Tips for Managing Money on Your Own

Every May, the voice of the commencement speaker rings in the land. Go forth! Play to win! But while graduates may be prepared to take up jobs and careers, they're often not ready to handle money. With the right start, however, you can make money management easy-in your 20s and for years to come. So here's my own "commencement" speech, about the meaning of financial life.

Respect cash. It takes real live dollars to set up on your own. Open a savings account and keep at least two months' rent on hand.

Manage your spending. Independent life is far more expensive than you think. Add up the bills and compare them to your take-home pay. If there's more outgo than income, well… you know what to do.

Get rid of credit-card debt. Many consumers think of credit-card debt as "normal"-just like having a mortgage or auto loan. In fact, it's a total waste of money that you could be using for savings or having fun. If you're carrying debt, add up the amount (most people underestimate), check the interest rates (if you paid late a couple of times, your rate might be up to 24 percent or more) and lay out a plan for paying it off.

Teach yourself to save. At all income levels, some people save and others don't-it's usually a matter of lifestyle choice. That makes it important to get in the habit, even if you start small. As an experiment, put away $50 a month to see if it wrecks your life (it won't). Then go to $75 or $100.

Start your retirement savings. Because you'll hold onto these for years, you'll want to invest up to 80 percent of your retirement money in well-diversified stock-owning mutual funds. You might think you're too young, too ill paid or too bothered with other bills to join your company's 401(k)-but do it anyway. These are the best years of your investment life, when your money has 40 years or more to grow.

If you don't have a company plan, consider a Roth IRA. You can save up to $4,000 a year. All the earnings come entirely tax-free, as long as you take them after age 59.5. Roths have another big advantage: you can withdraw your own contribution whenever you want, tax-free and penalty-free. For example, say you invest $3,000 over three years, and earn $400. If you suddenly need money, you can withdraw up to $3,000 at any time, no strings attached.
Avoid financial planners, for now. To keep their jobs, they have to sell high-commission products, such as high-fee mutual funds. Stick with low-cost simple things, such as IRAs and target funds. At this stage in your life, there's nothing that you can't do better yourself.

Tips for Managing Money on Your Own | Culture