6 Tips for the 20-Something Teacher

Teacher Helping Students With Schoolwork

So you’re a teacher in your 20’s. But that age means nothing – some 20-something teachers like to mingle and be single, while others are married, have a house, dog and kids. But here are 8 tips to help you in the early part of your career:

 

Set a budget

I can hear the groans now. However, this is single-handedly the most important financial thing you can do. Understand how much money you bring in, how much you owe in debt payments, how much it costs to live each month – both with fixed and variable expenses, and how much you will have left. Do it every month, either with a pen and paper, Excel spreadsheet, or an online program and app like Mint.com.

 

Understand your paycheck

The early paychecks are fun to receive, but the novelty wears off fast. However, that doesn’t mean you shouldn’t be looking at your paychecks. Look at how much you make, what is being deducted, what taxes are being withheld, and how much is being diverted into your retirement savings (more on this later).

You’ll also want to make sure your tax withholding is accurate, so that not too much or too little is being taken out. While it’s nice to get a tax refund, it’s far better to be receiving this money throughout the year so you can pay off debt faster, or save the money sooner. A tax refund is your money whether you get it now or at tax time – why not have it now? If you are receiving a tax refund, then divide that number by the amount of paychecks you get per year and adjust your withholding until that number is added to your paycheck.

 

Create a debt snowball

If you have debt (other than a mortgage), and many people do, you need to create a plan to eliminate it. By creating a debt snowball, you will be able to know when you debt will be paid off and, if you make extra payments, what effect this would have on the timeline. A debt snowball can take two approaches. At Finance for Teachers, we prefer the “balance-driven” approach where you list debts from smallest balance to largest and pay them off. Knocking out some small ones first really helps pick up momentum. You can put one together here.

 

Ensure you have adequate long-term disability (LTD) insurance

Yep, you read that right – “disability insurance”. You are statistically more likely to need this than life insurnace, although that is importnant as well. When I was in my 20’s, I was invincible (I’m only 31, it was a short distance down memory lane!). However, when I tore the ACL, both minuscus’ and sprained the MCL in my left knee, I was out of work for a while. While I didn’t need to use my disability insurance, it could have been a lot worse. Injuries happen every day, and if you can’t work in your job again, disability insurance will kick in to help recover the loss of your paycheck.

According to the Social Security office, just over 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67. What if that was you in your 30’s, and you were without a paycheck? If you work in Illinois, you do get LTD through TRS, but you may want to consider purchasing a private policy on top of this.

 

Have an Emergency / Rainy Day / Savings Fund

Whatever you call it in your house, you need to have some savings put aside to cover the “What Ifs?” For our family recently, it was our auto insurance deductible of $1,000, thanks to me thinking I could fit underneath a truck in rush hour traffic! But it could be something more mundane. For a planner friend of mine, Sophia Bera of Gen Y Planning, it was a backed-up drain in her rental property. Things happen when you least expect them, so it’s handy to have some cash on hand for these things.

Need to know what order to do these things in? Check it out here

Start saving for retirement

Once you have taken care of finishing your debt snowball, you should then start saving for retirement. People will tell you to save for retirement as soon as possible, but that is bad advice. You need a solid “foundation” in your household budget before you can start saving for retirement, and that “foundation” involves not having any consumer debt.

Compare these two scenarios:

  1. Start saving for retirement now at 25. Between managing all of your debt, you begin to save $200/mo to a 403(b) until age 32, then $500/mo until age 60. At an 8% investment rate, you will have $840,000.
  2. Pay off all of your debt first. At age 28, you are able to save $500/mo due to not having any debt payments. Investing until age 60, at an 8% growth rate, this would then amount to $890,000.

That’s $50,000 more. By starting to save later.

You can play with these numbers here.

Even by starting three years later to invest, you will end up with more money. Is this a simplified example? Of course. But you still get to see the power of focusing on one thing at a time.

Building a successful financial future requires more than luck, it requires that one follow a sequence of steps in order. By following these steps early in your career, you will set yourself up for an easier journey getting to financial freedom.