10 Financial Commandments for Your 20s

Thou shalt not be financially lost forever. It just may feel that way when you're in young adulthood. Managing your finances for the first time can be overwhelming—what with the daily expenses, big-ticket costs such as housing and health care, heavy debts, and long-term goals, including your ridiculously distant retirement.

 The sooner you start making a financial plan for yourself, the brighter your future will be. "Building habits, especially in your twenties, is so important for long-term success," says John Deyeso, a financial planner in New York City, who works with a lot of younger people (and is 37 years old himself).

Here are the ten things you should do in your twenties to take control of your finances:

1. Develop a marketable skill.

Before you can start worrying about what to do with your need to earn some.

Think in terms of your career, not just a job. Because let's face it: You're probably not going to love your first job, and it won't be your last job. But you should try to make the best of it. My first job consisted mostly of fetching documents for colleagues and doing data entry. Ho-hum. But I learned all I could. Sure, sometimes the lesson of the day was: "I never want to do this again." But I also learned basic skills, such as the magic of Excel as well as proper office phone and e-mail etiquette, which are still extremely useful in my career.

Most importantly, I established a valuable skill (writing) and looked for and created opportunities to use it. I talked to my bosses about my writing, and they affirmed that I had a future in it. I wound up penning our press releases, editing an online column, and writing anything that needed writing at our small company. Outside the office, I blogged and took on various freelance assignments—some for no money—to practice my craft and build my network.

Don't be afraid to experiment. "You may need to take risks when you're younger," says Erin Baehr, a financial planner in Stroudsburg, Pa., and author of Growing Up and Saving Up. "You may take one job over another and find it doesn't work out. But when you're younger, you have the ability to do that. And then that can parlay into a bigger return down the road."

2. Establish a budget.

Once you're bringing home the bacon, you'll have to figure out how to slice it up. Without a budget, you risk overspending on discretionary items and undersaving for important big-ticket purchases.

"The big thing is really to differentiate between your needs, your wants, and your dreams," says Lauren Locker, a financial planner in Little Falls, N.J., who also teaches a personal finance course to undergraduate students at William Paterson University. First, lay out all your daily expenses (such as commuting costs and food bills) and recurring monthly payments (rent, utilities, debts). When you know where all your money is going, you can more easily see how to cut costs. For example, when I first made a budget, I was stunned to learn how much I was spending on take-out food. Being aware of the cost allowed me to trim it by ordering less food, less often. (See Money-Smart Ways to Eat Healthy for more.)

Next, factor in your short- and long-term savings goals, such as an emergency fund (see commandment #5) and retirement kitty (commandment #6). And if you ever expect to settle down and buy a house, you should probably start saving for the down payment as soon as possible.

A budgeting site such as Mint.com can be a big help if you want to digitize your budget. For more on how such sites work, see The Best Online Money-Management Tools.

3. Get insured.

Mayhem truly is everywhere (as Allstate has dramatized), and as an adult, you are responsible for protecting yourself and all your stuff from it. When horrible things happen to you—say, a trip to the emergency room or a fire in your apartment—insurance may save you from shelling out thousands of dollars all at once. For more on health care, see Obamacare for Twenty- and Thirtysomethings. If you rent your home, see Why Renters Need Insurance. And if you have a car, see our Smart Shopper's Guide to Auto Insurance.

4. Make a debt-repayment plan.

Debt is a reality for most young adults. But letting it linger—or, worse, grow—can set you back for years to come in the form of greater interest payments and lower credit scores.

For your student loans, be sure you have a good repayment plan in place—see Strategies for Repaying Student Loans—and consider some programs that can help reduce the burden, such as the Peace Corps or Americorps. A much easier way to trim this cost is to set up automatic payments for your federal student loans; doing so cuts 0.25% off your interest rate.

Work out a plan to tackle your credit card debt, too. Hopefully, being so young, you haven't had time to bury yourself in much. But if you've been quick on the swipe, your first step is to establish a budget (see commandment #2) and rein in your spending. You should then start paying down debt on your highest-rate cards first.

