Financial Focus In Your 20s – Part 2
Posted by Gail | Filed under Money Management, Saving
Okay, so you’ve bought into the whole “don’t spend more money than you make” thing. You’ve made a budget, got both your fixed and variable expenses in check. What’s next? Step #2 is…
2. Start saving. Saving is a habit. You either get into the habit of saving and have something in the future, or you don’t. If you’re waiting until you earn more money to start this habit, you’ll never start because there will always be a good reason to spend all your money. In fact, as you get older and take on more responsibilities, it will actually get harder and harder to find the money to save, particularly if you aren’t already in the habit.
Saving is the act of not spending. It is a conscious decision not to spend. And when you save, when you accumulate a stash of cash for some point down the road, you give yourself options. Savings, whether it be for emergencies or for retirement, gives you the flexibility to cope with the crap life will inevitably throw you way. No savings, no options.
It doesn’t matter how little you start saving. Even $25 a month is a start. Set up a savings account to do an automatic transfer of money from your chequing account every month. As you earn more, set aside a part of all your new earnings to boost your savings. If you don’t, your lifestyle will inflate – you’ll get used to spending more money – and you’ll have nothing to show for your hard work later on.
Use a Tax Free Savings Account for your emergency savings. You’ll need to set aside a safety net equivalent to six months’ worth of your essential expenses. Use an RRSP to start saving for retirement. If you’re in the lowest tax bracket, don’t claim the deduction yet. Hold it for the years when you’ll be earning more and can get a bigger tax bang for your deduction. If your employer offers a savings matching retirement program and you’re not taking full advantage of it, you’re too stupid for words. Beer or shoes cannot be more important than the extra cash your company is throwing at you. Grow up!
3. Get your debt paid off. Whether you graduated with a ton of student debt or just a couple of thousand in the hole, get it paid off. This is your big “have to do.” That debt, left to fester, will grow more cumbersome when it comes time to go back to school, qualify for a mortgage, or deal with a reversal in fortune such as a few months of unemployment. What, you think because you’re young that you’re not vulnerable? Go a few months without a job and see just how heavy those loan payments get when you’re also trying to pay rent and buy food. Get rid of the debt. If it’s a small amount – say under $10,000 – you should bust your butt to have it gone in 12 to 18 months. For balances between $10,000 and $35,000, you may need to take up to 3 years to beat back the debt. For amounts even higher, it may take you more time to demolish the debt. But for every year it takes you, know you are paying through the nose in interest.
If you’ve also got some consumer debt – credit cards or a line of credit – what the hell are you thinking? You’re in your twenties and you’re already behind the eight-ball for the sake of some dumb stuff you just had to have? Time to make amends for your prior stupidity in spending money you hadn’t yet earned. Making just the minimum payment means you’re a dope. A $4,000 balance at 19% interest would take almost ten years to pay off if you made only the minimum payment each month. And you would pay an extra $2,435 in interest. I don’t care how many jobs you need to take on, get that consumer debt gone!
Tomorrow: Financial Focus In Your 20s – Part 3
March 16, 2010 at 6:28 am
I seemed to have spent my the first half of my 20’s in school or travelling and finished with a couple thousand of credit card debt. Fortunately I seemed to have done item #3 intuitively once I started working. I paid off my debt as soon as possible and then opened a savings account. At which point I realized that I knew nothing about money and started reading books and newspaper articles on basic finances.
The only thing I wish I had in my late teens and early 20’s was more knowledge and understanding of money. How come I didn’t know anything?
March 16, 2010 at 6:57 am
I wish I had learned those lessons when I was in my 20s…I can only imagine how much better off I’d be today in my 40s. I’m only just building an emergency fund – never had one. And my RRSPs were put in mutual funds and the management fees coupled with low returns mean I’d have been better off putting the money under the mattress!
March 16, 2010 at 7:44 am
My husband and I were fortunate to have worked for companies that had employer-matched pension plans when we were younger. And we did take advantage of them. They will both be nice nest eggs for our retirement. I’m glad we had similar mindsets in our 20’s, since we didn’t meet until our mid 30’s. Now in our mid 40’s, we’re doing okay.
March 16, 2010 at 8:40 am
What a great series. I hope the message gets to those who can use it.
I didn’t graduate until I was 26 yrs old. When I found out what I owed ($45000) I freaked out. And almost fainted when they told me that it would mean paying around $900/month for 10 years.
I decided to take more courses while I was building my business, enough classes to get interest relief on my loans and ended up paying off the rest in under 2 years. It was hard work but I learned quickly that you need to take responsibility for what you owe before you can really enjoy life.
