Starting Out Right

Posted by Mike Smith :: March 25, 2008 @ 6:45 am

Our financial lives may start at an early age, but it’s not until we’re living on our own that our money management skills get put to the test. A proper start can make a huge difference.

It’s no surprise that many people have a hard time with their finances right after college. Between college debt, the startup costs of an adult life, and a lack of experience handling money, there are a lot of factors against you. A first “real job” may also bring in much more money than you’re used to having. It’s easy to settle into the mentality that you have plenty of money, enough to not worry about keeping track of it. In reality, entry-level pay tends not to be all that great, and you might not realize that you’re making only just enough to get by. Along with the newfound riches come newfound expenses as well. So keep track of your finances to stay on top of them.

In your twenties, planning for the future may seem like a low priority. I’m not just talking about goals that are way down the line, like retirement. Even goals that may be coming sooner than you think, such as purchasing a first home, seem far off. At this point in your life, you have an asset that others can never hope to re-attain: time. Having time allows you to put away less money now for the same benefit as putting away more later. Even if you realize that starting to invest early is the right way to go, finding the money to start may be difficult.

You may be tempted to pay off any outstanding student loans as quickly as possible. That’s an admirable goal, but not necessarily the best use of your money. Student loans tend to carry extremely low interest rates, which would be hard to find through other means. So instead of paying down your student loan debt quickly, at the cost of letting credit card debt accrue, using any extra money that you can scrape together to pay down credit card debt is probably a better way to go.

Person-to-person loans from Lending Club carry interest rates that are between those of most student loan debt on the one hand and credit card debt on the other. You can use such loans to pay down higher interest rate credit card debt and help to fund your long-term goals. Lowering your overall monthly payment towards debt will open up a whole new world of savings possibilities. Paying off your highest interest rate debt first (after making at least the minimum payments on your other debts) will yield the most savings. When you finally have only student loan debt remaining, which likely has the lowest interest rate of all of your debts, you can then begin to pay that off at an accelerated rate.