Hey everyone, so as I said last week your
twenties can either be your best friend or your worst enemy when it comes to personal
finance. And perhaps the biggest determining factor
between being way ahead of the game come your 30th birthday or well behind where you’d like
to be is your ability to identify and avoid some common money traps. Last week we covered three of those traps
and this week we’re going to be talking about 4 more. If you missed last week’s video I’ve left
a link to it in the description so you can check it out either before or after watching
this one. With that out of the way, let’s get started
picking up where we left off last week. A fourth common money trap that you should
avoid in your 20s is not getting a jump start on your retirement savings. Yeah, I know another one that sounds like
it’s basically just talking about compound interest. But particularly when you’re in your twenties,
truly understanding compound interest its effects, and how to get it to work for you
and not against you is probably the most important thing you can do to secure your financial
future. So, yes, I know I’m harping on it in this
video but it is really that crucial. So what do I mean by getting a jump start
on your retirement savings? Live like a college student for a year after
getting a job. Keep your expenses as low as you possibly
can while investing every cent you can in tax-advantaged accounts. If, after college graduation, you and your
spouse’s household income is $6,000 a month and you can live on $15,000 a year for one
year (likely we’ll need to take advantage of rent hacking to achieve this) then you
could have over $4,000,000 invested in your nest egg in 45 years when you retire. That’s assuming a 10% return and no further
investing after that first year. That would mean you would have the equivalent
of a $44,000 annual income in today’s dollars assuming a 4% safe withdrawal rate. Again that’s based on just one year of investing
aggressively. If you had continued investing $1,000 a month
while living on the other $5,000 you would end up with nearly $13 million by the time
you retire. In that scenario, you would be able to live
on $135,000 a year assuming a 4% safe withdrawal rate was used in retirement. Even with an 8% rate of return, the numbers
are still pretty eye-opening. With just that one year of aggressive investing,
you would end up with over $1.8 million! If you continued investing after that first
year you would end up with almost $6.5 million! That’s a retirement income of almost $70,000
a year in today’s dollars following the 4% rule. A fifth common money trap that you should
avoid in your 20s is going to college without a plan. College is great for some, but it isn’t for
everybody. And you can create a very comfortable life
for yourself with or without a degree. According to the Bureau of Labor Statistics,
the median income for high school graduates in 2017 was about $37,300 per year. For those with bachelor’s degrees, it was
about $61,800. And for those with advanced degrees, it was
about $75,400. There’s certainly a pretty big leap between
high school graduates and those who have at least a bachelor’s degree, but we also have
to consider the time it takes to get that degree and the cost of college itself. According to ValuePenguin.com the average
annual cost of a four-year college for in-state residents is about $25,000. That number includes tuition and fees, room
and board, books and supplies, transportation, and other miscellaneous expenses. Judging by those numbers a four-year degree
at such a school would run about $100,000. That’s quite a chunk of change. Assuming that you put the full cost of that
degree on your student loans with a 4.5% interest rate and the standard 10-year term you would
be paying over $1,000 a month after graduation. That’s also quite a chunk of change. In fact, it’s about 20% of the median income
for those with bachelor’s degrees. And that’s just the tip of the iceberg. If you decide to go to school in some other
state it’ll cost even more. Those same 4-year colleges cost $41,000 per
year for out of state residents. Private colleges can cost $50,000 a year or
more. You can see how these costs can quickly add
up even if you finish your degree in the standard 4-years. But if you go to college without having some
idea of what you want to get from it you could find yourself changing your major a couple
of times and spending more years in school. With that being said, how do you save money
for college? A few things you could do would be going to
a community college to get your two year degree before transferring to a 4-year university
to finish your bachelor’s, looking for scholarships or grants, looking for part-time jobs you
can do while at school, and saving early in things like ESA and 529 plans if you have
the time among others. These strategies can make a pretty big difference
in the cost of college and the amount of catch-up work you’ll have to do after graduation. For example, according to ValuePenguin’s
data, the average annual cost of a community college is just $4,864. Heh, and I say just $4,800 as if that’s
not also a lot, but it significantly cheaper than the 4-year university. If you got your two-year degree from a community
college it would run you about $9,700. You could then transfer to a 4-year university
and finish your bachelor’s for an additional $50,000. In total it would cost about $60,000 compared
to going to the 4-year university from the beginning and shelling out six figures. ESAs and 529 Plans are both ways to save for
educational expenses. ESA stands for an education savings account. The 529 Plan gets its name from the IRS Code
number that it’s based on. Both the ESA and 529 Plan allows for tax-free