March 16, 2010 at 9:23 am
Being in my early 30s now, I wish I thought about holding my RRSP contributions until I got a “real” job and maximized the RRSP tax credit. The RRSP tax credit was just something I thought I would include every year, never thinking how I’d probably get better results with those credits in the future.
Live, learn and spread the information…that’s my plan.
March 16, 2010 at 9:24 am
Great series! I really wish I had this 10 years ago. I am in my late 20’s and I have made some bas desicions about consumer debt in my early 20’s. I have about 15000.00 in consumer debt including some credit cards and a loan. I am working to pay them off and should be in the clear in about 2 years. I have been a saver for some time now using both my work RRSP program and savings accounts but I never saw how really important it was I just did it because it seemed smart.
Growing up my parents never talked about money other that to say that there was never any but somehow they always came up with what ever was wanted. Now I know why. About a year ago they went throught their 2nd bankrupcy and even though they have been paying theit mortgage for 16 years they still owe MORE that the price they purchased the house for. Plus they have like nothing in a retirement fund let alone an emergency fund. That really scared me silly to clean up my act.
I am now on my way to clearing off my cunsumer debt, building a good solid retirement and emergeny funds and I even started account to set money away for my 8 year olds education and for things that she will need down the road.
Thank you Gail you really opened my eyes and taught me the lessons that I never learned at home.
March 16, 2010 at 9:48 am
I’m down to owing $7091 in student loans and am working to have it completely paid off this year!!
(crossing my finger for a raise in a month!)
March 16, 2010 at 9:52 am
I’m in my mid-thirties & when I was in my 20s I had a very good salary but my credit card limit was probably 1k. It was only after I bought my condo at about 28 that my credit card limit started being raised (not on my request). I didn’t try to get more credit in my 20s because it never even occurred to me. I know a lot of people on this site have said that just because the bank offers credit doesn’t mean you have to take it, but I think that a lot of the blame does lie on the visa/mc companies.
March 16, 2010 at 10:14 am
@MP ~ I am in the same boat, just turned 40 and only just started a TFSA for emergencies a few weeks ago.
We’re paying down our debt and trying to save…if you make a conscious effort, it can be done. Thankfully, my work has a matching plan for RRSP’s…I get any contributions matched up to 4% of my salary. It’s great.
March 16, 2010 at 10:29 am
I have one more year left in my 20’s but having children young makes you grow up fast…but financially the bumps and winding roads were hard to manoever. My husband moved into a full time position at a job that he had during high school and university that he never thought he would stay at just for the money and security. This year since we have eliminated consumer debt, have a plan, continue to save RESP’s and RRSP’s, have an emergency fund and planned spending..he actually applied for a job that suits his education and interests. I am so proud of him for doing it, that even if he doesn’t get it the guilt that I have been carrying is alot less heavy.
I am in the middle of reading David Bach’s “Smart Women Finish Rich” and finished your new book “Debt Free Forever”. I feel so empowered about what I am learning and what I can teach my girls.
Thank you so much for all the lessons and the bloggers who have made it possible for us 20’s girls to say no thankyou to debt and the relief that comes from not worry about it so much. We can have it all marriage, career, house, children but we can’t have it all at the same time. I want my girls to feel that they can have a baby before 30 but we are going to prepare them for it well in their teens.
March 16, 2010 at 10:37 am
Well, I’ve just turned 26. At the beginning of this year, I finished paying off my $25000 school loan from the bank. It took 2.5 years, but it was worth it. In those past 2.5 years, I’ve had a wedding and put together a good savings with my hubby – all the while both of us not having permanent work. We’ve saved and sacrificed and are proud of where we are. Our next goal? A home – but we need permanent jobs first.
This article (and yesterdays) should be a must for those going into post-secondary education and/or the workforce. Gail, have you thought about visiting secondary schools and post-secondary schools to whip all of us 20-somethings into shape???
March 16, 2010 at 10:51 am
I’m trying to get my student loan paid off as soon as possible. I left Uni almost 3 years ago with 27000 in debt. Unfortunately for me, getting it paid off in 3 years is not possible when I have to leave on my own and then leaving with someone but making not enough money until just recently. I’ve been working on a 5 year plan to get my loan paid off. It is not so much budgeting that needs to change, but fulltime consistent employment is what needs to happen. Hopefully the temp fulltime job I have now sticks around next year and I will bump up my loan payments to get that loan outta there.
March 16, 2010 at 11:06 am
I was fortunate enough to graduate college without any student loans. My parents were able to pay my college costs so I started in the work-force after graduation without a penny of debt. I am really impressed with those of you who are working feverishly to pay off your student loans. Keep up the great job!!! I’m not sure I would have had the same determination – I am very impressed!
