Getting a handle on your financial life can feel overwhelming when you launch into your adult life, as many recent graduates are now doing.
Most people don’t put much thought into the fundamentals ahead of time: getting health insurance, paying off debt, contributing to retirement plans, building an emergency cushion, knowing your credit score and improving it.
For some advice for young adults who are starting to focus on these key financial tasks, we sat down with Beth Kobliner, personal finance expert and author of the recently revised classic guide “Get a Financial Life: Personal Finance in Your Twenties and Thirties.”
Beth Kobliner
For decades, Kobliner’s expertise has focused on the basic ABCs of managing your money. He even taught Elmo about money on Sesame Street.
Despite having a job in hand and possibly an employer-provided 401(k) plan, the uncertainty of the economy, sky-high home prices, and the capriciousness of the market would make anyone nervous about their money decisions, let alone young adults just starting out.
Read more: 6 money moves you should make in your 20s that will help you get ahead
Kobliner spoke to Yahoo Finance about his advice. Here are edited excerpts from our conversation:
Kerry Hannon: What are your financial rules of thumb for someone evaluating their current saving and spending habits?
Beth Kobliner: My rough financial rules for knowing if you’re on the right track, completely off track, or somewhere in between are:
Your debt payments (not including your mortgage, if you have one) should be less than 15% of your monthly payment before taxes.
Don’t spend more than 30% of your monthly take-home pay on rent or mortgage payments. This rule is something to aim for, but it’s not really achievable if you live in a major city like New York, San Francisco, or Washington, DC, where you may need multiple roommates to even come close.
Save at least 10% of your take-home pay each month. It’s essential to think of your savings as a fixed monthly expense that’s part of your budget, just like car payments or rent.
Realistically, it may not always be possible to achieve these goals, especially if you are just starting your career, but they are good guidelines to keep in mind.
Why is time so important to people at this stage when it comes to their money?
When you’re young, money grows exponentially if you invest even small amounts in tax-deferred retirement accounts. But you need to do it methodically and save it for long periods of time. That magic of tax-free compounding, as tough as times are for young people today, is the best way to ensure you have some money in the future.
How is the financial world different from when you first wrote your guide for young people?
Today’s young people want to make a lot of money quickly. They may be living paycheck to paycheck and are looking for quick answers. With social media, these quick answers seem pretty easy. There is always a desire to find the best stocks instead of investing in a low-cost index fund. The best way to lose money is to try to make it quickly, and you may suffer a really big loss that will take a long time to recover from.
The basics are the same: stay debt-free, save in a long-term retirement plan (although it has the word retirement, it’s actually a super smart investment plan), and invest in low-cost index funds.
What are some of the particular challenges facing this age group?
They have more student loan debt than previous generations. They also have more credit card debt than their parents’ generation at this age.
The other big thing is the job market. That started a few years ago. For the first time in decades, unemployment rates for college graduates are worse than those of the average population. That has been really difficult for young people.
That is a great historical change. And of course, people who don’t go to college are having it even worse.
Any simple tips for paying off debt?
One of the smartest financial moves you can take is to take whatever savings you have (beyond the money you need for essentials like rent, food, and health insurance) and pay off your high-rate loans.
The reason is simple: you can usually “earn” more by paying off a loan than by saving and investing. That’s because paying off a credit card or loan with a high 20% interest rate is equivalent to earning 20% on an investment, an extremely attractive rate of return.
Do you have any questions about retirement? Personal finances? Anything career related? Click here to send Kerry Hannon a note.
Is there one main thing you would recommend people do to improve their credit score?
The most important thing you need to know to keep your credit score high is not to miss payments. And if possible, the bottom line that really matters is paying off your high-rate debt in full each month. Many young people think they need to have credit card debt because it improves their credit score. That’s not true. That’s a myth.
For someone graduating this year, what are the best steps to take in terms of their financial life?
Try to get a job. If you can live at home with your parents while you watch, do it. If work has a 401(k) plan, you’re probably already enrolled in it; If not, do it. If there is an equivalent amount of money from your employer for the dollars you invest, at least save enough to maximize that amount. Don’t go into debt with your credit cards. Make sure you know what your student loans are and don’t miss payments.
If you do those things, you will be on the right track.
Kerry Hannon is a senior columnist for Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including the upcoming “Retirement Bites: A Generation X Guide to Securing Your Financial Future,” “In control at 50+: how to succeed in the new world of work,” and “You’re never too old to get rich.” Follow her on blue sky.
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