“I look back on my 20s. It’s supposed to be the prime of your life, the most vital, the most beautiful. But you’re making your critical decisions and sometimes your most critical mistakes.” Ann Brashares
How many times have you heard, “….If I only knew then what I know now”? When you are in your 20’s there is a lot going on. For many, it’s a time when you land a “real” job or are managing work and school. And some ladies are getting married or beginning a family. Lots of things may be happening at once, but you WILL appreciate the financial groundwork you lay down now, many years down the road. So what to do?
Rock the Roth: A ROTH is an account that allows you to contribute up to $5,500 a year after-tax.¹ You don’t receive a tax deduction for contributing to a Roth but the benefit of this type of account is that it will grow tax-deferred and the money you take out in the future is tax-free. Another great feature is that you can use it to purchase your first home. There are some caveats: you have to have had the account for at least five years and can take up to $10,000 for a first time home purchase. Ask a financial planner or your CPA for details. You may also want to do a cost-benefit analysis on if it makes sense to take the funds out or to allow them to continue to grow tax deferred. Ultimately the tax benefits of a Roth IRA can serve you well in retirement.
It’s all about cash flow: Understanding what you have coming in for income and what you have going out for expenses will serve you well not only in your 20s but throughout your life. A quick way to think about cash flow is to take your income (include any money from a side hustle) and subtract out your expenses. Ideally you want to have a net positive that can then be used to pay down debt, build an emergency fund or save for a long-term goal. Cash flow is not about how much money you have in your investments or in the bank; it is about how much money you have on hand to meet your financial obligations.
Live for later not now: We all want to enjoy our day-to-day experiences but think twice before doing it at your expense (literally). Overusing credit cards or overspending is a big hole to dig out of. If you are an average American carrying $3,000 in debt you could be paying between $400 and $450 a year just in interest.² Debt harms lives and it can harm you for a long time. It can negatively impact your credit score, not to mention your personal health.³ It can be really hard to curb spending and if you feel like you need help there are a few things you can do: you can find a financial planner to help you analyze your debt and get a plan in place or find a nonprofit organization that helps with debt relief. Student loan debt is a another story and again, it may be a good idea to meet with a financial planner to look at options.
Building a solid financial base in your twenties is a great way to enter into your 30s, 40s and then eventually retirement. If you have questions or need additional guidance, seek out a financial advisor. Your future self will really, really thank you!
¹https://www.irs.gov/retirement-plans/roth-irasThe Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.