3 Essential Money Lessons That Every 20-Something Should Know
Despite its importance, financial literacy is not commonly taught as part of our national school curriculum. This often leads to college graduates who leave school without the real-world knowledge necessary to financially prepare for their current and future lives. In fact, 13 percent of Americans say they’re “not very” or “not at all” confident in their knowledge of personal finance*.
Taking a financial course when it’s available is an excellent way to better prepare for your future. When that’s not an option, it’s possible to fill in knowledge gaps with some basic money lessons. Start with these three important ones.
1. Creating a budget
Managing your personal finances and working toward other financials goals all starts with a solid budget. There are several ways to create a budget that works for your lifestyle and needs. Some common examples include:
- Traditional budgeting: This can be created in several ways. At its most basic, though, start by taking your after-tax income and deducting traditional expenses such as rent, food, utilities, gas, and savings and debt payments. What’s left is the money you can use for “wants,” like entertainment or clothing.
- Zero-based budgeting: Although common with businesses, zero-based budgeting can also be useful for individuals. This method requires creating a budget based on your monetary needs for a specific amount of time, like each month. Every line item in your budget should be analyzed for need and cost, and those items can fluctuate throughout the year. This keeps your budget fluid with any changes that might occur in your finances, but it requires more work than traditional budgeting since you’ll need to revisit it more frequently.
- 50/30/20 budgeting: The 50/30/20 budget divvies up your income into three categories, and you’ll spend a certain percentage of your income on each. If you’re following this strategy, your spending should reflect 50 percent of your take-home income being used for “needs” (housing, food, transportation, insurance, etc.), 30 percent for “wants” (travel, entertainment, take-out, etc.) and 20 percent on savings and debt (emergency fund, retirement, and debt payments, etc.).
- Envelope budgeting: People who follow the envelope system put a certain amount of cash into different envelopes for spending in different categories each month. Once the envelopes are empty, you’re done spending on that category for the month.
AIG Retirement Services’ FutureFIT® University offers a Financial Basics program that can also help you propel your budgeting to the next level. Learn about checking accounts, creating a budget, credit card use and much more.
2. Borrowing money for college
When options like student aid, scholarships, grants and work-study programs aren’t enough to cover the cost of college, student loans might be necessary to earn your degree and propel your career. If you’re heading down this route, get smart about your options. Some things to consider include:
- Federal vs. private loans: It’s possible to find affordable private loans but remember that federal loans offer fixed interest rates that are often lower than what you’ll find through private companies. They also tend to offer income-driven repayment plans that set your monthly payments at an amount you can afford based on factors like your income and family size. Whether you take out private or federal loans, be sure to only take out what you need.
- Subsidized vs. unsubsidized loans: Federal loans come in either subsidized or unsubsidized options. With unsubsidized loans, there is no requirement to demonstrate financial need, but you will be responsible for paying the interest. If you can demonstrate the financial need that qualifies you for subsidized federal loans, the U.S. Department of Education pays the interest on your loans while you’re in school at least half-time, for the first six months after you leave school and during a period of deferment.
Whether you have private or federal student loans, you should have a repayment schedule in place so that you don’t fall behind or pay more in interest than is necessary. AIG Retirement Services’ FutureFIT® University has a Paying for College module that can help.
3. Saving for retirement ASAP
Budgeting and paying for college can help you handle your finances in the present, but it’s also important to plan for the future. When you’re in your 20s, the fact that retirement is still decades away works to your advantage. Through the glory of tax deferral and compound interest, the money you invest in a retirement account now can grow with very little effort on your part until you retire. The most common retirement savings options include:
- 401(k)s: This employer-sponsored plan allows you to save for retirement directly from your paycheck (easy) before you pay taxes (lowering your taxable income for the year), plus your employer may offer a match up to a certain percentage (free money!). Some 401(k) plans also offer a Roth option with after-tax contributions and tax-free growth.
- Individual Retirement Accounts: An Individual Retirement Account (IRA) comes as a Traditional or Roth, each with advantages for either tax-free growth or growth on a tax-deferred basis. They’re an excellent option for people who don’t have 401(k)s through work or as an additional way to save even more for retirement.
- 403(b)s: This type of retirement plan is offered by public schools and some 501(c)(3) tax-exempt organizations. The plan is set up similarly to a 401(k) — you can contribute directly from your paycheck and employers may also offer a match and different options for investments. Some may also offer Roth accounts as an option for saving.
AIG Retirement Services’ Planning for Retirement module will teach you about optimizing your approach to retirement savings, how annuities can help with goals, how to best transfer wealth for future goals and more.
Getting familiar with the basic money concepts listed above helps set you up for success after graduation. By getting ahead of the curve today, you’ll be more likely to stay on track and reach your goals.