A Necessary 10-Step Personal Finance Guide for 20 Somethings

If you’re in your 20s, now is the ideal time to put the finishing touches on your personal finance guide and then to go out and execute your plan to perfection.

To assist you, I’ve dug a few plays out of our own financial playbook. I’ve broken them into five short-term goals and five-long term goals. Together, this 10-point checklist is a winner, and guaranteed to get you through your 20s and beyond.

1. Track every cent

To be on your game, you have to know where every dime and dollar is going, what’s incoming and what’s outgoing.

Use a columnar pad to track earnings and expenses, or an Excel spreadsheet or an online money-management tool like Mint.com, which boasts 10 million users because it automatically pulls all your information into one place, categorizes it and suggests ways to help you save and budget.

Think of your budget as the roadmap that you’re going to follow from year to year to get you to your destination. Without it, you run the risk of encountering too many financial dead-ends. Even as young as you still are, you can ill afford to lose time; you need to make time work for, as we’ll soon explain.

2. Cut expenses 10 percent

Imposing a 10 percent reduction in expenses is like giving yourself an immediate 10 percent pay raise, if not more, when you realize that everything you buy, you purchase with net (after-tax), not gross (pre-tax) dollars.

Everybody can cut 10 percent pretty painlessly. Again, if you need help, just review the expenses on your checklist to see where you’re bleeding the most bucks.

Here are some examples:

Is your car spending more time in your auto mechanic’s shop than on the road? Solution: sell it for a more dependable car or sell it, bank the money, and start taking public transportation.

Are you still paying a monthly maintenance fee on your checking account? Solution: Eliminate fees by maintaining a minimum balance or using automatic deposit or using a low- or no-fee online bank. For more suggestions, check out 10 Smart Ways to Avoid Paying Checking Account Fees for Good.

Are you still paying between $100 and $200 a month for cable or satellite? Solution: Buy a TV antennae for around $50 to $100. Unlike the floppy rabbit-eared antennae gizmos of the past, models like Mohu Leaf 50 ($70) and the Winegard FlatWave Amped ($90) are slim enough to fit on a bookshelf and allow for crisp over-the-view airing. You could also pay for a streaming service from Netflix or Amazon for about $10 a month.

Are you going to renew your warehouse membership card? Solution: Skip it. Membership warehouses encourage bulk-buying, but if you’re living on your own, you don’t need a 10-pound wheel of cheese or a dozen blueberry muffins, no matter how good they taste.

Trim the fat, it’s everywhere. Did I hear 15 percent? 20 percent? You can do it.

3. Start the emergency fund yesterday

Cutting expenses is found-money. Indeed, if you’re still driving, you’ve been handed a recent wonderful gift, with the sudden and dramatic drop in gasoline prices. The idea is to take that gift and save it, not squander it.

With that found-money, think emergency fund first. Definition of cash emergency: demands on your cash that come out of the blue. Here are some examples: your best friend in college just asked you to be his best man. Ka-Ching! You need a root canal and a crown that your medical insurance doesn’t cover. Double Ka-Ching!  Your iPhone 6+ just went through the wash. You got busted driving solo in the carpool lane on the way to work.

Wherever you look, some personal financial guru will tell you how much she thinks you need to stash in your rainy day fund. One rule of thumb says set aside the equivalent of three months of living expenses. So, figure if you make $48,000 a year, you need to set aside $12,000.

If that nut seems too tough to crack, try breaking it down into a more manageable size. Get creative. Say to yourself, “Let’s see, if I ironed my shirts instead of sending them out to the cleaners and if I brown-bagged it for lunch just one more day a week, I could save $20 a week. After a year, I would have $1,000.

Let’s keep thinking small, because when you start small, small things can quickly transform into big things, with time. Suppose, for example, you buy a bag of a Corn Nuts (barbecue, ranch, etc., they’re all delicious) every day for $.75 for 10 years -- in other words, a bag of Corn Nuts for every day of your life in your 20s. At the end of 10 years, you would have almost $4,000 ($3,992.86) if you had put your money in a savings account compounding monthly at 5 percent.

