When you don't have a lot of money, what to do with it might seem like a silly question. But the high price of college, pressure to start saving for retirement at an early age, and pricey urban housing markets mean today's 20-somethings face tough financial decisions, with little room for error. It's not easy being young.
Take Rachel Manwill, a 24-year-old assistant editor who is trying to pay off $6,000 in credit card debt while earning around $34,000 a year. "After I'm done paying my bills, there's not a whole lot left beyond what I know I'm going to need for gas and food," she says. In an effort to save money, she still lives with her parents in Upper Marlboro, Md., and, even so, feels that she's living paycheck to paycheck. "It just never seems like there's enough," she says.
Many in Manwill's generation share her frustration. According to the latest numbers from the Bureau of Labor Statistics, consumers between the ages of 16 and 25 report household spending of just $282 less per year than their pretax income of $28,258. (Housing and transportation alone account for more than half of those expenditures.) Consumers between ages 25 and 34 fare better, spending almost $10,000 less than their average pretax household income of $56,149, but still devote 57 percent of their take-home pay to the basics—food, housing, and transportation.
So, what is a strapped 20-something to do? The key, say personal finance experts, lies in prioritizing all of those competing demands for money. Here's a road map to help sort it all out:
Spending. First jobs come with some unavoidable start-up costs, such as a new suit and possibly wheels to match. Those expenses can easily outweigh first paychecks. That's why Liz Pulliam Weston, author of Easy Money, recommends pretending that your new salary doesn't exist. "Most people would be better off if they continued to live like broke college students for a few years, until they get a handle on expenses," she says. "You will get approved for a monstrous car loan. There is no relationship between what you can afford and what you can get," she adds, which means those getting started on their careers have to exercise self-discipline and sometimes self-denial. If you need a car for work, buy a two-year-old used one, Weston says.
"Diminish your expectations," advises Tamara Draut, author of Strapped. Small habits such as bringing lunch, buying coffee at a deli instead of a coffeehouse, and waiting to buy a new car can make a big difference, she says. Living at home, which 1 in 7 adults between the ages of 25 and 29 does, can also provide financial breathing room, Draut adds.
All this scrimping need not mean living on bread and water. "You do need little luxuries, and you can fit them in no matter how small [your income] is, but you can't have them all the time," says Carmen Wong Ulrich, author of Generation Debt.
Credit card debt. Entering the workforce with credit card debt is not necessarily a bad thing, Ulrich says. "There are times in your life when you use a credit card that you are using debt in a good, smart way," she says, such as buying a couple of work outfits and cheap furniture for a first apartment. As long as the purchases are necessary to one's new professional life and paid off quickly, she adds, then it's not a problem.
But when debt accumulates, especially on multiple cards, it's time to crack down by paying as close as possible to the full balance each month. To decide which card to pay off first, check the credit limits, says Bill Hardekopf, chief executive of LowCards.com. Going over the limit can mean an additional fee of around $30. Even getting close to credit limits can trigger credit card providers to increase interest rates, which will make it that much harder to pay off the debt. The next priority should be paying off the cards with the highest interest rates to minimize interest payments.
Student loans. "Don't worry about student loan debt too much," says Weston, unless it's dominated by high-interest private loans. As long as most of it is locked in at lower rates, 20-somethings are better off putting their extra cash into high-yield savings accounts or retirement savings. The other advantage of student loans is that they tend to be flexible, with loan companies granting deferrals or forbearance to struggling borrowers going through temporary crunches, Weston adds. (Deferring doesn't stop interest from piling on more debt, so it's an option to be used only in emergencies.)