It’s a hard time to be a 20-something. The world has concocted a troubling cocktail of economic trends and turned them loose against today’s young people one after another, almost as if to say, “How will you respond to this?”
First there was the long-term stagnation of middle-class wages during the past three decades. Then there was the equally disturbing trend of rapidly increasing college tuition costs and student loan debt. Finally, in 2008, the unprecedented global financial meltdown caused a recession that evaporated many of the entry-level jobs 20-somethings usually aim for.
The result has been what feels like a whole generation of young people who are getting crushed between their insurmountable student loan payments on one hand and the frustrating lack of well-paying job openings on the other hand.
We can’t change these trends, unfortunately, but we can offer some great money lessons for these 20-somethings (and some 30-somethings) to navigate this treacherous economic terrain while preserving their sanity and long-term financial health. Here are seven money lessons we’ve learned:
1. New Cars Are a Luxury for the Select Few
It seems strange to start by talking about cars, but the fact is that there are very few purchases that can affect your finances as much as buying a new car. And let’s be honest: a new car is a luxury. Despite the many ads that condition us to believe everyone should buy a new car, the truth is (A) almost any new car costs a lot and (B) they’re almost always financed on credit. We’ve heard too many stories about well-intentioned young people who got behind in their car payments or couldn’t afford to continue paying their car loan anymore.
Certainly, some people are financially ready to buy a new car. But while you’re in your 20s, why even consider it? If you have a little extra money in your monthly budget, put it in a savings account (more on this in a minute) rather than putting it toward a car payment. A well-maintained used vehicle will get you around town just as well as a new one, and will be much healthier for your long-term finances.
2. Living Like a College Student Lasts Beyond College
Look, we’re not saying you have to eat microwavable noodles for dinner every night, but there are certain “college student” habits that you should try to maintain as long as possible. The primary one is being cost-conscious. Just like underclassmen gravitate toward any free meal that’s available, you should pay attention to what you’re spending and take advantage of the low-cost options available to you. Whether this means going to your local library instead of shopping online or buying clothes at a thrift shop instead of a department store, your 20s are a good time to keep those frugal habits strong.
3. Student Loan Debt Can Be Managed
Many of us have student loan debt. And the average amount of student loan debt is over $25,000 per borrower. That’s a lot to manage. But fortunately, there are some great programs like Income-Based Repayment and Pay As You Earn that can help those who are struggling to make their payments.
Unfortunately, those programs can lead to more interest payments in the long-run, so an even better solution is to limit expenses as much as possible while making larger student loan payments to get out of debt quicker. Whatever you do, don’t stop paying the loans without first contacting your lender to see if they will work out an alternate repayment plan with you. While paying off student loans may be hard, defaulting on them is even more painful.
4. Consumer Debt Must Be Approached With Urgency
Do you have credit card debt? If so, you’ll need to treat it like a hot potato — something that must be addressed as soon as possible. That’s because the way credit card interest works means you can get buried in debt if you’re not proactive. For those 20-somethings who have this type of debt, it’s extremely important they make a priority out of paying off those credit card balances.
There are a lot of different ways to tackle credit card debt aside from the obvious. You could consider doing a balance transfer in order to obtain a lower interest rate, you could use a site like ReadyForZero to keep you motivated, or you could freeze your card in a block of ice to make it unlikely you’ll add more to the balance. Whatever you do, keep that sense of urgency.
5. An Emergency Fund Is Not Old-Fashioned
Saving up some money in an emergency fund is an idea that’s been around for quite awhile. And it’s as relevant today as it was whenever it was first implemented. Because of all the unfortunate trends listed above, life for a 20-something is as uncertain and financially precarious as ever.
That is why you absolutely need to save up an emergency fund — ideally one that could cover several months’ worth of expenses if possible. I know, it’s hard to do that. But you can do it, and if you do, you’ll be so grateful to have that cushion in place when an unexpected expense like a medical bill or car repair comes out of the blue.
6. Saving for Retirement Is As Necessary As Ever
By now you’ve surely heard about the power of compound interest and how important it is to start saving early in life for your retirement. I know from experience how hard it is to do that and how distant that goal of retirement feels when you’re a 20-something just trying to get a good start in life.
“Retirement? I’ll deal with that when I’m old,” you might think. But the reality is even if you can only afford to dedicate $50 or $15 per month to your retirement account it’s still worth it. That little amount will grow faster than you imagine. It really will.
7. You Can Reward Yourself Without Splurging
One of the hardest things about living on a budget as a young person is that there are so many fun things to do — and isn’t being young about exploring, spending time with friends, and making good memories? Yes, it sure is! So the key is to learn how to do all of that without jeopardizing your budget.
And the key is to reward yourself without splurging. For example, if you give yourself one night per month to go to a concert, a nice dinner, or a movie, then you still get to enjoy those things while keeping the spending to a reasonable amount. And more importantly, find ways to get your fun time in without getting your wallet involved. Watch a classic movie on your home TV screen rather than go to the movie theater, or host a potluck rather than going to a restaurant with your friends.
The bottom line is, you can still have a great time as a twenty-something as you make your way through the challenging financial times that we find ourselves in. By learning and utilizing the money lessons above, you will be on your way to getting the most out of your twenties — and the decades to come.