That’s not chicken feed, that’s real emergency money. Give yourself a real savings number and start working toward it.

4. Moonlight or side-hustle, aka get a second job

As we’ve just shown, you can nickel and dime your way to substantial savings. If, however, you’ve racked up some big debts or have big-ticket dreams that include a house, yearly vacations, etc., you’ll have to do more than just log your average five-day-a-week, nine-to-five gig. You need a second job to deepen and broaden your income stream and truly make it a breakout year.

Obviously, if somebody’s already paying you to do a job, you could ask for extra hours or you could apply your same skill or trade on your days off for somebody else. If you pursue that strategy, guard against the burnout factor. Working as an accountant five days a week, then taking on some small bookkeeping or tax jobs on the weekends could send you over the deep end.

You might last longer in a second or part-time job if your weekend work is completely different from what you do during the week. If you sit in front of a computer all week, you might find it refreshing waiting tables, stocking shelves, mowing lawns, walking dogs, styling hair, working as a security guard, landscaping, baking or taking on other activities that require a little less brain power.

In the end, it’s not the extra work that will kill you (you’re in your 20s for Pete’s sake), it’s being away from friends and family and the social events and outings that define who you are. So, whatever second job you take on, assign a dollar limit to it. Tell yourself you’re going to work until I make ____. Fill in the number, then call it quits when you reach it.

Then again, you might like your second job so much -- maybe you started a side business and it’s about to take off -- that you can’t stop or don’t want to. That’s a good problem to have!

5. Cut debt

It’s not enough to cut expenses, save money and work yourself to the bone; you also have to cut debt -- those overhanging expenses that continue to grow because you’re only been paying the minimum on your credit card and student loan balances.

Debt and death. They sound similar, don’t they, and it’s more than a little ironic that the word mortgage, the debt you incur when you finance a home, comes from mort, the Old French word for death.

Anyway, debt can be death to your finances and budget, and, more important, to your dreams, so you have a plan to slay the debt ogre.

Again, different finance experts have different strategies for paying it down. Technically, you should go after your highest-interest debt first. For example, if you’re paying 17 percent on a credit card with a $1,000 balance and you’re collecting only .02 percent in your high-yielding savings account, that’s clearly demoralizing. Another school of thought, however, proposes paying off a $200 debt at, say, 10 percent interest first, just because you need to experience a few small victories first before going after the really big fish that threaten to sink your financial boat.

Obviously, when you’re in true debt-cutting mode, you can’t think of piling on more debt. You might, however, apply for new credit to replace your expensive, older credit. There are three main ways to pursue this strategy, but they all require good credit. You can receive a free credit report from each agency once a year by going to AnnualCreditReport.com.

Three debt consolidation strategies:

Strategy 1

Put all your credit card balances on one card, presumably one with a lower interest rate. There are several credit cards with low-rate balance transfer promotions, which sometimes run 12 or 18 months. Use the introductory rate to pay off as much debt as you can.

Strategy 2

Take out a personal loan, which has a fixed rate that should be lower than what you’re paying on revolving credit card debt.

Strategy 3

Get a personal line of credit from your bank or credit union to consolidate debt. You don’t need to own a home or property to qualify, but your interest rate will largely depend on your credit score and other relationships that you have at the bank where you’re applying for the loan. You draw down your line by writing a check or making a transfer to your checking account.

To set yourself up for the remainder of your life, you need more than just a short game. Your financial playbook also requires some long-term winners. At first, they might not seem quite as pressing as your quick-hitters, but looking back at the end of the game, you might realize they might be even more important. These next five, rounding out our top 10, definitely belong in your financial game plan.

6. Save for retirement

Saving for retirement might be a hard notion to grasp, as you’ve probably just begun to work, but here’s a powerful example that will illustrate the urgency of saving for retirement, although you might not retire for another 40 or 50 years.

At 20, your sister puts $3,000 a year into an individual retirement account at 8 percent a year, and does so for 10 years, for all of her 20s, then stops, never adding another dime.

