#26 – Michael Joseph – Why You Should Live Small and Do More in Your 20’s

The transition from college to full-time work is a big change. It’s a major change in identity from young adult in college to full grown, full time adult.  For most people, it’s the first time in their lives that they are making reliable income.  However, with more income, comes more temptation.  

The temptation to buy a new car, to live alone, to buy all of the things you never had money for as a broke college student. 

These temptations are normal, but also a huge mistake financially!

Here are my reasons why you should be more financially conservative in your 20’s:

Low Income/ High Debt Ratio 

The average entry-level salary in the US for someone graduating college is between $26,000 and 35,000.  That’s not very much money. A mistake a lot of people make is getting their own place or buying a new car.  An entry level salary cannot cover these expenses.  If someone can make it work, they are most likely “house poor”.  Being house poor is living paycheck to paycheck due to being held down by spending too much on housing / vehicles.  It is extremely difficult to save when over 50% of your income Is going toward these expenses.  That also doesn’t include your student loans….  At the beginning of your professional career your income is at its lowest, and your debt is at its highest. 

Most College Graduates with debt take advantage of the 6-month deferment post-graduation.  This gives grads 6 months to find jobs and save a little money before that additional expense kicks in.  The smart thing to do in this situation is to incorporate that expense into your budget for the time you start your first full-time job.  If you do this, then it is a lot more difficult to justify luxury expenses because you simply cannot afford it. 

This is the reason a lot of grads move home after college.  It’s not the most ideal outcome for someone who has lived outside of their parent’s home for the last four years, but it provides a huge advantage in terms of saving money until a promotion or better paying job is available. Rent is your biggest expense, period.  

For those who don’t have this option, the best thing you can do for yourself is to lower your cost of living.  You can do this by living exactly as you did in college, like you have no money. Live with roommates, don’t eat out, save what you can. 

My first job out of college, I was only making $28000 per year. I lived with 5 people, which only made my rent cost around $300.  It wasn’t ideal at times, but I was able to pay my student loan payment, rent, other expenses, and save a little money for myself.  If I lived alone or in a more expensive house, I would have been BROKE…

A utility mindset post-college will help you save money and cover all your responsibilities until you can get a promotion or better job because you have more experience.  With low income and high debt, living as small as possible will get you through this time.  

Get a Side Hustle / Second Job

You should have a side hustle or second job, at least in the beginning of your career.  I say this for 3 reasons:  

  1. You most likely have very little money

This falls under the low income / high debt category again.  Post-College is survival mode. You are doing whatever you can to get by and get out of debt. A second form of income can lift some of the pressure that comes from covering all of your expenses with a low salary.  The more you can earn early on, the quicker you can eliminate debt and grow your financial portfolio.

  • You have more energy than you will ten years from now

You are young! The older you get, the less energy you have to grind for extra money. 

My first 6 months of working full time, I worked a part-time job on my days off.  I didn’t have a day off for almost 6 months, but that part time job afforded me an extra 600$ a month and gave me room to breathe financially. 

  • You have less responsibilities

When you are in your 20’s you have way less responsibilities!  All you have to worry about is keeping yourself alive.  By the time people are in their 30’s, they most likely have a family or own a home which creates additional time obligations that a side hustle or second job may not warrant.  Do it while you’re young so you can save more for your future.

Build Savings / Retirement 

This is really hard to justify as a young person with little money.  Retirement is 40 years away and it’s very easy to say I have time….  Yes, you do, but every month you wait, that’s potential gain lost over 40 years.  Every dollar you put towards retirement/ investments in your 20’s will pay you far more than your 40’s.  Why?

  1. Interest / Market Growth! 

For retirement, as long as you are making under $60000 per year you should consider opening a Roth IRA. A Roth IRA is a retirement account that charges your income tax upfront.  This means that all of the interest that accumulates over 40 years will be tax free. 

 If you only put $50 per paycheck into your Roth IRA for 40 years, you would have $318,000 tax free.  

If your company provides a 401k, with a matching option you should do that as well! A 401k Is a retirement plan where you put in more money upfront, and then you are taxed as you pull money out. 

A lot of companies will match your investment per paycheck.  If you have this option, do it!  This is free money, and the more money in your account over the course of 40 years, the more savings you will have! 

Summary 

Jumping into the workforce can be tough.  You are underpaid, you have a ton of debt and it’s stressful.  But you can make it work!  Living small, taking advantage your extra energy,  and investing, you can set yourself up for a successful financial situation for the rest of your life.  

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