5 Ways My Parents Saved Me from Spending My 20s in Debt

happy young woman with bicycle

Falling into debt in your 20s can seem inevitable. It's a Catch-22: Either you don't pursue a college education and get stuck in a not-too-desirable income bracket for life, or take you out tens of thousands of dollars in student loans, which will (you hope) allow you to earn more money -- but for many years after graduation, most of that extra income will go toward paying down your debt. Either way, you're stuck with little discretionary income -- at least until your loans are paid off -- making it hard to live comfortably and save.

Unlike most of my peers, who were expected to cover their own expenses and relied heavily on loans to pay for college, I was incredibly fortunate to have parents who'd saved enough to set me up for financial success right out the gate. Of course, if you or your recent college grad offspring are already saddled with debt, this article won't benefit you much.

But if college is still in the future for you (or your kids) it might. There are ways to reduce that ugly student debt burden so many young people face today, and not every measure my parents took to set me up for financial success cost them a lot of money.

1. They Insisted All My Summer Paychecks Go Into a Roth IRA

My first paid job was at a tutoring center when I was in high school. Unlike the many parents who have their children handle their own discretionary spending in the hopes of teaching them the value of a dollar, mine had a different plan in mind. They realized that funneling my minimal earnings into a Roth individual retirement account could help me cultivate a sizable nest egg for the future.

This tactic flies in the face of the common belief that young people should learn to use and budget their own money early on. But I still learned how to budget effectively, because having enough to stash away became a priority of mine. And I still learned the value of a dollar. But my Roth IRA boasted a balance of $15,000 by the time I graduated from college.

Not a huge number, perhaps, but here's why it's important: Thanks to my early start and the benefits of compound growth, that money has huge potential. A 16-year-old who deposits $2,000 a year into a Roth IRA for four years could have $305,165 by age 65. And that's if he never adds to it again.

If investing all of your child's earnings into a retirement or savings account sounds too extreme, consider dedicating a percentage of those earnings toward these pursuits. Young adults commonly undervalue the importance of long-term financial planning. Teach your kids not to.

2. They Got Me a Credit Card in My Name

Unlike paying for college or keeping your kid entirely on your tab, this tip could cost you almost nothing. For parents who already give their kids an allowance to cover some expenses, or who agree to pay for certain costs like gas, getting your child a low-balance secured credit card is a good way help her build credit.

I lived with my dad, but he traveled for business, which meant I needed some way to cover my expenses when he was out of town. Instead of handing me cash, he got me a young adult Visa (V) with a low credit limit. Although the card had my name on it, he paid the balance each month. By the age of 21, I boasted a 760 credit score thanks to five years of responsible credit use under my name. And it didn't cost my dad any more money than he was already planning to spend on my upkeep.

If you're unable to commit to covering your child's credit card balance in full, you can either agree to share the financial responsibility with him, or agree to help cover the bill should he be unable to. Either way, the goal is to establish good credit in your child's name. Providing a safety net is the surest way to ensure that the opposite doesn't occur.

3. They Froze My Credit

When I went off the college, my parents were concerned that my credit card information and identity might be at risk. So, for just $30, they put a security freeze my credit, which made it much harder for anyone who might steal my information to open new accounts in my name. Whenever I needed a new apartment or adjustment to my credit card limit, all it took was a $2 to $10 fee to each of the bureaus to temporarily unfreeze my credit, allowing for a check of my records.

4. My Parents Paid for College

This was obviously the most generous and difficult financial task my parents took on to set me up for financial success. While college tuition has increased remarkably from my grandparents generation to mine, so far my family has been able to maintain its tradition of saving enough to send each new set of children to college. Still, I was given stricter guidelines than some of my friends: I had to attend an in-state, public university and graduate in four years or fewer. (There are other ways to cut the cost of college.) I studied hard, planned every class I took methodically, and graduated in three years.

This was, of course, a rare privilege that few of my friends could relate to. It might seem almost ludicrous, in fact, that a family would pay for an entire college education without external help, especially with tuition and fees alone averaging $8,893 for an in-state, four-year public university, according to the College Board. Today, the average college grad leaves school $29,400 in the red, according to The Project on Student Debt.

