How to Make Financial Decisions in Your Twenties
In the sea of things written about the millennial generation; how we’re all at once tech savvy, entitled, faltering, over-achievers, few have acknowledged that these characteristics are symptomatic of any generation in their twenties. Every youth culture struggles with asserting themselves at the cusp of adulthood. While there have been age and demographic shifts in when twenty-somethings marry and start families, we all in some way or another build our first home during this decade. So how do we go about building a strong foundation?
Housing is likely your single biggest expense. How can you get by in an expensive city when financial planners say no more than 20 percent of your income should go to your rent or mortgage?
If you live in a city where you don’t need a car, you can squeak by with 35 percent of your paycheck going to rent. However, that added bit means very little on an entry-level salary. This is when it is time to hide your “young person in the big city with an enviable apartment” rom-coms and get real. If you prioritize living in a trendy neighborhood, realize that staying on budget likely means roommates in a no fringes like security building. On the other hand, if the thought of roommates frightens you, understand that you will likely have to live further out of the city to afford privacy.
For recent college grads considering home ownership, wait. While it is true that mortgage rates are low, owning a house or condo is, at the absolute minimum, a five year commitment. Few recent college grads are able to afford a home they can grow into as a single person let alone one ample enough to house the possibility of a spouse and kids five to ten years down the line. Also being tied to property may force you to say no to exciting opportunities in other cities.
Finally, there is the living arrangement many dare to speak; living with your parents. One positive legacy of the Great Indian Middle Class is no or littlesocial stigma of living at home. For most of us this is far from the ideal living situation, but a few months living rent free can do wonders for helping you build your savings.
Many people complain about the albatross that is student loans and paying them quickly. The most common question I receive from recent college grads is, “I got x amount of money for my graduation, should I just apply it all to my loans?” My answer: No!
Student loans are a relatively neutral item on your credit report, especially when you are young. Carrying student loan debt is unlikely going to disqualify your for an apartment or car. If you are lucky enough to get graduation money or a similar windfall at the age of 22, the money is best left sitting in your bank. Think of it as being gifted the three to six months savings I wrote about in my previous column.
If the prospect of carrying debt unnerves you, consider adding an extra $50 or so to your monthly payments or making an extra payment every few months. Once you are more established in your career, have ample savings, and no other debts, then by all means, pay your loans aggressively!
Your twenties represent one of the most dynamic decades in your life. Millennials are simultaneously told by previous generations to seize opportunities and wait our turn. When making life choices, including those with a financial component, think about which experiences you will remember fondly—or at least humorously—years from now. Your decisions may not always be the “right” ones, but there is no need to discredit thoughtful decisions and your wallet can forgive for those.
Best wishes to you and your financial health! Have your own piece of advice or a burning question about your financial future? Share with us in the comments!