Your 20’s are an exciting time of your life, so much opportunity for development and growth. For a lot of us we hit some major milestones… starting our first “adulting” job or career, getting married, buying our first home or car, maybe even paying off those good ol’ student loans.
The time you have in your 20’s has the potential to set the tone of your financial health of the rest of your life, so it’s important to develop some essential habits…
1. Create a Budget
You hear this one from everyone, make a budget!
Write down and understand where your money is coming and going. When you start to track your income and expenses it opens your eyes to all the potential money you could be saving and investing but were actually eating away by going out three or four times a week.
You can track your budget using a number of different tools and methods, you can do the home brewed approach by developing a simple spreadsheet or you can use a number of financial and budgeting applications for your smart phone. Whatever method you end up choosing the most important attribute is your dedication and consistence in tracking your in’s and out’s. Check out our guide at making a budget and slashing our expenses.
2. Automate Your Savings
This one is easy, money you never see in your paycheck is harder to spend on impulse. Set up automatic deductions from your paycheck to deposit into an online high yield savings account or online brokerage account for investing.
There are plenty of options today that not only are easy to setup and use but help you in the long run of setting you up for financial success. It may be developing an emergency fund for a rainy day, or starting that passive income dividend stream you always wanted.
Start small, it can be a little as $5 to $10 a paycheck but your goal should be to gradually ramp up your deductions until it starts to feel uncomfortable. You will be amazed in as little as a year how much you have saved with this approach.
3. Have an Emergency Fund
In your 20’s change can be rapid and sudden, your 15 year old car breaks down.. your furnace goes out, or you just received a pink slip. You can never be too careful by creating a emergency fund to cover those rainy days.
Strive to save up 6 to 12 months’ worth of living expenses to get you through the tough times. Since the majority of Americans don’t have the cash on hand to cover a $1000 expense, it should be a wake up call to have a stash of cash to help you when you need it. By maintaining an emergency fund it allows you to avoid the major pitfalls of using credit and loans to cover those unexpected expenses and racking up unnecessary interest payments.
An emergency fund is not a “I need the newest iPhone” fund, or the “shopping spree” fund, and it should not be considered an investment fund. Leave it alone and keep it in a liquid high yield savings or money market account, it may not sound as sexy as putting it all in the latest penny stock but you’ll be happy when you need it to cover that blown out tire.
4. Invest early and often – Retirement (401k, IRA, etc.) and Taxable Accounts
In your 20’s you have one of the greatest assets that money can’t buy, and that is time.
Use that time and the magic of compounding by investing early. If you are fortunate enough to have an employer that provides access to a 401k, try to contribute 15% of your pretax income or if you can’t achieve that do your best to contribute the percentage needed to receive an employer match if available. Your starting salary and contributes may start out small initially but as time goes by you’ll see massive growth and the sooner you start the less effort will be required in your 30’s, 40’s, and 50’s to prepare for retirement.
“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”
With every raise you receive try increasing your retirement contribute by 1-2%. If you were living on your previous salary just fine, you won’t miss that 1 or 2% all that much.
For 2019, you are able to contribute up to $19,000 of your pre-tax income. I know, your thinking to yourself…$19,000?! Are you crazy? You all have the potential to achieve that and more… you just have to start!
Other retirement vehicles such as IRA’s offer other tax benefits depending on your income, and I recommend looking into them if you do not have access to or are maxing out your 401k.
Taxable investment accounts also can be considered when you have reached your goals for your emergency funds and retirement contributions. Remember not to chase the latest penny stock or virtual currency, start off small and steady by researching low-cost index and mutual funds that provide you diversity to hundreds or thousands of companies.
“It’s a mirage… the idea it has some huge intrinsic value is just a joke”
-Warren Buffet (on Bitcoin)
5. Live Like a College Student
You were living like one not too long ago so why change it? Just because your making big bucks now doesn’t mean you should go out and blow it all on a new depreciating car or some fancy apartment. Get a roommate, nurse that old car for a few more years, buy a a refurbished smartphone with cash. If you really want to jump start yourself on your way to extraordinary financial wealth, live below your means!
Photo by rawpixel.com on Pexels.com
Remember, your 20’s can be the best years of your life or… they could be the years that set you up for success for the rest of your life, it is your choice. By making simple and steady habits with your finances now you’ll thanking yourself later.
So what are your thoughts? We would love to hear from you! Leave a comment below or send us an email via our Contact Page.
If you liked what you’ve read please be sure hit the “like” button and share! If you want to receive the latest articles please be sure to subscribe.