Because I'm debt-free now, I have the ability to save money for the future while my responsibilities are few.

5. My Bank Account Was Temporarily Funded to Get Me Started

For many of my friends, graduation was followed by a few months of job seeking, which themselves were followed by a few months of near-poverty, as their first paychecks were barely enough to cover basic needs. If your bank account has $3 in it, that first paycheck for a half-week's work isn't going to help you much.

The day after college graduation, my parents drove me down to Los Angeles, where I was to start my first full-time job later that week. With a deposit and first month's rent due, I could easily have fallen into debt before receiving my first paycheck. To tide me over, my parents put a few thousand dollars in my checking account so I wouldn't be living hand-to-mouth (or credit card to mouth) those first few paychecks. As my friends faced the prospect feeding themselves for the next two weeks on $100 -- or living on credit -- I was able to use that loan to avoid discomfort, and soon after, paid it all back as my own earnings accumulated.

Christina Lavingia is an editor for GOBankingRates.com, a national personal finance site that provides readers with the best banks, credit unions and interest rates available, as well as personal finance news and tips. Follow her on Twitter @GO_ChristinaL.

7 Financial Tasks to Accomplish Before You Hit 30
See Gallery
5 Ways My Parents Saved Me from Spending My 20s in Debt
However responsible you plan to be in your 30s, there's one thing you simply can't make up for -- time. And when it comes to compounding interest, time is secret ingredient. Here's an example: If a 25-year-old saves $3,000 a year for 10 years in a retirement account, the $30,000 investment will grow to $472,000 by age 65. If a 35-year-old saves $3,000 a year for 30 years (a full 20 years longer), the $90,000 investment will only be worth $367,000 at age 65. The moral? Your money's ability to make money babies increases exponentially if you let compounding interest start doing its thing while you're still in your 20s.
Based on what you just read about compounding interest, it's a no-brainer that now is the time to start saving for retirement. If your company offers a 401(k) match, there's free money on the table, ready to be put toward your retirement each and every month. If your company doesn't offer retirement options or if you haven't yet settled into your career, another great retirement vehicle is a Roth individual retirement account. You can contribute up to $5,500 a year, and you can take the principal out at anytime with no penalty, if needed. The important thing is to put your money to work now so your 65-year-old self can retire comfortably later.
If you don't already know where your credit report stands, now is the time to make yourself aware. You can get a free credit report from each of the three credit bureaus once a year, and now is the time to make sure there are no mistakes on your report. If your score is lower than you realized or if you discover any inconsistencies or problems, you have a head start on sorting it all out.
Saving for a rainy day is essential, even if you're the luckiest person in town. As your responsibilities increase in your 30s, the possibility for unexpected costs goes up. And as your financial responsibilities increase, it could become more difficult to put away the money you'd need to get by for three to six months (a typical emergency fund amount). Preparing for a rainy day has to be done while the sun's out, and your 20s is just that time.
If you're one of the seven out of 10 college students who graduated with student loan debt, you might be approaching your 30s in the red. Student loans may have a low interest rate, but they cannot be forgiven in bankruptcy. And as you add a spouse, a mortgage and even children to your life, the ability to pay down your student loans may become more difficult or burdensome. If the extra money is there now, pay those loans down.
If, like us, you defied the marriage-age average and said "I do" before you hit 30, life insurance is something worth looking into. When you're young and healthy, the costs are incredibly low. And should anything happen to you, your spouse will be grateful for the sure financial footing going forward. Make sure you get enough to cover any outstanding debt (including mortgages), funeral expenses and enough to help your spouse get back on his or her feet.
While the average age of marriage is pushing 30, 44 percent of women have already had a baby by age 25. If you find yourself already in the throes of parenting, the time to start thinking about your baby's education is now. By saving while he or she is still young, the amount you'll have to contribute later will be significantly less. How? You guessed it -- compounding interest via a 529 college savings plan.

Read Full Story