So, I thought I’d do a quick series on financial maxims by age. I’m sure the information isn’t Earth-shattering, as most of you probably know this, but I’ll try to include helpful information for you as you plan your financial journey from now until retirement.

In Your 20s

You’ve heard it time and again, the best time to start investing is in your 20s. This is because the younger you start, the more risk you can take on, and even if things get bad for a little while – like now – then you’ve still got plenty of time to recover. But, beyond that, it also gives you that much more time for your money to compound. The earlier you start, the more goes into your retirement accounts and the more you’ll have saved up then if you waited until your 40s to save.

I’ve got a friend that I’ve been trying to talk to about this. Her sole ambition in life is to be a stay-at-home mom. That’s all well and good, but she’s not even in a stable relationship yet, so she’s working and she’s leaving free money on the table from her employer. She’s 26 and doesn’t believe she needs to worry about it. It’s infuriating sometimes to have these discussions with her!

But, the truth is, she doesn’t know what life has in store for her. Yes, she may very well be a stay-at-home mom, but at some point those kids are going to grow up and she’s going to need to start thinking about retirement. She should be investing now, if not for herself, then to help her and her future husband maintain their lifestyles in retirement. Put in that perspective, she understood where I was coming from and went ahead and started contributing to her 401(k). She’s at least meeting the employer’s match at this point and I’m very proud of this step. I just hope she doesn’t cash it in when she gets married. But, I don’t think she will.

Anyway, the point is, thinking about your finances and investing in your future are things you want to start in your 20s, and it’s the easiest time to do it. There are so many things already changing in your life that it just makes sense. Let’s take a look at some things to consider.

# 1 – Plan Ahead

Something most people in their 20s fail to do is plan ahead. A lot of times, twenty-something’s are still living like they’re in college, care free with no problems in the world. And that’s when debt settles in.

I recommend all college students to sit down at the beginning of their senior year and really think about the next five years of their lives. Where do they want to be, not just career-wise, but also financially. After college, they should reassess their five year goals and then start looking at their 10- and 20-year goals as well.
Some things that folks in their 20s should also start learning at this time are:

• Make a budget and stick with it.

• Set up an emergency fund and start adding to it.

• Start investing.

• If needed, create a debt reduction plan.

You’ll find that these things typically coincide with other financial maxims people in their 20s hear about.

# 2 – Live Within Your Means

I’m sure we’ve all heard this one, whether we’re in our 20s or not. The thing is, if you make it a habit in your 20s, the rest is a piece of cake. If you can’t afford something, don’t buy it. Don’t spend more money every month than you make. Let go of your materialistic need to keep up with the latest fashion and gadgets. It doesn’t matter and it makes your life a whole lot worse later down the line. If you learn to live within your means while you’re young, you’ll save yourself tons of money and stress over the years…just ask your parents.

Ok, so that’s great. Live within your means. How do you do that when you’re in your 20s and making a crappy salary? Well, there are some options.

1. You could live with your parents while you get back on your feet.

I realize this isn’t the most attractive option for most people, but it is effective, I can assure you. You may still have to pay a little something for rent, but in most cases, this will allow you to work on building a savings or paying down debt, while keeping you responsible with bills.

2. Go with a cheaper apartment/car.

Don’t sacrifice your personal safety, first and foremost. And when I say cheaper, I don’t mean cheaper quality. I mean that not all of us in our 20s can afford a 5 bedroom house or the BMW. Sometimes we have to take things slow. By going with the cheaper option, like renting an apartment or getting an excellently valued used car, you can save the extra money for later purchases.

3. Gone are the days of eating out three meals a day, every day.

Learn to cook. Eating out is a huge expense and if you eat with others, it generally costs you more all the way around. Go back to planning ahead and figure out your meals ahead of time. For instance, if you normally go grocery shopping on Sunday’s, sit down Saturday or Sunday morning before leaving and figure out what you’re going to eat for the week, then make sure you have everything you need.

4. Clip coupons and hunt for the deals.

This isn’t going to make or break you by any means, but it can save you quite a bit of money. And, if you’ve got the energy for it, you could even learn how to play the coupon game for a little extra savings. But, when it comes to living within your means, every little bit helps.

5. Watch out for the impulse buys; give yourself a 30-day cooling off period.

I know most people say a 24-hour cooling off period, but I’m off the opinion that if you go with 30 days, you’ll realize just how much you DON’T need that particular item. And, as impulse buying is one of the big reasons most people end up in debt, it’s good to have a buffer time before you make any purchases. This buffer also gives you time to think of ways to save for the item if you really want it, rather than just sticking it on credit.

These are just a few of the ways you can keep your spending under control and learn to live within your means.

# 3 – Pay Yourself First

Savings needs to happen automatically for most people or they forget to do it, or something just comes up. In any case, the best way to turn saving into a habit is to pay yourself first and to do it automatically. Have your employer distribute an amount to your savings directly, or set up and automatic transfer with your bank so it moves as soon as the check hits the account.

# 4 – Pay Off Debt

If you’re one of the lucky few who left college with little-to-no debt, congratulations. You’re in the minority. If you left college with a lot of debt, well you’ve got your work cut out for you. But, the sooner you get started and get it paid off, the more you’ll save yourself over the long run.

How you choose to pay off your debt is entirely up to you. Personally, I like the traditional snowball method where you order your debts from highest interest rate to lowest, irrespective of the amount owed, and start hacking away at the top one, paying the bare minimums on the rest. Once the highest is knocked out, move to the next one and apply the payment that was going to the previous debt to this new one. Keep going until you get to the end.

If the Dave Ramsey method works for you, so be it. Personal finance is called such because it’s personal to each of us. So, find a method that you’re comfortable with and start using it. The important thing is to start now, while you’re young.

# 5 – Start Investing

401(k), 401(k), 401(k)! I can’t say this enough. Participate in your employer’s 401(k) at least up to their match. Do not leave the free money on the table. I know it sometimes feels like you need that money in your check rather then in a retirement account, but if you start contributing, you’ll find you don’t even miss that money…unless you have an insanely cool contribution match of like 15%…then maybe. But, the likelihood of that is slim to none. So, go with the 3-5% match and start socking it away.

# 6 – Take Care of Your Credit

Assuming you haven’t already damaged your credit, now’s the time to really focus on taking care of it. Your credit rating is like your word that you’ll repay a lender. So, the better your credit looks, the more trustworthy you appear to lenders. This becomes important when looking to buy your car, rent an apartment, get utilities, and even applying for some jobs.

I’ve never really mentioned it, but I was actually turned down for employment by the first bank I interviewed with because of my credit. The reality is that when you handle cash all day long, they want to make sure that you’re not going to help yourself to what’s in your drawer in order to meet your obligations outside of work. Your credit rating does matter.

So, there’s a lot of information here and I’ve left some things out to open discussion in the comments. What would you tell your 20-year-old self about money? Do you disagree with anything on the list?

Stay tuned for the next installment, Financial Maxims for your 30s.

Related posts:

1. Financial Maxims: In Your 30s
2. Financial Maxims: In Your 40s
3. Financial Maxims: In Your 50s
4. Carnival of Personal Finance – Financial Armageddon Edition!
5. The 2009 Financial Road-Map