You, on the other hand, don’t start until you’re 30. In fact, you didn’t even know what an IRA was when you were 20. From age 30 to 65, however, you dutifully contribute $3,000 a year, earning the same 8 percent.

Your sister’s total contribution was $30,000, yours was $105,000, but when she turned 65, she had more than $642,000 in her account, while you had $518,000. You contributed 200 percent more to your IRA than your sister did, and she comes out more than 20 percent ahead of you.

When it comes to your retirement, time is more important than money. When you delay saving for retirement, you’re putting your future financial well-being at risk.

7. Claim your career goal and the salary you want to earn

Today, colleges and universities are under a microscope because each year they’re graduating thousands of students whose prospects for good-paying jobs are dim. Peter Thiel, the founder of PayPal, has even called the graduate/job disconnect a scandal that’s worse than the subprime loan crisis because students have no recourse for charging off their debts, unlike home loan borrowers have had through foreclosure or a short sale.

His voice might be extreme because you still need a degree to become a doctor or a lawyer, but you don’t need a diploma to start up a software company. So, ask yourself, if you’re a junior or senior in college whether it’s worth it to fork out another $50,000 in tuition, room and board, and go deeper into debt without a guaranteed job waiting for you.

At the same time, if you’ve already graduated with a B.A. or a B.S., ask yourself whether you need to go to grad school. Yes, you want to keep your job skills fresh, but maybe there’s another way to pay for them without taking on more debt. More learning is moving to the Internet every day with free massive online open courses or MOOCs offered by top colleges like MIT and Stanford.

Talk to older professionals whom you admire. Ask them whether they would choose the same profession today and if they feel a young person like yourself can still make it in their field. Know, of course, what salary you can expect at different career stages. It’s important because not a lot of poets live in palaces.

8. Get health insurance

If you get sick or injured and you’re uninsured, who is going to pick up the tab for your care and recovery? If you’re under 26, you can stay on your parents’ health plan, provided they have a plan.

Of course, if you’re under 26 and working, you might already be under your employer’s health plan.

If you’re not working or declined your employer’s coverage, you need to sign up for health coverage. It’s also the law. As for our original question, as to who is going to pick up the tab if you don’t -- the answer is your parents or society. Do you want to burden your parents with your medical bills? And if your care falls to the state or the federal government, are you prepared, as someone not paying into the system, to possibly receive fewer treatment choices or options?

9. Move out or move in with your parents?

Is this the year you move out of your parents’ house or is it the year you move back in? We can make a case for both options, but you really should make the choice based on your long-term goals.

If your goal is to save for a down payment on a house or to go to grad school or to start a business, acts that usually cost a substantial chunk of change, clearly moving back home is a great option to bolster your savings. Share your grand plans with your parents, and if you didn’t wear out your welcome your first 20 or so odd years, they should be glad to have you back. They probably understand today’s economics better than most.

On the other hand, moving out could help you establish your financial independence in an unexpected way. Paying your own rent, utilities, and food while you’re also trying to cover your car payment and various other insurances has a way of making you grow up real fast. Without your parents’ security blanket, you will likely learn the true value of a dollar and just how many of them you’ll need going deeper into your 20s.

10. Create a will

Creating a will isn’t just for old people. People die in their 20s, too.

Most important, the exercise will make you stop and do an accounting of what you currently own and perhaps the legacy you want to create it.

The act of writing a will also ties back to the first step in our ultimate personal finance guide for 20-somethings -- writing out a plan and a budget. It will force you take stock of your life and come up with a real financial blueprint that you can follow the rest of your life.

Just the fact that you’re making out a will in your 20s speaks highly about your character. It’s not a morose act to ponder one’s demise; it’s a mature act that says you’re someone who has his stuff together!

Let the magic begin

Your 20s are a magical time. It’s a precocious period that deserves the creation of the ultimate personal finance plan that can serve you for decades to come.

Whatever plan you end up choosing, hold it up as the standard you want to reach going forward. Don’t worry if you drift off course from time to time. That’s bound to occur. Just trust the time, energy and thought you’ve put into your plan, and most of all, trust that you’re the best person to execute it.

Good luck!