Say hello to the real world, filled with bills, debt and credit scores. On the flip side, it can also have exciting stuff in it, like achieving financial independence and reaching goals you set out for yourself. The key to being successful financially is building a solid foundation of good habits. This means learning a bit about personal finance so that you can get yourself on track and prevent significant financial issues later on. We promise it’s easier than it sounds. Read on to find out the most important financial steps to take in your 20s.
Become Financially Independent From Your Parents
This requires checking off another box: getting a job or some other stable source of income, like starting your own business or freelancing. Perhaps you are already financially independent from your parents or maybe you still have a lingering phone bill that they pay for - either way complete independence from the bank of Mom and Dad is something you should strive for. It is a rite of passage that you should be proud to accomplish. If you’re not financially independent from your parents at this point, then make it a financial goal of yours.
Set Your Financial Goals
Want to buy a house in 5 years? Live debt free? Buy a new car? Whatever you aspire to achieve financially, decide how many years from now you want to reach that goal and then find out the steps you need to take. Think of both short and long-term goals - try creating a 1 year, 5 year and 10 year goal. This will set you up for success by giving you targets to work toward. Personally, we find it much more motivating to keep a financial goal top of mind rather than to work with no goal in sight.
Create A Budget
Making a budget may seem unnecessary, but it will really help you manage your money, prevent you from spending more than you can afford and help you reach your financial goals. It’s as easy as: 1) logging all of your expenses and income for one month, 2) categorizing your expenses (home, food, fun, etc.), 3) deciding how much you should be spending in each category, 4) trying out your strategy and 5) measuring your results, revising and trying again if necessary. A common budgeting strategy is the 50/30/20 method, where you allocate 50% of your take home pay to “needs,” 30% to “wants” and 20% to your savings. To learn more and to use our free, downloadable Monthly Budgeting spreadsheet, check out our article 5 Steps To Creating A Monthly Budget.
Build Your Credit History
Your credit score is a key factor in getting approved for lines of credit and it can even impact how much you pay for security deposits and car insurance. The biggest contributor to your credit score is your payment history, so you should start building a positive payment history to improve your credit score. If you have student loans, you should make it a priority to pay on time each month. An easy way to start building your credit is with a credit card, as long as you only buy what you can afford and pay off your balance in full each month. View your credit accounts as means to build your credit rather than ways to pay off debt down the road. For more ways to build your credit, read Best Strategies To Start Building Your Credit.
Manage Your Debt
This goes hand in hand with building your credit, but it’s worth going over. At this point in your life, you should be able to easily think of all the debt you have because hopefully it is not a lot. Perhaps, this includes student loans and credit cards. You are at an advantage because you probably just started accumulating debt so you can more easily manage it. Recognize that debt can be a tool to grow your net worth or it can be an anchor holding you down. If you have accumulated debt, take some time to take an inventory of your accounts and create a repayment plan. To learn about 2 popular methods to pay off debt, read our article Paying Off Debt: Snowball vs Avalanche Methods. It will be much easier to take control of your debt now rather than years from now after racking up more.
Start Saving For Retirement
You might be thinking, “I’m only X years old, I don’t need to be saving for retirement yet.” But in reality, you can use compound interest and time to benefit you much more if you start contributing to a retirement account in your 20s as compared to later in life. Moreover, if your work offers an employer match on your 401K deposits, then you should be depositing the amount that gets you the maximum employer match - otherwise you’re leaving money on the table. Contributions to both a 401K and a traditional IRA use pre-tax dollars, meaning it lowers your taxable income which is beneficial for you. To learn more, read our article Start Saving For Retirement In Your 20's: Here’s Why & How. Your future self will thank you.
Start An Emergency Fund
One of the most significant takeaways from the recent financial crisis that many people have experienced due to Coronavirus, is how crucial having an emergency fund is. A January 2020 study by Bank Rate found that only 41% of Americans would use their savings to cover a $1,000 unexpected expense, such as a car repair or emergency room visit. Other top responses included using a credit card and borrowing from family/friends. The best way you can avoid getting yourself in a situation where you need to rack up debt or ask for financial support from loved ones is by preparing little by little each month. Saving enough to cover several months of expenses may have seemed far fetched before, but recently many people have been faced with situations where they needed to live a few months with little to no income before unemployment benefits arrived. Start saving for unexpected expenses and unforeseen situations today.
It may seem like a big undertaking but by taking these financial steps now, you set yourself up for a successful life. It’s much harder to repair poor credit or dig yourself out of debt years from now. Instead, by reading this and taking these steps you can be financially prepared going forward and ready for what life throws at you.