"Keep living like a college student" and other tips for your 20s

In his book Personal Finance in Your 20s for Dummies, best-selling author and award-winning columnist Eric Tyson explains what a twentysomething needs to know about personal finance. He covers such topics as developing a budget, reducing debt, making informed investment decisions, and getting an early start on saving.

We recently had the opportunity to interview Mr. Tyson, who shares some of the same saving and investing philosophies.


Eric Tyson: Some challenges are specific to the current economic environment. The unemployment rate for the United States right now is quite high. It's especially high among younger people—which is typically what happens in a recession, but this time it's even more severe. And the costs of goods and services keep rising. College, of course, is increasingly expensive. Today, a lot of kids are graduating from college with larger debts than previous generations. For those reasons and others, there are some unique financial challenges that exist today.

Over the years, it's become obvious that the principles of sound personal-financial management apply to everyone—regardless of marital status, ethnicity, race, or gender. Yet there's something unique about folks just getting out of college and entering the working world for the first time. This seems especially true for the generation coming up now that's been so indoctrinated into the world of technology and online access.


Eric Tyson: It depends on what kind of debt we're talking about. If you've accumulated high-cost consumer debt, like on a credit card, you absolutely, positively want to get rid of that debt as quickly as you possibly can.

If you've taken on debt for college, in my view, that's good debt. It's generally available at a relatively low interest rate. So paying that off over time per the terms of the loan is a reasonable thing to do.


Eric Tyson: I think one of the most important things for a person to do is to take a look at where they're currently spending their money. Get out your checkbook, your online banking information, your credit card statement—anything that will help you document where you're spending money in a typical month. And that's where the rubber begins to hit the road for most people, because you can figure out in which of these areas you're most willing to make a reduction.

When I graduated from business school, a professor who knew I wanted to become an entrepreneur gave me this advice: "Keep living like a college student." Think back to when you were in college: You had roommates to share the rent, and you probably weren't spending a lot of money. There's no reason you can't maintain the positive aspects of that lifestyle in your 20s. You need to fight the temptation you may feel from your peer group to get an expensive apartment (or car), live in the nicest part of the city, and spend all the money that you're earning. Doing that is really foolish, probably going to restrict the options you have open to you in the future, and most likely going to handicap your ability to save and invest money.


Eric Tyson: For most people, saving for retirement in your 20s is probably not very enticing. What I found a more powerful motivator for most folks is when they realize how much of their employment income is being siphoned off in taxes. You don't think of retirement savings accounts as tax-reduction accounts, but in many cases, your contributions are not taxed at either the federal or state level. So for every $1,000 you can contribute into these accounts, you may be able to save yourself hundreds of dollars in taxes. None of us enjoys paying taxes, and if you can reduce your tax bill by contributing to a retirement savings account, somehow the idea of putting money away for the distant future becomes more appealing.

It also makes sense to start saving money in your 20s because you've got many decades ahead of you where that money can compound and grow. And the nice thing about retirement accounts is that the investment earnings are sheltered from taxation, which is another bonus.


Eric Tyson: Many people have access to retirement savings plans through their employers, and those plans typically offer diversified mutual funds, so that can be a useful way to go. Investing in index funds is a way to get broad diversification and keep your costs low. Keeping your investment costs down can enhance and improve your returns over time, which makes sense because those investment costs are deducted from your returns.

You also need to make saving a priority. It should be the first thing that you do. Ideally you should be contributing to an investment plan or retirement account automatically. That way it's deducted from your paycheck, so you don't even have to think about it. It's not something where you wait until the end of the month and then see if there's money left over. I like people to save first and then manage what's left, because then you're forcing yourself to truly live within your means. Now over time, you may have to play with the savings percentage that you're trying to target. I would encourage people to start off with a modest amount and then, if they're able to, build it up over time. Rather than saying, I want to save 15% of my income, start with maybe 5%. If you're comfortable doing that for several months, then you can begin to increase that number. It's also a good idea to take advantage of any matching contributions your employer may offer.


Eric Tyson: People of all ages, but especially younger people, may at times feel a little bit overwhelmed dealing with financial decisions. I think the key is to educate yourself and then begin to develop a to-do list. Don't expect that you're going to finish that to-do list tomorrow or next week or even next month. It might take you a number of months to really optimize your financial situation. The good news is that once you're able to do that, it really shouldn't take a lot of time in the future. Also, it's important to develop and continue to enhance your investment IQ. Saving money and living within your means is great, but if you don't know how to invest your money, you could be making easily avoidable mistakes.

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