for protecting yourself, your household and all of your belongings. 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. Remember, insurance is cash for future delivery when you need it. Work with insurance professionals to put the proper life, disability, home, car and liability coverages in place.
5. Work to get out of debt as quickly as possible. Debt is a reality for most young adults. Allowing it to 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 and make use of any available repayment forgiveness or reduction programs. For credit card debt, work to eliminate it as soon as possible given the very high interest rates associated with this debt. Only borrow to buy the minimum car you need versus what you can budget monthly. Today’s very high vehicle-related debt and operating costs are budget crushers.
6. Build an emergency fund. Insurance coverages alone won't cover all of your unexpected problems as they do not cover all expenses. Insurance comes with deductibles, coinsurance and uncovered items. You need to have cash on hand to fill in the gaps. Some call it a rainy-day fund. Remember, unexpected life events happen as we have all seen with the pandemic. As I have written, you should work to have at least six-month's worth of living expenses, including debt service, 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, tax refund or birthday gift.
7. Start saving for retirement or when you want to stop working. Once your emergency fund is fully in place, you need to set your sights on saving for the long term—when you stop working full time. The sooner you start saving, the better. Because of the magic of compounding, time can create great benefits for you. 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. The sooner you start, the better the result will be because of compounding.
8. Establish and improve your credit history. In order to establish a credit history and earn a good credit score, you should take on some debt and show that you know how to manage it. The credit rating, along with the credit report on which it is 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 of 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 credit cards sparingly.
9. Exit the "Parents Bank." You love your parents. What better way to show them than to set them free of your financial responsibilities? I believe that by the time you reach age 30 your primary goal is to become financially self-sufficient. You need to get off of your parents' payroll. This also means you don't want to resort to getting help even in a pinch—hence, the need for an emergency fund. If you do need financial assistance from your parents, approach them maturely and responsibly.
11. Develop a clean digital history. Remember those college party pictures and the shots you took at the naked beach on your semester abroad? It’s now time to scrub them from your public image. Like it or not, your social media activity is viewable by the entire web-surfing world, including all of your current or potential employers. It could impact your qualifying for a job. Get your digital act together by searching for yourself online. Add to your positive persona by promoting your good deeds on social media. For example, your LinkedIn account should be a glowing representation of your professional potential. If you're an expert on a certain subject, you can show off your knowledge via Twitter, Tumblr, Quora, WordPress or other sites.
11. Begin to get your key financial documents in order. The independent you—not your parents—should have your birth certificate, passport, Social Security card and other official documents. Also, you should have a list of all 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 of this important information in a secure place, such as an actual safe, and make sure the key people in your life that you trust know where it's located. Other documents to keep in mind: apartment leases, roommate agreement, cohabitation agreement, list of account passwords and car registration and title.
Getting started to develop good money habits should begin in your 30s. There are several simple, but important steps to take to get an individual on a path to financial security and success.
At the FinancialVerse, we work to make personal finance understandable for people of all ages. Our easy-to-read books provide you with ideas on how to better manage your money and work to achieve financial security. Check them out today!