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Young Money: A Gameplan For Your Money As A Young Adult

4 September 2008 7 Comments

For young adults entering the “real world” it can be an interesting time. You are focused on your career, you are living in a new place potentially, and you are hit with terms such as 401(k), HMO and other “real world” jargon. One of the most important components of this transition to adulthood is learning how to manage your money. Well, since we’re focused on helping young money out, this post will be a step by step game plan on how to manage your money as a young adult.

No need to hire a financial adviser or pay for financial advice. Here is your complete breakdown of what to do to pursue young money. As a young adult, your goal is to have as much money left over as possible each month by effectively budgeting your money and balancing your lifestyle with your income. As the money you put away each month builds up, the following steps will tell you exactly what to do with this money.

Step 1: Pay off your debt

Many young adults have a few thousand in high interest debt as they enter the real world. As you start to get real income, your first priority should be to pay off this high interest debt. Note that this doesn’t include a mortgage.

Step 2 – Build an emergency fund

Your next step on the path to young money is to build an emergency fund. If you’re single with no kids, aim for $5,000. If you have a family, you may want to increase this up to $10,000. Make sure you keep this cash in a high interest savings account with easy electronic transfer capabilities. I use ING Direct.

Note: Some people will tell you to build an emergency fund first before paying off high interest debt. I disagree because you are paying interest on that debt and whatever cash you have saved is canceled out by your debt. If an emergency hits while you are in step 1, you have no choice but to use your credit card to pay for the emergency.

The great thing about this step is that once it’s done, you can forget about it and let the money sit and build interest. Unless an emergency hits where you need to use this cash, you can forget about step 2!

Step 3 – Maximize company contributions for your 401(k) plan

If you work for a company that offers a 401(k) plan, you should max out your contributions as much as necessary to get the full company matching. This is free money and should be taken advantage of. I don’t recommend contributing more to the 401(k) than necessary to get full matching.

Note: You can combine step 2 and 3 simultaneously if you are comfortable with not having a full emergency fund. This may make sense to maximize company matching while building your emergency fund.

If you’re a beginning investor, choose a basket of funds for your 401(k) that is balanced. I’d recommend having a chunk of it in some kind of international exposure.

Step 4 – Open a Roth IRA

If you still have money left over each month, it’s time to start putting money into a Roth IRA. By combining a 401(k) plan and your own Roth IRA, you are taking advantage of both sides of the tax break. 401(k) contributions allow a deduction on the front end and a Roth will allow you a tax advantage on the back end through tax free withdrawals. I use Zecco for my Roth so I don’t have to pay for trading commissions.

The combination of 401(k) contributions, company matching contributions, and additional Roth IRA contributions will result in a fantastic retirement planning package.

Also, if necessary, you can withdrawal your contributions from a Roth IRA without penalty (you can’t withdrawal the earnings until you’re older). There are also some stipulations which allow you to remove funds from a Roth IRA for a first home purchase. Consult an expert for more advice on this topic.

Step 5 – Ramp up your income

At this point, you have your retirement planning covered and emergencies covered. Also, you have no debt. A great start and you are ahead of just about everyone else your age. On your way to young money. It’s time to ramp up your income so that you can begin your pursuit of real wealth.

There are two ways to do this and I recommend pursuing both. First, excelling at your career can result in promotions and higher compensation. This is definitely important. Second, building a side income will significantly boost your income and your pursuit of young money. Imagine what even just a few extra hundred bucks a month can do to your financial picture?

A side income is something many people don’t pursue even when they have good ideas. It takes creativity and some serious work ethic to build a side income during the after hours when you’re tired from your job. However, it could pay off significantly. As a young adult, you might have the energy and time to make it happen.

Step 6 – Choose investments for the extra money

If you make it to step 6, it means you have extra money after maxing out your retirement and other obligations. That is a great thing and you have definitely achieved young money. At this point I would recommend building up a nice portfolio in a brokerage account. Also, another option is to buy a house. You will need a down payment for the house so start putting money away for that. If you already own a house, you may want to consider extra payments to pay off your mortgage.

Many people debate whether paying off a mortgage is a good thing, but if done in a combination of investment choices, you can’t go wrong. It is a guaranteed investment and comes with great peace of mind with knowing your house is paid off.

If you are past this point, then it means you don’t need to read this article anymore because you have a great deal of money. Invest it wisely and enjoy the lifestyle it affords you and your family.

Skills To Focus On Throughout The Process

As a young adult pursuing young money, there are several skills that you should begin to learn and will probably never stop learning. Let’s take a look at a few of them. The more you learn about each of these, the more you should be able to fly through the above steps I’ve outlined above.

1. Learning how to pick investments

This is a huge one and can greatly impact the return of your money. Whether you’re investing in stocks, real estate or whatever, you will need to learn how to choose investments wisely. Learning how to research the financial picture of a company or the potential cash flow of a piece of property takes skill. Read books, read blogs, and always be willing to listen to somebody who’s done it before.

2. Entrepreneurial skills

Entrepreneurial skills are extremely important as your pursue additional income streams or perhaps your own company as a main source of income. Running your own successful business can jump start your pursuit of young money!

3. Balancing Income & expenses

To maximize your savings, investment and pursuit of wealth, it is imperative that you learn how to balance your income and expenses. Your goal is to ramp up your income without ramping up your expenses in the same fashion. Too many people today ramp up their lifestyle and expenses in tandem with their increases in income; thus, never achieving higher levels of wealth. Master how to manage your lifestyle and your money and you will be on your way to young money.

Good luck on your pursuit of young money!

7 Comments »

  • torbjorn said:

    I’ve been looking into opening an INGdirect account because my current bank (ScotiaBank) just doesn’t give me that % interest that makes it worth ignoring the money. Anyhoo…is it easy to transfer within ING accounts? For example, eventually I’d purchase some GICs, but want to stack up my cash in savings first – do you know if I can purchase straight from my savings there? Have you tried it?

    (emailed ING with this question but they’re taking some time to reply)

  • kevin duffey said:

    torbjorn:

    ING Direct is awesome for transfering funds in between accounts. I do it all the time. I have multiple ING accounts linked together as well as accounts outside ING direct that i can transfer money between.

    What are you referring to when you say GIC?

    Also, if you end up opening an ING account, I would appreciate you clicking the link in this article so 20s Money refers you! Gotta pay the bills somehow, right? 🙂

  • torbjorn said:

    A GIC is a Guaranteed Investment Certificate – like a locked-in savings acct, often with even higher interest than a savings acct. INGdirect should offer them, at least they do in Canada. You can usually choose what your time frame is – and the longer the time-frame, and more untouchable it is (non-cashable until an agreed date) the higher the interest will be.

    sure! I’ll definitely click on your referral link.

    AND thanks for the info!

  • kevin duffey said:

    Ah ok, we refer to them as CD’s (certificate of deposit) and yes ING Direct offers them. I have held them before within my ING account. Take care.

  • Joshua Charles said:

    Love this site. I’m now in my early 30s and only recently entered the financial management arena. I was particularly interested in the section about saving up an emergency fund. That’s so important. And actually, ShoreBank, whom I represent, is offering an online HYSA of 3.5% APY. With it comes 24/7 access and the capacity to connect multiple accounts to it for easy tranfers. But the thing that really sets them apart from anyone else is their mission statement. I pretty much used to think all banks were the same until I came across ShoreBank. They follow a triple bottom line, committing themselves to serving the community and helping to save the environment in addition to making a profit for their customers. So, not only is my money compounding nicely, but I have the satisfaction that it’s being used to help people and the planet. You can find them at sbk.com.