Friday, May 2, 2014

Financial strategies for 20-somethings

Many people in their 20s are dealing with large amounts of student loan and credit card debt and are living paycheck to paycheck, while dreaming of the day they can allocate some of their money to reach their financial goals.
If you're a 20-something, you may think financial planning at this stage in your life is pointless. But the truth is, there are some basic strategies you can implement, regardless of how much debt you have or how much income you're earning. Learning these strategies will help you set up the financial foundation you need to move through this challenging time in your life and set the stage for a strong financial future.
1. Create a budget
Budgeting is critical, even if you're not making that much money yet, as it allows you to see how much money is coming in and going out every month. Although you may understand you should budget, the reality is you probably aren't.
Getting a budgeting system in place as early as possible and reviewing how money is being spent so that adjustments can be made, if necessary, ensures you are living within your means and able to save toward your financial goals.
The basic budget formula for after-tax income is:
  • 50 percent for fixed expenses, such as housing (allocating 28 percent or less for housing expenses), basic food and insurance premiums.
  • 20 percent for financial goals. This would include extra debt payments, a cash cushion, retirement, etc.
  • 30 percent for variable expenses, such as dining out, entertainment and travel.
2. Set up 'money dates'
Set up weekly "money dates" to review your budget and manage and plan out your finances. By calling this allocated time with your money a "date," you can begin to bring a fun, exciting element into your financial life to help you stay committed for the long haul.
During your money date, you should pay your bills (although most should be set up as autopay), update and review your budget, and take care of any other financial concerns. 
3. Save automatically
Most people don't save, because they make it way too difficult for themselves. Instead, review your budget and aim to start saving toward your financial goals by following the "pay yourself first" strategy. Under this method, you set up your savings to be automated every month so that you save before spending money on variable expenses.
The goal is to save 20 percent of your net income — but don't let that amount scare you. Even if you can start with only $10 a month, that's better than nothing. Every year, review and see if you can increase your savings amount.
4. Build a cash cushion
The goal of a cash cushion is to have three to nine months' worth of your fixed expenses in a savings account to pay for life's unexpected incidents. Life always throws curveballs — your car breaks down, your computercrashes, or you receive an unexpected medical bill — and having money in the bank to cover those expenses will help you maintain your financial peace of mind.
If your fixed expenses are $3,000 per month, you should aim to build a cash cushion of anywhere from $9,000 to $18,000, depending on your comfort level, job security, etc.
That sounds like a lot, I know. But remember, just start with what you can to build your cash cushion over a few years. Again, even if it's $10 a week, that's still one step in the right direction.
Your credit score affects nearly everything in your financial life. It affects the interest rate on the car loan you apply for, your mortgage loan, your credit cards — even your job and housing prospects, as potential employers and landlords can reference your credit score when reviewing your application.
By monitoring your credit score, you can see where you stand and what you can do to improve it if necessary. Use websites like to view your credit score (not your actual FICO score) regularly for free, and then pay to see your actual credit score at least annually using
6. Reduce your debt
The first step is to make a list of all your debts. Get clear about how much you owe, the interest rate of each debt and the minimum payment due.
Then review your budget to determine how much you can realistically add toward extra debt payments; start with the debt with the highest interest rate, while paying the minimums on the rest. This will allow you to save the most in interest payments. Once the debt with the highest interest rate is paid off, move on to the second highest and so on.
7. Save for the future
If you have the ability to start investing into your retirement accounts after you've allocated some monthly funds toward building your cash cushion and paying off your debts, then set up an automatic contribution into your retirement account. 
By starting early, you can allow compounding interest to work in your favor on your investment accounts. If you are new to investing, make sure you do your homework and read investment books so you are clear about what to expect when investing for your future.
8. Grow your earning potential
Income is one of the biggest factors in wealth creation over time. After all, if you don't make money — or don't make enough money — it is very difficult to save for your financial future. If you can't save as much as you would like to due to your income level, focus on ways to increase your earning potential for the long run.
There are a lot of free courses you can take online. Watching YouTube videos to sharpen skills is something anyone can do. Also, there are so many ways you can earn extra money on the side. Entrepreneur, author and financial guru Ramit Sethi advocates for this at his online community, called "I Will Teach You To Be Rich," named for his self-help book for 20-somethings. Think outside the box, and continue to focus on increasing your earning potential every year.
Brittney Castro is a CNBC Contributor and founder and CEO of Financially Wise Women
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