When you’re a young adult, the world of finance can be a confusing and dismal place. People in their late teens and early twenties are often leaving home for the first time, looking for a career and strapped for cash. They are likely credit-less and unsure how to budget for all the new bills that come with independence.
If this describes you, there is no need to fear. Being young is actually a blessing. If you start off right, you can positively impact the rest of your financial life. The following are a few strategies you can employ now to lay foundation for a sound financial future.
Live Like a Student (Even If You Aren’t One Anymore)
Often, new graduates scale up their living expenses tremendously when they leave school and begin the career phase of their life. Don’t make the mistake of spending beyond what you earn, especially when you’re just starting out.
Take advantage of the fact that you don’t yet have a mortgage or family to support and get your finances in order. This doesn’t mean you should live off of Ramen noodles and share a bachelor apartment. Just don’t start racking up unnecessarily high bills for rent, credit cards or car payments. Pay off your student loans and start saving some of the money you don’t need to spend.
Open a Retirement Account
Retirement isn’t something to start thinking about when you’re middle-aged. As soon as you begin receiving a monthly paycheck, you should be putting some of it into a retirement account. In fact, Forbes.com lists starting too late as one of the top mistakes young people make when it comes to saving for retirement.
If possible, open an employer-sponsored account like a 401(k) or IRA through your job. Deducting a regular contribution from your paycheck will go into your account before taxes are taken out. Also, most employers encourage you to make deposits into your account by matching a certain percentage of what you contribute on your own. This is free money start collecting as soon as you can.
Even if you can’t open an account under an employer, you should still begin saving in a retirement account and deposit your earnings pre-tax. Being young gives you the ability to apply a more aggressive approach to your portfolio. Plus, the deposits and investments you make at 20 are far more valuable than at 30 because of the compounding interest they can earn. The earlier you begin saving for retirement, the more opportunity you give your portfolio to grow over time.
Take Advantage of Student Credit Cards
One of the most financially difficult aspects of being young is not having a well-established credit history. This is especially true in today’s economic situation, when creditors are more hesitant than ever to lend out credit.
Luckily, you can take advantage of the favorable terms of a student credit card while you’re in college and help establish healthy credit for post-graduation life. Creditors make student credit cards more accessible to college-aged people who haven’t yet established a credit history so they can be groomed into responsible adult spenders. Many also offer additional incentives meant specifically for college students. For example, the MtvU card offers rewards points for good grades and on purchases made at bookstores.
Be careful, though. Student credit cards are like any other when it comes to how they affect your credit. You can dig yourself a deep financial hole if you don’t use yours responsibly. Adam Levin, co-founder and chairman of Credit.com, is quoted in the Wall Street Journal as suggesting students keep their balance within 10 to 30 percent of the limit. This will not only establish a credit history through regular on-time payments, but also positively impact overall credit by maintaining a low debt to credit ratio.
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