Financial Health at Any Age, Part 1 – 20s and 30s

Like all types of health, financial health is important at any age, but how you achieve it can change as the years go by. That’s why Cobblestone has created a series of articles with our best financial advice, decade by decade. Stay tuned for more installments in the coming months.

Young adults are confronted with a tidal wave of new financial experiences. They’re collecting a “real” paycheck for the first time. Many face a mountain of student debt. And they have a laundry list of fun ways to spend their money (most of which they couldn’t afford as teens).

So how do people in their 20s and 30s start to find financial balance? Here’s a list of 9 financial tips to start with.

1) Develop a marketable skill

Warren Buffett has said, “The most important investment you can make is in yourself,” and this advice couldn’t be more true for young adults.

With 30-40 years of strong earning potential ahead of them, young adults need to focus on developing skills that they can get paid for. These skills – and their subsequent earnings – will lead to compounding benefits over the next several decades.

This so-called “human capital” should be the #1 development focus for young adults.

2) Establish a budget

A budget measures your income and your expenditures, ensuring that you spend and save responsibly. And as managing guru Peter Drucker famously quipped, “You can’t manage what you don’t measure.”

In the financial context, that means you can’t improve your finances unless you’re measuring them. A budget is a tool to do just that.

Apps like eMoney, Mint, Quicken, and You Need a Budget can help.

3) Get (properly) insured

Insurance is protection against worst-case scenarios. Since everyone’s worst case looks a little different, their insurance needs will differ too.

For example, life insurance becomes important if you have dependents who rely on your income. Married couples and parents should strongly consider life insurance. But unmarried, non-parents may not need it.

Health insurance protects against the risk of large healthcare costs. You never know when an accident might occur. For that reason, health insurance is generally advisable for everyone.

4) Debt repayment

Most people view debt as a python, slowly squeezing the life out of their bank accounts. Because you can’t sit on debt forever, eventually it will strangle your finances. All debt needs some form of a payoff plan. But not all debt is created equally. At low interest rates, it’s quite acceptable to pay off debt slowly.

Is it better to use $10,000 to pay off a 4% mortgage, or to invest $10,000 in assets that have historically returned 10% per year? For starters, one should gather more details before applying a one-size-fits-all answer. But based on the math alone, investing is the better option.

5) Build an emergency fund

An emergency fund is a pot of money (at least three to six months’ worth of living expenses) that sits in your bank account, waiting to be deployed in case of emergency. Think of it as “personally created insurance.”

Sudden car repair? Need a new furnace in the middle of winter? Is the roof leaking? You may need funds in short notice. And that’s why you should have an emergency fund.

6) Start saving for retirement

The best time to invest your money is when you’re young. That’s because you have the longest runway ahead of you for compound interest to work its magic.

Imagine you invested $1,000 at age 22 into a diverse stock fund earning 10% per year. By the time you retire at 62, that money would have grown to $45,000. That’s what 40 years of compound growth achieves.

But if you started investing at age 42, a $1,000 investment would only have grown to $6,700 by the time you reach 62.

While it can be hard to put away long-term savings when you’re young (and likely earning less than later in your career), there’s no better time to start your investing journey. The key to long-term success is to begin saving as soon as possible, even if you can only begin with a small amount.

7) Build, monitor, and improve your credit history

Credit scores measure how credit worthy you are in receiving a loan. The lower the score, the more risk the bank is taking. And when a bank takes more risk, it’s going to charge you a higher interest rate.

That’s why building a high credit score can be incredibly valuable. It allows you to secure beneficial interest rates on loans like mortgages.

Imagine taking out a $500,000 30-year mortgage for a home. With a great credit score, you secure a 5% interest rate. You have a $2,700 monthly payment. But with a bad credit score, you can only secure an 8% interest rate – leading to a $3,700 monthly payment.

A good credit score represents more than your reputation. It helps you save serious money. Consider regularly monitoring your credit with free, reputable websites, such as www.annualcreditreport.com.

8) Keep your documents in order

At some point in your 20s or 30s, you may start a family and you’ll want to help care for the people in it whether you’re alive or not. After all, bad luck and tragedy do happen. You ought to be prepared, just in case.

Keeping your financial documents in order can be a big help to your dependents should you pass away.

Examples include:

Statements from banks
Statements from investing accounts
Insurance policy documents
Loan documents

Anything that has to do with assets you have, debts you owe, or assets that could be owed to you should be documented and maintained for tax purposes.

9) Start estate planning

As we stated in the last tip, you never know when tragedy might strike. While we hope you live to see 100, you should plan your estate now to protect against an unforeseen tragedy.

Most 20- and 30-somethings don’t have complex estates. You likely won’t need trusts or intricate tax planning.

But you do need three important documents:

A will, which declares your wishes about the distribution of your assets and the care of any minor children should you die.
A power of attorney, which gives another person the power to act as your agent should you be incapacitated.
A healthcare proxy, which gives another person the power to make medical decisions should you be incapacitated.

The latter two documents come into play most often when someone is incapable of acting on their own. For this reason, you should designate someone to make financial and medical decisions on your behalf.

Stay tuned for the next few months as we move through financial tips for the rest of the decades.

Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen, or experience. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational, and illustrative purposes.

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