5. Build an emergency fund.

Insurance alone (see commandment #3) won't cover all of your problems. You still need to have liquid savings on hand as an added precaution.

Some call it a rainy day fund. I think of mine as a polar vortex fund. This past frigid winter, my house's heat pump gave up. A new HVAC unit cost me and my husband about $4,000. Home insurance was no help, but our emergency fund saved us from going into debt to cover the replacement or (ack!) asking our parents for the money.

Kiplinger's recommends stashing enough to pay three to six months' worth of expenses in a safe and easy-to-access savings account. Contributing to your fund should be a top priority in your budget. Aim to sock away at least 10% of each paycheck until you reach your goal, and add a boost any time you luck into some extra income, such as a bonus or birthday gift. To help speed up the process, 

6. Start saving for retirement.

I know, I know, retirement seems like forever from now. But it's more important than ever for us to focus on this savings goal as soon as possible. "Our generation, the twenty- and thirtysomethings, maybe the first to have to save for retirement for as long as your work career," says Deyeso. (See The New Retirement Realities for Generations X and Y.)

The sooner you start saving, the better. Because of the magic of compounding, time will fatten up your retirement kitty. For example, if a 25-year-old saves just $100 a month, assuming an 8% return and quarterly compounding, she'll have $346,039 by the time she turns 65.

Don't think of saving for retirement as subtracting money from your paycheck or checking account. Rather, consider them automatic payments to your future self. If you participate in your company's 401(k)—as you should—your contribution can be automatically deducted from each paycheck before taxes. If you have a Roth IRA (also highly recommended), you can set up automatic transfers through your bank or brokerage. "It hurts at first, but people adapt," says Deyeso. "That money gets forgotten about."

7. Build up your credit history.

You'll need to take on some debt ("having no credit is as bad as having bad credit," says Locker) and show that you know how to manage it well (see commandment #4) in order to build up your credit history and earn a good credit score. This number, along with the credit report on which it's based, is the key to many milestones in your financial life. A good score means lower rates on credit cards and loans. Landlords may consider your score before offering you a lease. And employers might take a look at your credit report during the hiring process.

Unfortunately, because you're young, you're at a disadvantage. The length of your credit history counts for 10% of your FICO score, the most widely used model. But a lot of your score, 35%, depends on your payment history. So you can easily raise your financial grade by paying all your bills on time. Another 30% of your score is based on how much you owe, calculated as a percentage of your available credit. In other words, maxing out your credit card every month is bad, even if you always pay off the entire balance. Be sure to use your card sparingly. "FICO high achievers," who score at least 750 on a scale of 300 to 850, typically use just 7% of their available credit. For more information.

Read more: 10 Financial Commandments for Your 20s

The Ugly Truth About Payday, Pawn Shop and Car Title Loans

Payday Loans A Bad Solution to a Bigger Problem

These lenders of last resort often prove to be a very unsafe 'safety net'

People in financial trouble may take on payday, pawnshop, and car title loans to tide them over until they're financially stable. But these seemingly innocent loans often cause them to end up in worse shape than when they started.

On the outside, they just look like convenient ways for people with subprime credit to borrow money. However, there's no such thing as easy money. Read on to learn the truth about these three risky loans, and find some alternatives you should consider instead.

Payday Loans

How they work: The payday loan process usually begins with you writing a post-dated check for the loan amount plus interest and fees. When the loan is due, the lender collects the balance unless you choose to roll the loan over (in exchange for more fees, of course).

Why they're dangerous: These loans boast notoriously high-interest rates that make it almost impossible for borrowers to pay off their balance on time. Even if they pay a small amount each payday, this often just covers the interest and fees, leaving the balance intact. Richard Cordray, the Consumer Financial Protection Bureau director, said in a statement last year that payday loans are long-term, expensive debt

burdens: "For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates." It should come as no surprise that payday loan borrowers often find themselves needing to roll over or take on new loans, trapped in a vicious cycle of debt.

