my two cents

How Can I Recover From the Money Problems of My Early 20s?

Photo: George Marks/Getty Images

Dear Charlotte,

I am a 29-year old account executive and have been living in a major (read: expensive) East Coast city for 7 years now. After graduating from college, I worked in publishing, which was great for my creative satisfaction but not for my finances. By my mid-20s, I knew I needed something that allowed me to plan for my future, develop a nest egg, etc. When I got a new job, my former company tried to sue me and bar me from taking it. I had to hire an attorney, was delayed in starting my new role, and was essentially unemployed for six months with no income while I tried to fight my old employers. At 26, I was totally ill-equipped to handle this, and I blew my savings on attorneys’ fees and racked up credit card debt. I eventually came out of it with a good job, but the damage had been done: I had no savings, thousands of dollars on my credit cards, and a poor credit score.

Three years later, I have made a dent in things, but feel like I’ve never truly been able to catch up. I’ve made a decent salary (~$70,000) for the past few years and am tracking toward $100–$115,000 for this year. I have about $8,000 in credit card debt and pay down as much as I can each month. I own my car free and clear, and live in a rent-controlled apartment. I contribute to my 401(k) to get the maximum employer match and have toyed with the idea of liquidating the Roth IRA I started when I was 19. I want to have a safety net, own my home someday, etc., but I don’t know how to go about it. I live comfortably but feel like I’m barely making ends meet because I’m still paying for my past mistakes. What is the best strategy here?

I know what this feels like: You’re trying to steer your little money ship across choppy water, and even though land is visible ahead, you can’t seem to get closer. In this scenario, credit card debt is akin to springing a leak — it slows down or scuttles your progress entirely. It’s a fixable problem, but an infuriating one. At least you have a decent excuse for it, though. That lawsuit sounds like a weird, expensive, and stressful debacle. When I was my early 20s, I racked up a few thousand dollars on a random Gap credit card for no good reason at all, and I’m not alone. One survey showed that about 30 percent of 20-somethings are in the same boat, and the majority aren’t saving for retirement at all. That’s not a great bar, but measured against it, you’re not doing too badly.

Of course, you want to be doing better, especially since you can afford it. And you’re right to fret about your credit card debt as well as your future savings. You’ve seen what can happen when shit hits the fan, and you never want to be in that position again. Depending on how high your card’s interest rate is, your bills could be growing almost as fast as you’re paying them down, and that’s frustrating. Doing away with them needs to be your top priority. After that, you can start padding an emergency fund and beefing up your retirement savings — but for now, those go on the back burner.

You mentioned that your credit score took a hit during the lawsuit. How’s it doing these days? If it’s in the “good” range, consider transferring your existing debt onto a zero-interest credit card, also known as a balance-transfer card (here are some good options), which will allow you to “roll over” that pesky $8,000 into an account with no APR (a.k.a. interest) for a set period of time, usually about a year or 18 months, during which you should hammer away at it with every dollar you can spare. As you’re making significantly more money now than you have previously (congrats!), this seems doable — a $30,000 salary bump should be enough to eradicate that $8,000 within a 12- to 18-month window. Take that deadline seriously. Once you hit it, your APR will go through the roof, and you want your balance gone before that happens.

If your credit score is still lackluster, there’s a chance you won’t be approved for a balance-transfer card with a high enough limit to hold the full $8,000. If that’s the case, roll over as much as the card will allow, and then pay down whatever’s left over on your previous card first before you start chipping away at the zero-interest account.

As for a backup plan: If you can’t get approved for a balance-transfer card at all, your best alternative is to take out a personal loan with a lower interest rate than your card’s APR, use that money to pay off the credit card immediately, and then proceed with tackling the loan. (Here are some good suggestions for personal loans.) Think of yourself as racing against interest rates — the lower you can get them, the sooner you can stop worrying about them altogether.

And this may go without saying, but steer clear of plastic for now, and handle your regular expenses with a debit card or cash. It’ll be easier to get rid of your credit card balance if it’s only going one direction (down) in steady increments, and streamlining your methods of paying for things will help you keep better track of your money in general.

Speaking of methods — I know that a higher salary doesn’t exactly mean an extra $8,000 on your paycheck. So let’s figure out the math of exactly how much you can throw at your debt each month. Since I don’t know the details of your pay structure, I’ll be conservative: If you make about $100,000 this year and continue to contribute to your 401(k) up to your full employer match (let’s say 6 percent of your salary, which is the average employer match cap), then you’re probably taking home a little more than $2,500 every two weeks, give or take depending on your health insurance plan and state taxes. Compared to the ~$70,000 salary you previously made, I’ll assume that’s at least $500 more than you’re used to seeing on a biweekly payday. Keep living like your salary never increased, and you’ll be able to shovel $1,000 per month toward your debt (automate these payments so that you never even see that money). If you’re in a zero-interest window, then you’ll be debt free by next summer.

Side note: Contributing to your 401(k) up to your employer match is a good idea, but don’t put in more than that until your credit card is wiped — beyond the match limit, your rate of return on investing is lower than what you gain by paying off your debt. Meanwhile, leave your Roth IRA alone. If you’re really desperate, you could withdraw the principal funds that you put in over five years ago without a tax penalty, but liquidating the whole account (or withdrawing any of the gains that principal has earned) will cost you more in taxes than it’s worth. You have better options.

Once your debt is gone, you can turn your attention toward a solid long-term spending plan, which includes responsible stuff like upping your 401(k) contributions and creating an emergency fund (aim to sock away at least three months’ worth of living expenses, in cash, in a high yield savings account). Perhaps you’ve heard of the 50-30-20 rule: 50 percent of your income should go to “needs” (the boring stuff like housing, groceries, car maintenance, etc.), 30 percent should go to “wants” (the fun stuff like dinners out, new shoes, and nice sheets), and 20 percent should go to savings (at least 10 percent for retirement, and another 10 percent for other medium- to long-term goals, including the aforementioned emergency fund). You don’t need to adhere to these ratios while you’re laser-focused on your debt, but once you’re in the clear, use them to map out your next steps.

Remember: You may feel like you’re struggling, and it’s understandable that you’d be freaked out after that lawsuit mess. But the truth is, most people do dumb things with their money in their 20s. Your income and spending will ebb and flow throughout your life, and if there’s a silver lining, it’s that your dry spell happened relatively early, when you had less at stake. Now you’re well-positioned to make up for it, and then some.

How Can I Recover From the Money Problems of My Early 20s?