Money Smart in Your 20s
Where You Are
At 20, it may seem like you have all the time in the world to save. There may be other responsibilities to focus on such as college, trade school, or keeping up with your new financial independence. However, now is the BEST time to start preparing for your financial future.
Why It’s Important
Building a strong foundation, even with the smallest steps, can bring huge financial rewards later in life. You may think retirement is too far off to care about, or any big life purchases are out of reach, but that couldn’t be further from the truth. Your 20’s will likely bring the most drastic financial changes than any other decade. You may go from sharing an apartment and balancing school and work, to holding down a full-time job and thinking about buying a house or getting married.
How To Do It
Before you know it, you’ll be in your thirties where you’re expected to already have a savings plan and investment portfolio. Hint: don’t worry, most don’t. But you can be ready, and ahead of the game, by taking some of these simple steps. You’re sure to find something that you can start working on now!
1. Start A Budget.
As you start moving out on your own (literally or figuratively), you will pick up new expenses along the way. Rent, car payment, groceries, insurance... they all add up, and sometimes, seem to come out of nowhere. You can take some of the pressure off by creating a budget and sticking to it. The important thing is to know how much you are spending and why. Remember to include allocations in your budget for saving and also for fun. It’s your ‘20’s, enjoy it!
It can seem like putting saving off, just for now, makes sense with all the new financial obligations. However, there are some small moves you can make that will lead to big rewards later. The key to long-term savings is consistency and longevity. That means making regular deposits (no matter how small) and leaving them to grow. For example, saving just $10 a week starting in your twenties could yield you a return upwards of $150,000.00 by the time you reach retirement. Imagine what that number could be as you increase the amount you save as your earnings go up!
3. Build Your Credit Score.
Credit is important, but it can be dangerous. Paying bills on time, and in full, can help build your credit score. That means putting bills in your own name and making sure you stay on top of them. However, that alone won’t build your credit all that quickly. You should also look into lower interest pre-paid credit cards. These are great credit builders, usually with smaller limits so you are less likely to get into trouble racking up debt. The key is to use the card for smaller purchases (such as gas) and then pay off the balance each month. Then watch your credit score soar.
4. Avoid Financing Cars.
In general, you should try to avoid financing depreciating assets (things like cars that lose their value over time). This may mean taking public transit or riding your bike for a time while you save up a small amount to buy a reliable used car. Once you have a car, you can continue to set money aside that you would otherwise put towards a car payment. In a year or two, put the used car and your car savings as a down payment to buy a better used car. Continue this pattern and before you know it, you could have the cash to buy a car outright - with zero car payment. If paying outright still isn’t an option, you should strive to put as much down as you possibly can so you are financing as little as possible. This also makes it easier to pay off the balance early (just make sure there are no pre-payment penalties!). You may have to wait for that car of your dreams, but your wallet will thank you later!
5. Start An Emergency Fund.
Scraping together an emergency fund of even as little as $500 or $1,000 can be a huge money saver when unexpected medical bills or car expenses catch you off guard. Without an emergency fund, you may be left covering those bills with high-interest credit cards or personal loans that will leave you struggling to keep up with long after the emergency passed. It’s easier than you think to establish an emergency fund. You can try selling older electronics, sports equipment, or clothes you rarely use on community resale sites. You can also try taking up part-time side-gigs until you have what you need. Any Christmas or birthday gifts of cash can go directly into this emergency fund. Once you have your emergency fund, leave it alone unless a true financial emergency comes up.
6. Get Insured.
By your twenties, you probably know that you need medical and car insurance. You may be able to get health insurance through your work, but if not, look into individual policies or resources your county has for low-income earners. Shop around for car insurance to make sure you have the best rate and are not over-insured—paying for more coverage than you actually need. You may not have thought about life and disability insurance. If you don’t have a family in your 20’s life insurance may not be a necessity. However, disability insurance should not be overlooked, no matter how young you are. According to the Social Security Administration, 25% of 20-year-olds will become disabled before retirement. Disability insurance can help replace part of your income should you become disabled - even temporarily. Finally, if you rent, you can get an inexpensive renter’s policy that can cover not only your rental but your belongings as well.
Where To Start
You probably don’t feel like you can implement all of the above tips right now - and that’s okay. See what looks feasible and start from there. You can always keep adding on as your financial competency builds. The best first step is always a budget because anyone can put one together, regardless of income. Get to know your money, and you’ll see where and when to add more of the steps above.
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