MONEY
Advice
Financial crisis guide for 20-somethings
Last Updated: Wednesday, October 22, 2008 | 8:36 AM ET
By Anna Vander Broek Forbes
As the pop artist Prince sang, "Life is just a party, and parties weren't meant to last."
He may have been referencing the end of the millennium, but these days we can relate. With the gloom and doom on Wall Street, it seems as though the free-spending party is over. But for those of us in our 20s the party may be over for now, but our work lives are just beginning. Perhaps we should be humming a Rolling Stones tune instead: Time Is On My Side.
One positive spin on the market's collapse is that stocks are finally cheap, and each time we invest in our 401(k) or IRA we're buying more shares for the same amount of dollars that we invest. Even though the headlines may scream total financial collapse, don't run into a hole fearing Armageddon.
'Be prepared to tighten your belts.'—Sean Masaki Flynn, professor
"It does feel awful," says Ron Florance, who deals with financial advisers at Wells Fargo Private Bank in Los Angeles. "It's all just so dire, but you just have to get over it."
Life as we know it is probably going to change in some way for every adult from Wall Street to Walla Walla, Wash.
"Be prepared to tighten your belts," says Sean Masaki Flynn, an economics professor at Vassar College in Poughkeepsie, N.Y., and author of Economics for Dummies.
Flynn sees signs that we are at the beginning of a major movement away from living on credit and expects our generation to become even more risk-averse in our finances. Flynn's advice: Save your cash and stop charging purchases you can't afford. Start living below your means.
Now is not the time to waste money paying interest to a lender. Running a balance on a credit card these days can be more costly. While the Federal Reserve may have cut interest rates, the overall tightness of credit may cause your card company to impose higher rates and generally be more careful with the amount of credit they extend to you.
'If there is any lesson in all this, too much debt is a bad thing.'—Ron Florance
Student loans are also going to be affected by a tight credit market. Many student loans are tied to the London Interbank Offered Rate, or LIBOR, which is the British counterpart to the U.S. federal funds rate. Although the two are normally comparable, lately the LIBOR has been stubbornly high. So if your loan is tied to it you may see rates go up. If you're making payments on several loans, think about consolidating them into the lowest possible rate and paying it off more quickly.
"If there is any lesson in all this, too much debt is a bad thing," says Florance.
Buying a house is not going to be as easy for those of us in our 20s as it was for our older siblings or even our parents. If your credit score is less than perfect, expect to put on a sizable down payment —perhaps as much as 20 per cent, which, after all, has been the standard down payment for most of the last century.
We may start to see the job market affected by the financial crisis as well. It's hard to know this early who will feel the pain and in what ways, but it's wise to start thinking about updating your resume. While it may seem premature, it would be good to start making and renewing job contacts to use in the future. We 20-somethings do have something on our side, however and that is time. We are fortunate to be young enough to have the time to bounce back from the current financial mess. This has happened many times before in our nation's history and a bullish bet on our economy has always been the more rewarding one with the fullness of time.
However, learn a few lessons from what's going on. You don't have to board yourself up in your apartment or start hoarding cans of food. I haven't seen one bread line yet. But consider shifting your lifestyle down a few gears — at least for now.