growth and withdrawals as long as you are withdrawing the money for qualifying expenses. While contributions to the ESA are not tax-deductible,
they can be withdrawn tax-free for qualifying primary and secondary expenses as well as
college. You can choose just about any type of investment
you want and can contribute $2,000 per child, per year. ESAs must have a beneficiary listed and that
person must use the money by the age of 30 to avoid any taxes and penalties. If they aren’t going to use the money before
30 you can transfer it to another beneficiary as long as they are related to the original
beneficiary. This is really cool because it means that
if you’re saving for your kids college and they end up deciding not to go you can transfer
the account to your grandchildren! However, there are income restrictions with
the ESA. The restrictions begin with incomes between
$95,000 and $110,000 for individuals and $190,000 and $220,000 for those who file jointly. 529 Plans are offered by most states and are
a little more restrictive with their investing options than the ESA. For most states there are a few portfolios
that you can choose from when investing your money and you can reallocate your investments
twice a year. To make up for this the 529 Plans do offer
higher contribution limits of $14,000 per year and the money is still withdrawn tax-free
for qualifying expenses. There is no age limit for those using the
money. So if you’re beneficiary decides they want
to go back to school in their forties they’re free to do so with this money. Withdrawals can be used for college expenses
including tuition, room and board, and textbooks and supplies. However, they cannot be used for primary and
secondary school expenses like the ESA can. Unlike the ESA, there are no income restrictions
with most 529 Plans. And finally, just like the ESA, you can transfer
from the original beneficiary to someone else as long as they are related. With both of these plans, it’s important
to consult a financial professional as there are sometimes some differences in the fine
print, but this is generally how the options look. But as you can imagine these options can give
your son or daughter a massive head-start when it comes to saving for college. It’s okay to work while you are in school. It’s great to be able to work during the
summer to earn enough money to pay for school. If that’s not enough though, there’s no
shame in working part-time during the school year as well. Your 30-year-old self will thank you for it
someday. Consider if you went to a community college
to get your two-year degree. It costs you approximately $10,000. If you then went to finish your bachelor’s
at a 4-year school you’d be paying about $50,000. In total your educational expenses are around
$60,000 over the course of 4 years. If you worked a full-time job in the summer
(13 weeks) that pays $12 an hour you would earn about $6,240. If you also worked 20 hours per week during
the school year (39 weeks) you would earn an additional $9,360. In total, you would have an income of $15,600. After taxes, this would likely be about $14,000
a year in income. With $15,000 a year in educational expenses
that would nearly pay for your entire degree! Within a few months of graduation, you could
be debt-free and off to the races building your investing portfolio. A sixth common money trap that you should
avoid in your 20s is buying a home before you’re ready. Our mid to late twenties is often when we
buy our first house. Many times this is perfectly fine. However, sometimes people buy houses before
they’re ready and that can lead to catastrophe. So how do you know if you are ready to buy
a home? Generally speaking, there are three rules
of thumb when it comes to buying homes. They are the 28/36 rule, the 30% solution,
and the 25% method. The 28/36 rule states that you should spend
no more than 28% of your gross income on your mortgage payments including the principal,
interest, insurance, property taxes, PMI if you have it, and HOA and other related fees
and dues if you have them. The rule also states that no more than 36%
of your gross income should be spent on your housing and all other debts. Or in other words, 36% of your gross income
should go towards your mortgage principal (or rent if you’re a renter), interest, insurance,
property taxes, PMI, HOA fees, and other debt payments like a car, student loans, or other
personal loans. The 30% solution states that no more than
30% of your gross income should be allocated towards housing costs which basically includes
the same things as before. Technically the 30% solution also advises
that you have no more than 20% of your take-home pay should be going towards non-housing debts. However, unlike the 28/36 rule, it doesn’t
have a second layer for you to adjust your housing costs if you are in a situation where
you’re up to your eyeballs in debt. This could lead to some very tight budgets
if you have a fair amount of debt relative to your income. The 25% method is the one popularized by Dave
Ramsey and it states that you should allocate no more than 25% of your take-home pay, towards
your housing costs. This is undoubtedly the most conservative
of these three rules of thumb and generally works very well, especially in situations
where you need to allocate a large portion of your income towards other financial goals
such as giving, paying off debt, or investing in your future. If you are unable to afford a home based on
any of these rules you definitely should not be buying, even if you qualify for a loan. This may lead to missing out on some real
estate appreciation, but that’s a far better problem to have than being unable to afford
