How to set yourself up financially starting in your 20s

“Adulting” with your money. You’ve got this.

Your money is like anything else you need to learn. It seems crazy complicated at first, then bit by bit you learn more, until you realize it’s more accessible than you thought.

Even though the adult world has many confusing concepts, remember that most people are not geniuses. Yet they manage to navigate, and so can you.

Gradually you will be a full-fledged, salary-earning, tax-paying, money-saving grown-up.

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Age doesn’t matter as much as you think, says Paul Gaudio, a certified financial planner at Bryn Mawr Trust in Princeton, New Jersey.

Someone who’s 21 or 26 needs the same core principles of financial planning — investing, risk management, estate and tax planning — as people in their 30s, 40s and 50s. “It just changes in terms of focus,” Gaudio said.

On a starting salary that has to cover your monthly bills and get you through your days, you may have to do without some things, says Chris Kampitsis, a CFP at the Barnum Financial Group in Elmsford, New York. “We all have choices to make,” he said. “For some people, it’s living in the suburbs and moving to the city when they get their financial feet under them.”

Live on less

“The biggest thing, from Job One, if at all remotely, humanly possible: Immediately start putting 10% of your money into your 401(k),” he said.

Kampitsis is firm on this strategy, if not the amount. If you can’t do 10%, then do 5%. And if you can’t do 5%, save 1% or 2%, but set a goal of raising the amount.

Learning to live on less than you make from the start of your career means you’ll never feel hamstrung by lack of money. “You’ll always simply have built your lifestyle and your expenditure around that 90% habit,” Kampitsis said. Doing this now is far easier than it will be in 10 years to 15 years, when you could be dealing with wedding costs, mortgages or children.

Take everything you can

It’s good to learn early on how to squeeze the most out of your employer benefits. “Maximize those benefits to the maximum extent possible,” Gaudio said.

That means saving enough in your 401(k) to get the employer match, if there is one. “That is money you would not get if you didn’t put in that contribution,” Kampitsis said.

If you feel squeezed by contributing to the retirement plan or an individual retirement account, here’s a government gift in the form of a tax credit: the saver’s credit, for those with 401(k) plans or IRAs who aren’t dependents on someone else’s tax return and earn under a certain limit.

The maximum saver’s credit can be as high as $1,000 for single filers and $2,000 for married-filing jointly. To claim this tax break, you file Form 8880 with your tax return.

Manage risk

Even if you don’t think you have much of value in that first apartment, get renter’s insurance.

You’ll want to be covered in case of fire or theft, and you can get a rider to cover any special things, such as a piece of expensive jewelry, a valuable painting or a laptop.

The average cost is about $16 a month — a small price to pay, considering what could happen in case a neighbor lets their bathtub overflow.

Don’t get carded

Most recent college graduates don’t understand how credit cards work, Gaudio says.

If they had a credit card account in college that their parents paid for, they may not even have seen the bill. In that case, they’ve learned to see it only as a way to pay for things.

Learn to use credit responsibly. Gaudio recommends using credit cards for emergencies, and relying on debit cards, cash or checks for everyday spending. “That way, the balances never build up,” he said.

Reality check

In your early 20s, you almost certainly have competing priorities and a starting salary.

You may have student loans to pay down in addition to your other monthly bills. On top of that, you know you should have a couple of months’ expenses stashed away in case of an emergency, not to mention the need to save for retirement.

Unless you’re in a sales job with an unpredictable cash flow, there’s good news. “Your income is a known quantity,” Gaudio said. “There’s a million ways to create a budget, and I always encourage people to create one.”

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