22 Things Every 22-Year-Old Should Know About Finances
Inspired by Glamour's popular "30 Things Every Woman Should Have And Know By The Time She's 30," we decided to put together our own list, on 22 things every bright-eyed 22 year-old-college grad should know about money.
By age 22, you should have:
1. An idea of what you want to do with your life professionally, and what your bottom line is. Make sure you know what the average salary is regarding the profession you choose.
2. A basic understanding of investing your cash. Here are 10 investing terms that are essential.
3. A credit card. Building your credit is extremely important. Credit is used as a check for almost everything: apartment application, mortgage loans, car loans, etc., so get a credit card early on and use it responsibly.
4. The ambition to pursue jobs you may be underqualified for, and the humility to accept a position you may be overqualified for.
5. A budget -- have your income figured out, including financial help from your parents. Make lists of all your fixed expenses and your variable expenses. Seeing your expenses at one time will make you aware of what you have left to save or spend.
6. A plan of attack for your student loans. Knowing how much you owe, the amount your monthly payments will be, and when they're slated to start will enable you to begin planning repayment. If you're a grad with student debt but no job, you can consolidate multiple loans into a single payment, which stretches out the payments on federal loans up to 30 years. However, you will end up paying more interest over time.
7. An understanding of money management. Financial literacy is extremely important in setting up future success for a fledgling adult. There are many books that can serve as a guide to financial literacy, and are geared specifically towards young adults. We recently discussed Ramit Sethi's "I Will Teach You To Be Rich," (along with an interview of Sethi) which you can see here.
8. Connections. Even if they're just professors you were friendly with, or fellow classmates who are already employed, contacts are useful. According to an ABC News report, 80% of today's jobs are landed through networking. They can serve as mentors, a listening ear, and a possible referral for a job. Sign up for a LinkedIn account if you don't already have one.
9. Knowledge on statistics of how graduates are faring in the workforce.
10. An honest talk with your parents about their expectations. If you move back home with Mom and Dad, find out if they expect you to contribute to the household, land a job within a certain amount of time, and how your financial situation will impact theirs. Be truthful about how much you can pitch in, and let them in on any anxiety you're having. This type of clear communication will eliminate any elephant in the room.
11. The tools to be financially successful later on. Opening a checking account is the first step to the adult world of finances, and you'll also likely get your first checkbook free from the bank. Many companies ask their employees to bring in a voided check to help them set up automatic payment into that employee's checking account, which is even more incentive to hop on the grown-up bandwagon.
12. The student checking accounts/credit cards you used in college will no longer have student benefits.
13. Where to get your free credit report. You're allowed to obtain your annual credit report for free at AnnualCreditReport.com.
14. Where to get your credit score. The basic credit report including your score costs about $15. Pick any of the three major reporting agencies to do this: Equifax, Experian, or Transunion.
15. The benefits and drawbacks to working a freelance job: on the upside, freelance work is a good alternative to trying to find a full-time job in this rocky climate of unemployment. On the downside, you will be hit with unpaid taxes from all those freelance jobs. Freelancers have to estimate how much they'll owe and keep that amount aside. Freelancers also have to pay self-employment taxes: 15.3% on top of income taxes. Tax analysts suggest freelancers who make over $1,000 a year to pay estimated taxes every quarter using the IRS form 1040-ES, to be filed by the 15th of January, April, June, and September of each year.
16. Set aside at least 10% of any paycheck you make. You need to start building a nest egg you don't touch, exclusively for emergencies like an unexpected layoff or a long bout of unemployment. The rule of thumb is to save up at least 6 months of living expenses.
17. What to look for in a credit card -- be selective. There are cards with incentives such as low APRs, balance transfer offers, cash back, reward points, miles, and more. Consider which features are important to you.
18. How to use credit to your advantage and avoid becoming a slave to your credit (the average household in the U.S. has $7,000 in credit card debt). If you're just starting out with credit, a secured credit card is a good way to go, because the credit limit on your card is usually equal to the security deposit you place with your financial institution. That way you don't spend excessively. Also, pick a card that reports payments to the three major credit bureaus and you'll be able to establish credit with any of them. Use the 10%-20% rule as a guide to how much of your available credit you should use. Pay your bills on time each month, because even one late payment can result in a big drop in your credit score.
19. That it's already time to start thinking about retirement.
20. What the ideal credit score is. The most widely used credit score is the FICO score, which is calculated using information in consumer credit reports. FICO credit scores range from 300 to 850, 850 being the best score.
21. Unfamiliar terms like mutual funds, 401(k), Roth IRA, and generally any financial term you hear frequently.
22. That you're not alone. 50% of recent grads are unemployed or underemployed. Personally, it took me five months of applying for different positions and took "allowance" from my parents to stay afloat. Yes, it felt embarrassing. Yes, it's hard to be 22. But the circumstances are affecting everyone, and you're not alone.