Money in your 20s: 5 Things Everyone Should Know

I am participating in the first annual Women’s Money Week, a project to empower women to take control of their finances.   Today's topic is Money in your Twenties/Thirties/Forties/Fifties/Retirement. Check out the Women's Money Week 2012 website for more posts from some amazing Women Money Bloggers!    

For some this period may represent your glory days while others may refer to it as a Quarter Life Crisis, but your 20s is a time of amazing transformation. The bridge connecting adolescence and adulthood, your 20s may bring your first (full-time) job, first love, first major purchase (ex- a new car), and first experience with recurring bills (student loans anyone?).  With all these “firsts,” it is important to make sure you are making smart choices and creating good habits to carry you through the rest of your life…ESPECIALLY when it comes to your finances.    Here are a few things that I believe everyone should know about money before leaving your 20s to put you on the path to financial security:

How to create a budget.

You have probably heard this before, but the budget is one of the basic principles of personal finance. For some, this may be your first experience making enough money to actually support yourself.  In order to manage this new fortune, you need to keep track of the money you have coming in (income), the money you have going out (expenses), and make sure that your income is always greater than your expenses.  

Avoid the credit trap!

When I was in college, there were credit card companies all over the campus offering free t-shirts, mugs, etc.  just for signing up.  In that setting I was eager to sign up for my first credit card, but luckily I refrained from actually using the card for over a year and truly considered it a tool to be used for emergencies (and the occasional tattoo—don’t judge me lol).  Your 20s is a time for establishing and building your credit. Because you probably have little to no credit already, you probably won’t have the best credit rates, so spending recklessly on your card and carrying a credit card balance from month to month means that you may face hefty interest charges.  That spring wardrobe you caught on sale might not be that good of a deal if you buy it on credit and have to pay an extra 10-20% over the course of a year.  Also, don’t mess up your credit early by applying for a lot of different credit cards, maxing out card, and missing payments.  Not only do these immediately hurt your credit score (which would affect your future interest rates on home/auto loans), but they create bad financial habits that become more and more difficult to break.

Understand the power (and pain) of interest.

I already touched on how carrying debt is costly (aka wasting money) due to interest charges, however interest can be a good thing if it is being paid to you. Get into the habit of making regular contributions to an interest bearing savings or checking account and earn free money (although you will have to pay income taxes on your interest earnings).

Time is on your side, so take advantage of it!

When it comes to saving for retirement, it is best to start as early as possible.   Even if you can only contribute a small amount, the benefit will make it worth your while, as there is a little thing called compound interest.  Compound interest means earning interest, on the interest you have already earned.  In essence, you could deposit money into an interest bearing account, completely ignore it and years later you will still have more there than you started with.  In addition, you should also consider opening an investment account (401k, IRA) to fund your retirement. While there is more risk involved than with interest-bearing savings/checking accounts, the concept behind compound interest also applies to investment returns. "Someone who puts $4,000 a year into retirement accounts starting at 22 can have $1 million by age 62, assuming 8% average annual returns. Wait 10 years to start contributing, and you'd have to put in more than twice as much -- $8,800 a year -- to reach the same goal."Because you have 20+ years until retirement, the current economic downturn and volatile stock market will not have as large of an impact on you as it will for someone who is 55 currently. You have the time to ride out the low points of the stock market and when the market bounces back, you can reap the benefits.

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Money doesn’t bring happiness.

Money is important, and can buy you all kinds of new toys and luxuries, but it cannot buy happiness.  Focus less on material things and more on things that would make you happy.  Consider your values—Do you value financial freedom, being able to work for yourself, or having the freedom to travel? Do you enjoy time spent with family and friends above all other hobbies? Acquiring “stuff” might make you feel good for a moment, but it doesn’t match the feeling of joy you get from being with loved ones, or the accomplishment of achieving financial independence. You may love going out for dinner and drinks with your girls, but  know that you would be just as happy having a girls night in watching Sex and the City re-runs and catching up on good gossip.  Always remember that while money can be used to help you achieve your goals or pursue endeavors that make you happy, it is not necessary to achieve that happiness.