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Financial Tips for Twenty-Somethings

You're on your own now. You've finished school, are working your first real job, and maybe you're even buying a home or getting married. Here are a few tips to help you start managing your finances.

Construct a budget

The foundation of any financial plan depends on knowing what your income and expenses are and budgeting accordingly. Your income may be easy to figure out (look at your paycheck), but don't forget to add in other income such as interest income, and maybe earnings from a seasonal job. Most of your expenses will also be fixed, such as rent, utilities, and groceries, but don't forget about occasional expenses, such as clothes or car repairs.

If your income is greater than your expenses, you're in good shape, but if it's the other way around, you'll need to generate more income or cut expenses, or both. If cutting expenses, look at your wants first (e.g., travel); there's less flexibility when it comes to your needs (e.g., groceries).

Prioritize your debt

Maybe you've got student loans, a car loan, and some credit card debt. Paying all your debts on time will help you establish and maintain a good credit history, so it's important to make debt repayment a priority expense in your budget. If you need to reduce your debt burden, perhaps you can consolidate your student loans to lower the monthly payment. As for credit card debt, resolve to pay it off in a systematic fashion: always pay more than the minimum payment due, and if you have more than one card, direct any extra money you have toward the card with the highest interest rate.

Review your insurance coverage

Health insurance: Hopefully, you'll have coverage through your employer. If not, as part of recent health-reform legislation, you may be able to remain on your parents' health insurance if you are under age 26.

Disability insurance: You're fine now, but that could change in a heartbeat if an injury or illness puts you out of commission. Disability insurance pays benefits that will help cover your living expenses if you can't work due to an injury or illness. It may be offered through your employer, or you can purchase it on your own.

Life insurance: If you're employed, you may receive life insurance as part of your employee benefits package. If not, you may want to purchase a small policy to cover any final expenses (e.g., funeral expenses) that might be incurred if you die. And if you're getting married or planning a family, you'll need life insurance to protect your loved ones.

Plan for your future

One "expense item" you should include in your budget is saving for your future. Although retirement seems far off, start saving as soon as possible. Due to compound interest, the sooner you start saving even a modest amount, the greater the amount you can potentially accumulate over time. For example, $50 per month saved at 6% compounded monthly for 30 years yields a total accumulation of over $50,000, even though you only deposited $18,000 of that ($50 x 12 months x 30 years). (This is a hypothetical example and is not intended to reflect the actual performance of any investment--results will vary.)

Save for your short-term needs, too. Try to sock away at least three to six months worth of expenses in a savings or money market account, so that you'll have funds you can access in an emergency.

Take advantage of any employer-sponsored retirement plans you're offered; your contributions come out of your salary on a pretax basis, and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions. You may also want to look into opening an individual retirement account (IRA)--IRAs also feature tax deferral of earnings.