When you don't have a lot of money, it's even harder to decide what to do with it

When it comes to money, today's twentysomethings have to grow up fast. Between student loans, pressure to start saving early for retirement, and expensive urban housing markets, those first paychecks are in demand and there's little room for error.

So, what is a strapped twentysomething to do?

The key, according to personal finance experts, lies in prioritizing all of those competing demands for money. Here's a road map to help sort it all out:

Spending.

First jobs come with unavoidable start-up costs, such as a new suit and possibly wheels to match. Those expenses can easily overpower a starting salary. That's why Liz Pulliam Weston, author of The Ten Commandments of Money, recommends pretending that your new salary doesn't exist. "Most people would be better off if they continued to live like broke college students for a few years, until they get a handle on expenses," she says.

"Diminish your expectations," advises Tamara Draut, author of Strapped. Small things such as bringing your lunch, buying coffee at a deli instead of a coffee shop, and waiting to buy a new car can make a big difference, she says. Living at home can also provide financial breathing room, Draut adds.

But scrimping need not mean living on bread and water. "You do need little luxuries, and you can fit them in no matter how small [your income] is, but you can't have them all the time," says Carmen Wong Ulrich, author of The Real Cost of Living.

Credit card debt.

Entering the workforce with credit card debt is not necessarily a bad thing, Ulrich says. "There are times in your life when you use a credit card that you are using debt in a good, smart way," she says, such as buying a couple of work outfits and cheap furniture for a first apartment. As long as the purchases are necessary to one's new professional life and are paid off quickly, she adds, it's not a problem.

But when debt accumulates, especially on multiple cards, it's time to crack down by paying as close as possible to the full balance each month. To decide which card to pay off first, check the credit limits, says Bill Hardekopf, chief executive of LowCards.com. Going over the limit can mean an additional fee of around $30 and can also hurt your credit rating. Even getting close to your credit limit can trigger credit card providers to increase interest rates, which will make it that much harder to pay off the debt. The next priority should be paying off cards with the highest interest rates to minimize interest payments.

Student loans.

"Don't worry about student loan debt too much," says Weston, unless it's dominated by high-interest private loans. As long as most of it is locked in at lower rates, twentysomethings are better off putting their extra cash into high-yield savings accounts or retirement savings. Another advantage of student loans is that they tend to be flexible; loan companies may grant deferrals or forbearance to struggling borrowers going through temporary crunches, Weston adds. (Deferring doesn't stop interest from piling on more debt, so it's an option best reserved for emergencies.)

Paying late or missing payments altogether should be avoided at all costs, Draut cautions. Unless a borrower officially requests and receives a deferment or forbearance from the lender, missed payments can hurt your credit score.

Savings.

Weston suggests a cushion of at least $500 for emergency expenses, such as car repairs, to avoid racking up more credit card debt. Ideally, every worker should have up to six months of living costs stowed away in case of job loss, but Weston acknowledges that could take years and needn't be a top priority for younger workers.

Insurance.

While skipping health insurance altogether is tempting, it's a bad idea, Ulrich warns. "Almost half of bankruptcies last year were caused by medical debt. It's a gamble with your financial future you shouldn't take," she says. Since just one accident or illness can cost thousands of dollars, passing on insurance is a big risk, even for the young and healthy.

Most people get health insurance through their employer. If that's not an option, Ulrich recommends looking for a high-deductible plan, sometimes known as catastrophic insurance, to guard against major unexpected expenses. (Trips to the doctor or emergency room will cost more, but there is a cap.)

Long-term goals.

Financial dreams -- such as retiring early, buying a house, or traveling around the world -- need not be put on hold for decades. But to make them a reality before middle age, they may need to be slightly massaged. For example, workers in many urban areas may find that homes downtown are unaffordable, but a place in the suburbs can be within reach, Ulrich says. "You have to alter your plan."

Retirement.

Saving for retirement -- another long-term goal -- can also be temporarily deferred. While workers should try to take advantage of matching employer contributions to 401(k) and similar plans, saving above and beyond the level covered by the match can be nearly impossible for stretched entry-level workers. Still, Weston says young people should get in the habit of saving from their first paycheck: "You have the power of time behind you now."

Fidelity, which offers lifecycle, or target-date, funds that shift into less risky investments as workers grow older, recommends saving 12 to 15 percent of gross pretax pay each year. If employees start at age 25, they can replace 85 percent of their working income in retirement, the company estimates.

If that sounds daunting, consider Ulrich's view that today's youth may not be as financially well off as their parents' generation, but they're also living much fuller lives. "Not materially, but in terms of access to information, education, careers ... We have to hearten ourselves with that."

 

 

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