Pawn Shop Loans

How they work: Pawnshop loans typically involve you giving the pawn shop an item that you own (like a television, piece of jewelry, or computer) as collateral, and the pawnshop lends you a percentage of the item's value.

Why they're dangerous: These loans are short-term and typically have very high-interest rates and a variety of fees. If at the end of the loan period you can't afford to pay the balance plus interest and fees, the pawnshop may keep your item and sell it.

Car Title Loans

How they work: Like pawn shop loans, car title loans use one of your possessions (in this case, your automobile) as collateral to secure a short-term loan for a fraction of what your car is worth –- provided that you own the car free and clear. Just sign over the title of your car, and hand over a set of keys.

Why they're dangerous: As with payday and pawnshop loans, these secured loans typically come with very high (often triple-digit) interest rates and loads of hidden costs, from storage fees to repossession fees. This brings up another huge red flag – if you miss just one payment, fail to pay the fees, or aren't able to pay the interest accrued on the loan by the end of the term, your car could be sold or repossessed. Also, since title loans are often only 30 days long, borrowers only have a short amount of time to pay the principal, interest, and fees. Since they usually aren't able to pay everything back when it's due, they often renew the loan and the nightmare begins all over again.

How Do These Loans Affect My Finances?

The most redeeming qualities about secured loans are that lenders typically won't check your credit, and the loans aren't reported to the credit bureaus. But while you're frantically trying to gather enough money to pay off those loans, you may neglect paying off things that do affect your credit. So while they may not directly affect your score, know that secured loans can still cause trouble for your credit health.

Alternatives

Even if you're strapped for cash, you don't need to agree to ridiculously high-interest rates. Instead of taking on risky loans, consider these other options:

• Short-term loans: Small banks or credit unions may offer you loans with better rates and repayment terms.
• Asking for an extension: If you call your creditors before you miss a payment, they may be willing to give you a due-date extension or work out a payment plan.
• Borrowing from loved ones: It may be uncomfortable, but asking friends or family for a loan could still be a better alternative than secured loans. Just be sure to pay them back -– you don't want to burn bridges.
• Payday advances: If you have a benevolent employer, try asking for a payday advance. Since it's your money, not a loan, you'll save money on interest.
• Emergency assistance programs: You may find emergency assistance from community organizations or social services programs. In many areas, a call to 211 will connect you to help.
• Cash advances on credit cards: While not ideal, the 25 to 30 percent interest you may be charged for a cash advance is certainly better than triple-digit interest via the loans covered earlier.

Final Thoughts

Personal finance experts always recommend building up an emergency fund so you can avoid dangerous situations that are hard to escape. If you're not desperate for money yet, don't wait until an emergency strikes. Avoid living paycheck to paycheck at all costs, even if you have to trim your spending and live less comfortably.

If you're in a situation where you need to borrow money quickly, don't let emotions lead to rash decisions. Assess whether you'll realistically be able to repay the loan or not, and be wary about lenders who don't check your credit or income to make sure you can afford the loan. Other red flags include loans that have astronomically high annual percentage rates, loans that don't advertise the APR, and situations in which funds can be automatically deducted from your checking account.

It may seem hopeless, but you can get through this tough time without taking on a secured loan. Just remember: Evaluate your options, know what you're getting yourself into, and breathe.

STOP Trying to Get Rich – 8 Reasons To Avoid Wealth

Are you planning and working hard to become a future millionaire?

Have you ever stopped to think about life after wealth? Now’s the time, mate – while you are on the road to riches.

Here are eight consequences of wealth to avoid!

