Navigating Personal Finance In Your 20s; Spending

“Shut Up And Take My Money” — this is how millennials spend: without thought.

Financial literacy is one of the most important things any one person needs to learn in their lifetime. It will influence your life, your spouse and children’s lives, and directly affect how y’all live both now and later. Read below to figure out how you can navigate the inevitable major expenditures of your 20s and better manage your spending habits.

Spending In Your 20’s —

The typical 20-something is going to endure 4 main expenses during his or hers golden decade: an engagement ring, a wedding, a car and a house. What follows is a one-by-one in depth analysis of each as I lay out the numbers and propose some advice on how to navigate them.

Engagement Ring —

• The average engagement ring costs $5900 and only about 1/3 of buyers spend less than $3000 on a ring. This is not a purchase to just shrug-off.
• Sticking to a budget is difficult — while over 80% of all buyers set a budget for their purchase, almost 30% of those went over their predetermined spending limit.

It is often heard that you should spend one/two/three month’s salary on a ring, and while this sounds simple in theory, parting ways with that much capital can be tough, and you don’t want to be in debt before you can even start your life with your significant other. Certainly you want to give your soon-to-be spouse a worthy ring that they will love, but that does not mean you shouldn’t try to save money where you can. Some advice I’ve read on the matter:

• Shopping online can increase your total savings by up to 50 percent.
• Give up a small fraction of a carat size. For example, a 0.97 carat diamond is identical to a 1.0-carat diamond to the naked eye, but has a much smaller price tag.
• Negotiate with the jeweler. You’d be surprised how much you can save simply by asking/negotiating. It’s extremely important you do so. You can always shop elsewhere, and the jeweler knows it.

Wedding —

• The average cost of a wedding is $35,300. Yes you read that right — that’s roughly $10–20k/hour.
• If you start planning for your wedding 5 years before hand, you’d have to save roughly $600/month, which is pretty unfeasible.
• Only 10% of couples pay for their wedding in full without any help, but the vast majority of parents’ only pay for 2/3 of the total expenses, meaning the bride and groom are left to pay about $10k.

It’s easy to tell someone to cut back on wedding expenses, after all, they could use the money to set up a life together. But when you’re planning for what is to date the biggest day of your life, a day which will surely bring along with it a lifetime of memories, often times planning and saving go out the window.

Parents today have been known to dip into their retirement accounts in order to fund their child’s wedding. This does not pay dividends. Overspending now so that your child has to help you financially in retirement is not a gift any bride or groom really wants. If that happens, it’s not a gift — it’s a loan with heavy interest.

Search your ambitions and be realistic. Can you go without a large wedding? If not, that’s perfectly okay — but begin planning for it now:

• Speak with your parents and figure out if or how much they will help pay for it.
• Set expectations with your significant other early regarding the size and lavishness of the wedding.
• Research costs, communicate, and mutually agree upon a budget.

Car —

Let’s be clear: a car is a depreciating asset. If you can avoid it, do not buy a car.

• A new car loses between 20–30% of its value within the first year of driving it. Year 2? 15 more percent, gone. By year 5 a car has depreciated by about 60% of its value.
• A car is the second largest expense after housing (if you make $50k–$70k a year, about $10k will go to your car).
• Phantom costs (gas, maintenance, registration/parking fees, tickets, insurance) can severely increase your average cost per month. A $350 monthly car payment can quickly and quietly become $1000 all in all.

If you live in a compact city like NYC or SF, you can literally bike anywhere, seriously. Not only will you avoid monthly car payments, you’ll be healthier for it. Not to mention, it may be significantly cheaper to bike/walk/use public transportation and Uber everywhere instead of having a car.

If you must have a car, how should you go about it?

Literally buy a Toyota Camry or Honda Accord. Seriously. I know it’s not sexy, but be for real. No one cares about what kind of car you drive. No one is impressed by an expensive car. Be responsible and save your money so that you can build wealth instead of squandering it.

• Follow simple rules of thumb — Buy a car that’s maximum 6 years old. Sell it after 7 years. It should cost between $5–15k. It should have no more than 100,000 miles on it. Picking a car doesn’t have to be complicated.
• Buy off Craigslist. Use Kelly’s Blue Book to double check the valuation of the car and make sure you’re not overpaying. Never lease or borrow money to pay for the car (if you have to, it should be clear that you can’t afford it).
• Although I advise against it, if you wanted to indulge slightly and it is within your budget to do so, buying a used car at 2 years and 20,000 miles is the sweet spot. This way, you will buy when the car has depreciated roughly 40%, and 20,000 miles means little to no mechanical problems and minimal maintenance.

House —

“A home is a liability masquerading around as an asset.”

— Morgan Housel

Many people consider a home to be their biggest “investment,” it is not. A home is a form of consumption — you have to live somewhere, so you’d be paying for it by either way (renting, owning). It is a given.

Deciding when to go from renting to buying can be a long and difficult process to navigate. This is why the average age of a home-owner in America is 33. Nonetheless, let’s examine:

• The median home price in America is $330,000.
• Peer pressure to buy a house is real. It seems like it’s the “next step” of adulthood. You’re out of school, you have a job, you get married, now it’s time to buy a house and settle down.
• After saving up for and spending significant cash on an engagement ring, wedding, and car, a lot of young people won’t have the means to pay 20% down on a house.

When deciding if it is worth it to move from renting to buying, use a Rent vs. Buy Calculator, this will show you for the house values in your area, whether it make sense to buy or rent. However, buyers beware . . .

Like owning a car, there are many phantom costs that go along with buying a home.

• Don’t underestimate the amount that you will pay to furnish the home.
• Closing costs will vary by state, but can add thousands of dollars to your initial down payment. If you thought you were going to put 10% down on a $300k home, you might end up only being able to put 8% down since the process is so costly.
• Taxes and maintenance will increase your costs and inflation will decrease both buying power and depreciate the value of your home.

Consider this: Instead of putting a 20% down payment on your home, think about putting 3, 5 or 10% down instead. Yes, your monthly mortgage payments and insurance will be higher — but if you can instead put that extra 15 or so percent into the stock market, receive a 6–8% return compounded annually, you can begin to build long-term wealth.

The Unfortunate Spending Habits of Most 20-Somethings —

Where did you spend your last $400? The answer most commonly revolves around two or three weekends of nonsense and throwaway forget-the-workweek behavior. After all, it is true that American’s aged 20–30 spend an average of almost $3000 on vices (alcohol, drugs & gambling) per year.

So maybe that’s where you spent your last $400. That’s okay. Let me show you some statistics:

• 40% of Americans cannot come up with $400 in an emergency.
• The lowest-income households in the U.S. spend over $400 a year just on lottery tickets.

Spending money on vices, while exhilarating, is both fleeting and wasteful. Alongside these habits, millennials often spend more on comforts and conveniences:

• 60% of millennials will spend more than $4 on a single coffee.
• 70% of millennials will spend a little extra to eat at the “hip” restaurants in town.
• 69% of millennials buy clothes for reasons beyond basic necessity.
• Over 50% of millennials spend money on taxis and Ubers while only 29% of Gen X and 15% of Boomers do the same.

Navigating personal finance in your 20s doesn’t have to be difficult. Understanding what will most likely be the biggest purchases of the decade and preparing for them already sets you up better than the average millennial. Cutting back on unnecessary expenditures will be key if you wish to gain financial freedom.

More on saving and investing in your 20s to follow.

Thank you for reading!