March 16, 2010 at 11:12 am
Great advice. I’m another who wishes I’d learned earlier. I’m in my early 30’s and just last year decided that drowning in debt was a horrible way to live. Having found 2 great teachers I am own my way to debt-free. I’ve paid off 2 of the 4 student loans I have and just applied my income tax refund of $1200 to another one! Well on my way to a happier, healthier way of life!!!
Trying to stay focused… sometimes thats challenging but I kow its so worth it!!!
March 16, 2010 at 11:33 am
My parents taught me to be a saver so I started putting away savings for retirement, emergencies, etc. as soon as I started working. But now I’m confused about just how much I actually need to save for retirement.
I’ve always maxed out my RRSPs – yeah, the full 18% of gross income. This is far beyond Gail’s guideline of 10% of NET income! I am proud of myself and I enjoy the big fat tax refund I get as a result, but now I have to wonder, am I foregoing too much fun now? My life is pretty good, but maybe I could be having a little more fun.
I’ve done research to calculate how much I should contribute, but at age 28, so many of the variables are completely nebulous! What kind of lifestyle do I want when I retire? I have no idea… I mean, life is pretty good now, but so much will change over the next 35 years! Will I have a pension? Who knows… my job now offers a great pension if I stay in it forever, but I could switch jobs several times over my lifetime. And small differences in inflation and rates of return assumptions make a huge difference!
Gail, I will watch the rest of this series with bated breath.
March 16, 2010 at 11:38 am
I am an avid Gail follower. I watch her show and read her blog all the time. She has been an inspiration to me in turning my life around. I am 25 and am currently working along side with my fiance to pay down our student debt which totals about 38000, builing an emergency fund, saving for a down payment and saving for our wedding. I wish that in my early twenties and late teens I had had the knowledge and wisdom that Gail has given me. My parents have never been good with their money they tried their best but they are constantly living pay cheque to pay cheque. I found myself doing the same thing as soon as I began making my own money. I acted like the Princesses on Gail’s new show buying things I couldn’t afford on LOC’s or CC’s. I am now finally seeing the bigger picture. I don’t need those things to make me happy I can get my finanacial life back together and build for a more secure tomorrow. I look forward to rest of this series.
March 16, 2010 at 12:22 pm
That’s interesting, I have never thought of SAVING as deciding NOT to spend…. I always had it framed in my mind as a decision to put “now” money away in my future life account — the long term savings/planned expenses…. in other words paying myself first. Since the money is taken out of my monthly disposable income it is “spent” to me….
Those ads that highlight how much money is “saved” during discount sales burn me. If you are spending the cash to buy it you are NOT saving 50%, you are just spending 50% less than you would have if you bought it last week. Don’t be fooled.
March 16, 2010 at 12:31 pm
I’m following #1-3 pretty well so far (at age 23), although I could always be saving more!
March 16, 2010 at 1:50 pm
I found the best way to save is to set automatic transfers from my accounts on payday. When my paycheque comes into my chequing account each Monday I automatically contribute $120 to my RRSPs and $50 to go towards my yearly vacations along with $50 to go towards my car fund for when I want to buy a new one.
If you allow the money to sit in your account you will find things to spend it on! By transferring it out automatically it makes you think you don’t actually make as much money and thus limits your spending!
March 16, 2010 at 2:15 pm
I graduated from university with 14000 in student loans. It took me 4 years to pay it off, but it was worth every penny. Also, the good thing is that when you are done paying, you can just take the loan payment and put it toward retirement savings, since you have already been living without it for so long! I took a two month vacation in between doing that and used the money for a few ‘treats’ as a reward for paying it all off! Like Gail says…you gotta have some fun in there too and I think a little spending after working hard to get your student loans payed is well deserved…espeically when many people I knew were just defaulting…
March 16, 2010 at 2:39 pm
I’m 23 and graduating from my second university degree in May. I’ve been working full time for the last 2 years to pay off the loans that started accumulating during my schooling, and now everything is completely paid off. I’m working on building a nest egg that should be about $5000 by May.
However, I’ve been able to pay off my debts aggressively and start saving because I have been living with my parents during university. They are kicking me out when I graduate, and I am very nervous about my ability to save and not go into debt when I have to pay rent, utilities, etc. Does anyone have any advice?
March 16, 2010 at 3:12 pm
Ah, the innocence of the young… Me I mean… I was 19 when I started my career and I’m 38 now. Included in my job was lodgings, meals and even clothes! My pension was deducted automatically so my savings were looked after for me as well. The only thing I had to pay for was eating out, regular clothes, smokes (thank god I gave that up!) and booze. Life was good! No bank would give me a credit card – I tried – so I couldn’t get into debt.
Then life changed. As I moved towards my 30s I found love – he loved spending money he hadn’t earned yet and I followed suit – bought a house, had my daughter, was granted gold and platinum cards and even a $120,000 LOC!