1.  Your Time and Effort Are Spent on the Chase – You Forget to Enjoy Lifes’ Journey
Don’t be like Karl Rabeder who gave away millions in February 2010, saying “Wealth doesn’t create happiness. For 25 years, I worked like a slave for things I didn’t want or need. Now my dream is to have nothing.” from E. Jane Dickson, in a Readers Digest article entitled “Nothing But Joy”

Do you sometimes feel that life is passing you by while you plug away at the computer keyboard? How do you make sure that you are living your life to its’ fullest?

2.  You Ruin Your Kids

You don’t get to spend time with them (because you are busy earning all that money) so you buy things for them to make up for it. They live in a privileged environment where every wish is met – paving the way for them to develop into a spoiled, egotistical, entitlement-based person who can’t or won’t support themselves. Consequently, they develop no sense of self-worth.

When was the last time you and your kids just hung out together? Have you started preparing your children to deal with the consequences of your future wealth?

3.  Your Tax Bill Goes Up
OK, so maybe we will all be paying a lot of taxes, but if you are rich you are going to pay much more than the rest of us. There is a reason rich folks hire accountants, lawyers, and financial advisors to try to find ways around taxes! Did you know that the US marginal income tax rate during the entire decade of the fifties was at or above 90%! As recently as the decade of the 1970′s it has been at or above 70%. With the trillions of dollars in debt that we are now, it will happen again!

Do you think it would bother you to give Uncle Sam (and Aunt Sally – your state government) ¾ of your yearly income in taxes?

4.  People Like You for Your Money, Not Yourself
You may suddenly become popular with long-lost cousins needing help with the latest surgery for their 13th child. Your ‘friends’ end up always asking for a small loan at the end of the evening.

How will you handle requests for money and other assistance after you are wealthy?

5.  You Spend Your Time Managing Your Riches Instead of Doing What You Want
Getting rich and being rich are two different things. You need the money and investment skills to manage your fortune after you build it. That takes time and time is always in short supply. Even if you hire a money manager, you still need to provide oversight.

Do you enjoy managing your money? Are you prepared to spend more time at it after you are rich?

6.  Your Physical Security Can Be at Risk
Because you have money and nice things, you may become a target for burglars or kidnappers.

How will you counter this potential threat?

7.  You Can Lose Your Drive and Self-esteem
In Richistan – A Journey Through the American Wealth Boom and the Lives of the New Rich, Robert Frank notes that after achieving success in two businesses and selling them for tens of millions of dollars, Michael Sonnenfeldt still talks about ‘finding meaning’ beyond wealth. Frank notes that Sonnefeldt “had an emptiness in his soul. The business had been the center of his life and now it was gone.”

Will life lose its meaning for you if you achieve your wealth goals?

8.  You Will No Longer Belong
You work hard, buy a nice new house in an upscale neighborhood and suddenly you are like the Clempett family (on the old Beverly Hillbillies TV show)– trying to fit in but not knowing how!

How will you stay connected with family and friends who aren’t in your wealth circle?

These 8 consequences could happen on the road to riches. If you are hoping and planning to be wealthy, what steps are you taking to avoid them?

Source: STOP Trying to Get Rich - 8 Reasons To Avoid Wealth

You've Earned Your Degree - But Can You Handle Your Finances?

FINANCE

Remembering back to when I graduated from college, there are many things I wish I could go back and tell my younger self. Some are truisms that you can carry through life –- like avoiding debt -- and others are more palpable at the moment –- like hard work trumping your piece of paper.

I knew nothing about managing money when I graduated college and, sadly, I believe I was not alone in that experience. Most graduates -- and there were 2.85 million in 2013 -- are focused on getting a job, moving to wherever that job is, and living in the real world -- not financial literacy.

With that in mind, here are four basic financial steps you should take as a newly minted college graduate. If you're still looking for a job, these steps can still be implemented on a smaller scale.

1. Establish a Spending Plan

As a new college graduate, you're going to experience a lot of things you've never dealt with before, especially if you're moving to a new location. They include paying rent, dealing with variable expenses, buying groceries, and so forth. To best set yourself up for success, you want to plan out this spending. Call it a budget, call it a personal spending plan, or something else -- you want to have something to hang your financial hat on.