to keep a roof over your head. Ultimately the answer is you need to either
earn more, spend less, or some combination of the two. I know that isn’t the answer we’d necessarily
like to hear, but it is the truth. Thankfully, there are some things that most
of us will be able to do to save money quickly. For most people, the largest expenses they
have are related to shelter. The combination of housing/apartment costs,
maintenance, utilities, and related insurance premiums quickly add up to a bundle of cash. In a way, this is fortunate as it gives us
a huge opportunity to save money quickly. Rent hacking is a term that refers to you
sharing the costs of housing with others. Rent hacking takes on many forms depending
on the person using it. Similar to many college students you could
share the apartment with some roommates and split the costs. You could rent an apartment that allows subletting
to other tenants to help cover costs. Or you could rent out your places on travel
sites like Airbnb to earn some extra cash and offset the costs. Whichever way you decide to go the end result
is your portion of the housing costs goes down and you are then able to save more money. In addition to saving money on housing, you
could do a zero-sum budget to find out other areas you may be overspending in. If you’ve never done this before it can
be an eye-opening experience. Some people find they’re spending significantly
more on eating out than they thought. Others find there are some subscription services
that they no longer use and just forgot to cancel. Still, others find no glaring oversight in
their budgets but many categories that could use some fine-tuning. They then research ways to keep utility and
other ongoing costs down and save money that way. Depending on your situation this could lead
to savings of a few dozen dollars a month to a few hundred. When paired with rent hacking strategies it
can allow you to save some serious cash quickly. A third way that you could help yourself save
money for a down payment is to sell things that you don’t use anymore. Depending on the things you have and are willing
to sell this could have the effect of a small initial boost that might cut a month or two
off your savings timeline or a big boost that plays a major role in your overall savings
plan. A fourth way you can save money is by paying
off your debts. This is admittedly more of a long-term strategy,
but with those minimum payments gone you’ll be able to put more of your income toward
saving for a down payment and later toward your mortgage or investments. This will have a double-effect on your goal
to buy a house as it will be much easier to get a mortgage if your debts are under control. If you want to see an example of how big of
a difference using these strategies can make on your savings for a down payment you can
check out my earlier video on how to save money for a home at the link in the description. A seventh common money trap that you should
avoid in your 20s is not taking time to become financially literate. While the schools are getting better at teaching
financial education there’s still a long way to go. And even if they do manage to get to the level
we need to get to it’s not going to do much for those of us who have already finished
school. For those of us in that camp, we’re going
to have to take matters into our own hands through self-education. Expose yourself to new ideas. Read books, take classes, watch videos or
look at blogs related to money just like you are now. Any of these going to have very positive the
facts on your financial situation both in the present and future. They can introduce you to new ideas that you
may not have come across on your own. They can reassure you during uncertain times
that the world isn’t coming to an end and this too shall pass. They can give you encouragement when things
are going well and help keep you motivated to continue working towards your goals. And perhaps most importantly (especially if
you’re just starting out and didn’t get much financial education when you were growing
up) they can introduce you to so many new possibilities that get you excited about researching
finance. They can get you thinking about what you can
accomplish in your own life with your own resources. So if you’re watching this right now and you’re
in your 20s, or even if you’re not in your 20s and you’re just getting introduced to
the concept of financial literacy, make sure you never neglect it. I’ve also done a video on how big of a difference
this can make to your life and your finances. If you’re interested in learning more there’s
a link in the description. So those are 4 more money traps to avoid in
your twenties (or really any age). Have you, or anyone you’ve known fallen
into one of these traps? If so, how did they get out of it? If not, then do you think I missed any traps
that we should be avoiding? Let me know in the comments section below. Once again, if you didn’t catch the first
part of this video series you can find a link to it in the description below. Also, I want to make a quick announcement
about the channel. We’re coming into the Christmas and New Year’s
holidays. I know a lot of you will be spending the time
with friends and family and so will I. I never like to feel like I’m intruding on that time
especially since I know how few and far between these times are for some families. So just like last year, I will be taking a
brief break over the holiday season, but I will be back Monday, January 13th with some
more videos. So thank you all for taking time out of your
schedules every week to support this channel, I really appreciate it. And I hope you enjoy the holiday season and
have a great start to your new year. I’ll see you in 2020.