Now it’s just my daughter and I. We’re living well within our means and happy! There were no Gails back then but luckily she’s here now. So all you 20somethings with the easy access to credit that I never did, watch your bottom line and live life the Gail way. You’ll be happier for it
March 16, 2010 at 3:15 pm
@Monkey Yes, begin pricing out what you absolutely *need* to have to function in an apartment, and don’t get caught up in what you would *like* to have. ie the walls don’t *have* to be painted, you don’t need a whole set of dishes, you can pick up some cheap things at Value Village. One of the biggest mistakes I made when I was out on my own, was putting on credit, things I thought I had to have.
Create a budget for what you would like, and ask around – go to garage sales. I bought a toaster for $5 that worked for 4 years at a garage sale. Maybe somebody has an extra iron, extra pot.
Also, alot of apartments you don’t have to pay utilities, I would definately recommend that. Utilities can be a killer expense in the winter — I remember when I paid utilities on an apartment, I rarely had the heat on, I would have my clothes, and artic fleece robe, and a blanket…
March 16, 2010 at 4:53 pm
Monkey, I’m 25, and have been living away from home since 18 (started with res, moved onto apartments).
I completely agree with Kat – mention you need some things, and see what you can take with you. Your parents might assume you’re taking you’re bedroom furniture (mine did, when I finally moved out – though my twin bed was moved to a spare room, and I took the double bed from there). I was able to get things from family (toaster, microwave, etc) as birthday/Christmas gifts.
Rent – if you can get a roommate, your rent costs will drop, and it will also give you reduced fees for Internet, phone, cable. In my first apartment, I was in a basement, and got all that included from my landlord, but that can vary with every place.
March 16, 2010 at 8:03 pm
@Monkey…Let people you know, know that you will be getting your own place soon. You’d be surprised how many people will load you up with gently used stuff for you new home. Not everyone enjoys holding garage sales and like knowing that their old things are in a good home.
I received some of my nicest stuff from co-workers who were moving, spring cleaning, getting nicer things, etc. I really didn’t want a roomie after sharing with either a sister or roomie at University. If you look around, you should find something that fits your budget…even if it means your bedroom is in the one open space in the suite. Don’t be worried…this should be a fun time in life. And it doesn’t have to be expensive.
March 17, 2010 at 5:15 am
I wish I had Gail’s great advice when I graduated high school. I am 25 now, and finally have a full understanding of the importance of being frugal. I try to shop on Craigslist when I might need furniture or a book for school, instead of buy new and digging myself into an impossible hole. I think they should teach this to Seniors in high school or College Freshman.
March 17, 2010 at 12:03 pm
Such tiny student loan debts!! Not to you who are paying them, of course, but I would KILL for such small loans. I turned 30 6 months ago, and I’ve paid off $25,000 in student loans. I have another….ahem…$187,000 to go! I’m on a pretty tight 10 year plan to pay them off, but that doesn’t include my honey’s…ahem…ahem…$278,000 in student loans! Combined, we’re working on a 15 year plan for both, but we’ll be in our mid-40s when they’re done. Still much better than our 60s!
I’m paying off the last of my consumer debt and car loan this year, and then can really begin focusing on my loans. Right now the interest rates are so low, but half of my loans are private, which means when the Fed starts raising rates, I’m in trouble. Trying to get ahead of the curve now. Congrats to all of you who didn’t make my mistake, and best of luck as you move forward
!
March 17, 2010 at 2:13 pm
@Ronnie, I’m just wondering how it is possible to have that much in student loans? Are you in the US, & was it a private university or something? I can not IMAGINE trying to pay off what is essentially a home mortgage in student loans.
March 17, 2010 at 10:29 pm
Love this series and look forward to more. Just to give people motivation, my wife and I put about $3,000/month against our non-mortgage debt after we finished school as we were used to living like students, and then both had good jobs. Debt disappeared and we were so used to living frugally, but not for want, that our net worth was well into the 7 figures by 30. Neither of us made more than $45,000 until we were 30.
Gail is right, it’s your perspective you have to change.
March 22, 2010 at 10:18 am
I graduated from university at 23 with no student debt, having worked 4 jobs to do so. My future wife had about $45K in student debt. We paid it off in about two years by living frugally – we only made about a combined $60K at the time, and lived in Toronto. We shared an apartment with some friends of ours and put every extra dime into paying off those debts. We also began saving for a condo of our own at the same time.
Now that we’re in our early 30s and have two kids, we make better money now than we did, but it was that early saving and sacrifice that paved the way for the quality of life we’re enjoying now. And we haven’t forgotten our good habits – we’re on pace to have our mortgage paid off and be debt-free forever in 5 years.