The first big reason for a personal spending plan is to avoid lifestyle inflation. You will no longer be a poor college student and thus will be tempted to spend more. Avoid overspending as much as possible. The second reason is a plan will help you establish long-term habits that will help as you begin to earn more income. The key to whatever you develop is to be flexible and find something that works for your situation.

2. Set Up a Personal Slush Fund

A slush fund, as I call it, is money designated for buying whatever the heck you want, such as a nice meal or a fun experience.

This might sound a bit contradictory to the first step, but it's for a reason. Lifestyle inflation, especially as a new college graduate, is inevitable on many levels. Having a personal slush fund, as long as you're disciplined with it, will help you stay on track with your finances and still be able to enjoy life. As with many other things, life is about balance, and this will help you achieve that balance.

3. Start Killing Your Debt

The $1 trillion in student loan debt is a staggering number that must be dealt with. The average 2013 college graduate also had $3,000 in credit card debt when they walked across the stage.

Many college graduates avoiding dealing with their debt because it seems so overwhelming. Many also feel that because they might have a low-interest rate on their student loans that it's OK not to attack the debt. Avoid these temptations, as they only enslave you to making payments for longer.

First, tackle your debt from a high-interest credit card, since that will save the most money in the long run. If you're not aware of how credit cards work, they're only going to accrue more and more interest until you pay them off, as opposed to giving you a grace period like with most student loans.

4. Start Investing as Soon as You Can

If you've just graduated from college, the last thing on your mind is likely going to be investing. This is understandable if you have no experience with it and/or have a debt to pay off. However, this is the very time you should start thinking about it, especially once you secure a job.

If your new job offers a 401(k) plan, along with a match, that is the first option you want to pursue. Not only will this help you start saving for retirement, but the match will also provide you with free money in doing so. If your employer doesn't provide a 401(k) or doesn't match, then your best option is opening an individual retirement account through an online brokerage. Many brokerages will allow you to open an account for $1,000 or less and allow for automated contributions. I know retirement may seem too far off to even think about starting now, but by starting soon after you graduate from college, you're taking advantage of the best way to grow your wealth –- time. By starting now, even in small amounts, you will better be able to position yourself for the future you want.

I know becoming a new college graduate can bring a lot of overwhelming situations. The best thing to do, financially, is to take small steps and personalize what you're doing to lead you to success.

10 Little-Known Actions That Sabotage Your Credit Score

We’ve shared some great ways to boost your credit score. But what if you’ve worked really hard to raise that very important number, only to make a bad decision that sends it to the trenches? Or what if what you thought was a smart move for your credit comes back to bite you?

Maintaining stellar credit goes beyond paying your bills on time each month and keeping your balances low. Unfortunately, there are a number of little-known factors that can tank your credit score.

1. Local government debts

Behind on your property taxes? About half of U.S. counties sell property tax liens to debt collectors, says The Washington Post. Contact your local office and see if payment arrangements can be made.

2. Parking fines

Have you been ignoring the notice you received in the mail about a past-due parking citation? If the issuer gets fed up and decides to turn the account over to a collection agency, your credit will take a big hit, and the outstanding amount will soar once the interest, penalties, and administrative fees are tacked on.

3. Past-due library books

If you’re an avid reader, be sure to turn in those books on time or make sure to promptly pay any overdue fines or fees. Some libraries turn unpaid fines over to collection agencies.

 4. Cellphone bills

Ditched your cellphone contract for a more attractive plan with another provider? Hopefully, you took care of the outstanding balance and termination fee, or your credit score will take a hit.

5. Cash-only purchases

Using cash for all of your transactions is not a bad idea, especially if you are trying to avoid returning to a debt-ridden existence. However, if you are new to the credit world, it is practically impossible to boost your score without some form of debt.

