When I graduated from college, I had a moderate amount of student loan debt and zero credit card debt. I felt like a budget ninja for not carrying a balance on my card, but I was clueless about the power of compound interest, and retirement felt light years away. I knew how to save—but not for large, long-term goals. In college, everything is right now.
But now that my friends and I are of a certain age, we realize we could have used a few tips. Here’s what we wish we’d been told in our twenties.
Sign up for your company’s 401(K) immediately
As soon as you get a grownup job with a 401(k) or similar retirement vehicle, set up automated payments from your paycheck and contribute enough to get company matching funds if your workplace offers it. You won’t miss what you can’t see. Take it from me, it’ll never be as easy to save as it is now without kids, mortgage, childcare, braces, and all the rest. Aim for saving 10% of your gross income. Think of it as paying yourself first.
Open a Roth IRA
If your job doesn’t offer a retirement plan, don’t skip saving. Open a Roth IRA to jumpstart compound interest while you’re young. You can contribute up to $6,000 of your after-tax modified adjusted gross income (MAGI) per year. Even if you’re not settled into a full-time job yet, you can save in a Roth from part-time work. Just make sure the amount isn’t more than you earned.
Here’s what I wish I’d known. Let’s say you’re 23, and you open a Roth IRA with $500 and a goal to contribute $3,000 per year until you’re 65. At a 7% growth rate, your $126,000 in contributions would grow to $748,902. Sock away $5,000 per year and it’s $1,242,455. Wild, right? That’s the power of compound interest. Even if you have to take a break from saving, the early contributions will continue to grow. Play around with this calculator.
Learn how to budget
Many of us don’t really know where our money goes. But random spending adds up fast. If you create a plan, you can figure out where you’d rather have it go—like longer term savings goals or student loans—and still have some leftover for fun. Don’t think of budgeting as a ball and chain, think of it as taking charge. Use an app like YouNeedABudget (YNAB) to help, or create a simple spreadsheet.
Build an emergency fund
Women need to have some emergency money, especially if you’re single or you don’t have family to rely on. The standard recommendation is 3-6 months of essential living expenses, but most people don’t save even close to that, and do you really need to? Here at HerMoney, the recommendation is 6 weeks of expenses or, alternatively, $2,000. I like that goal. Start small if necessary—you could even reduce your retirement contribution to 7% and divert 3% until you’ve got it saved.
Pay off your credit card in full every month
This is a biggie. I figured this one out right out of the gate, but lots of friends had to learn the hard way. It’s much better not to pay 20% in interest fees or whatever your card’s “annual percentage rate” is on the monthly bill. I mean, that’s like paying a 20% tip on those cool boots. It’s not worth it. And you don’t need to carry a balance on your card to boost your credit score (lots of people think this).
Check out the perks of a good credit score
On the flip side, credit cards can be a super tool to build a high credit score, which helps you get lower insurance rates, qualify to rent an apartment without a co-signer, buy your own cell phone plan, and more. I didn’t understand for years that a good credit score could lower costs and open doors for me. Think of credit cards as a tool, not free money. Use it to pay a regular expense like a utility bill.
Watch the lifestyle creep
It’s so easy to ditch the frugal living habits once we’re feeling flush with full-time pay. But I can tell you from personal experience that living within your means pays dividends. I know rent is ridiculous now—but that makes these small habits even more important. Things like groceries instead of DoorDash take-out, the library instead of Audible, bicycling or public transport, buying second-hand, upgrading incrementally, living with roommates. Use your local Buy Nothing Facebook group or borrow from a neighbor. All these little moves help—plus, they’re better for the environment.
Figure out how to balance paying off debt with savings goals
So, I wish I’d understand the difference between interest rates when I was younger. I power-paid my low-interest student loans, because, you know, all debt is bad. But I neglected to save in a high-interest account as a result. You can do both! Once you automate retirement savings with that 7% return, figure out if there’s extra money for your student loans (interest rates generally range from 3 to 5%). In other words, let your savings growth get started while also paying down debt. Of course, if you’re carrying 23% interest on credit card debt, pay that off before socking extra money to student loans.
Don’t skip the health insurance!
If you’re still on your parents’ insurance plan, you’re set until age 26, but what if their plan isn’t adequate? If your job doesn’t offer health insurance or you’re between jobs, it’s super tempting to skip it. Don’t do it. Check to see if you qualify for a subsidy from your state’s marketplace or even qualify for expanded Medicaid. Young people have accidents, and random health issues crop up. You’ll want to be able to access good healthcare. Trust me, your parents want you to have it too.
More on HerMoney:
- 6 Successful Women Who Got Fired and Went on to Greater Achievements
- Women in Their 50s on What They Wish They Knew About Money + Career in Their 20s
- HerMoney Podcast: Financial Planners, Retirement Specialists, And HSAs For Long-Term Care
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