I’m definitely not suggesting that you open a new credit card or use your card all the time, but unused credit card accounts can be hit with dormancy fees that could damage your credit if you don’t realize they’re there.

An unused account could also be canceled, which reduces your available credit and could also be detrimental to your credit score.

6. Car rentals

Planning to rent a car using your debit card? Be prepared for the hard inquiry on your credit file that could result, plus a big deposit. The impact of a hard inquiry on your credit score varies by individual, but those newest to the credit world are usually hit the hardest because of the limited amount of information available in their credit profile.

Says Credit.com:

If the credit checks and deposits are too much for you to handle, search for companies, such as Alamo, that waive these requirements for debit card holders. Or, visit your nearest Rent-A-Wreck to retrieve a cash rental car with no strings attached.

7. Over-the-limit credit card balances

Not only will you be hit with a fee, but your credit utilization ratio will skyrocket, damaging your credit score.

To potential lenders, nearing your card’s limit indicates you are overextended and could have a hard time taking care of your obligations in the near future.

8. Too many credit card applications

Rate shopping for car and mortgage loans is a good thing and likely won’t drop your credit score, but applying for too many new credit card accounts in a brief period of time is a red flag to lenders.

9. No diversity

Lenders are interested in knowing if you can handle both revolving and nonrevolving debt, and the mix of credit you have constitutes 10 percent of your FICO score — the most commonly used credit score.

10. Closing credit cards

Not only could this increase your credit utilization ratio, but it could also shorten the length of your credit history — although closed accounts will remain on your credit reports for seven to 10 years.

Source: http://www.moneytalksnews.com/2014/05/23/11-little-known-actions-that-sabotage-your-credit-score/#ZkkdJUEiuVZP8fI4.99

I'm Debt-Free, So Why Did My Credit Score Drop?

Getting out of debt is a good thing, so why do some consumers see their credit scores decline after paying it off? There’s a common misconception that you must be in debt to have good credit, but that’s not the case. You do, however, have to use credit to earn a good credit score, and it’s sometimes difficult to see the difference.

Credit cards are probably the best example of this: If you pay your credit card bill every month, you are not in debt, and you’re building credit by using the card.

Swear Off Debt, Not Credit

If you’ve just paid off your credit cards, you may be said to yourself, “I’m never falling into debt again.” That’s a great goal, but if your plan involves cutting up the cards and never using them again (and you have no other debt, such as a mortgage or student loan), you may find yourself without a credit score.

It’s different among credit scoring models, but you have to have some recent credit activity on your credit report in order to have a credit score. If you don’t use your credit cards after paying the outstanding balances, the issuer will likely close the card due to inactivity, meaning they won’t report to the credit bureaus anymore. If that was your only form of recent, active credit, you’ll lose your credit score.

You can avoid this by using your credit card sparingly and paying the bill immediately. If you didn’t have a credit card before emerging from debt, you can get a secured card and apply the same strategy. Consider asking a trustworthy friend or relative to add you as an authorized user on one of their credit cards. That’s not a choice to be taken lightly by either party, so do your homework before trying it.

Prepare for Some Changes

Continuing with the credit card example: Paying off credit card debt can lead to a variety of shifts in your credit score. If you were using a high percentage of your credit limit, your credit score may improve, because you will have reduced the ratio of your debt to your available credit (here’s why that credit score factor is important). On the other hand, if you stop using the card, the issuer may close it, which would reduce your available credit and hurt your credit utilization rate.

Your mix of accounts also contributes to your credit score. Say you had student loans and credit cards, and you’ve just paid off your last student loan. If you don’t have an active installment loan on your credit report, your credit score may go down, but this isn’t nearly as important to your credit score as making payments on time or keeping your credit utilization rate low.

It’s easy to see how your various credit accounts impact your credit standing if you know how scores work. You can get a free, monthly snapshot of your credit and credit scores with a Credit.com account. Having a good understanding of your credit should allow you to reach your goals of getting out of debt without hurting your credit in the process.