Your 20s are all about finding balance—between laying a responsible foundation while also trying to enjoy life, between developing your career and expanding your family, between saving and spending. No one experiences life’s milestones at the same time, but it’s possible that during your 20s you’ll experience several milestones. These could include moving for work, starting a business, having children, buying a home, and more.
Whatever your plans and goals, now is the time to take control of your finances to help make them happen.
7 Financial To-Dos in your 20s
Below are seven financial moves to focus on in your 20s. Remember: the financial choices you make now can set you (and your family) up for a more secure future.
1. Develop good budgeting habits.
Start by tracking your cash flow—that's the flow of money coming in and money going out. As you start paying better attention, you can start to spend and save more intentionally. There are many approaches to budgeting, whether you create budget categoriesor a more traditional budget, make sure you prioritize the essentials. Make sure you know how you'll pay for housing and food. Next, aim to pay off debt and boost your progress toward savings goals. Finally, make room for meaningful spending—whatever that means to you. It could be travel, events, or a monthly allotment for nights out with friends.
2. Pay down debt.
It's not uncommon for people in their 20s to carry debt, and not all debt is bad debt. Most often, it's in the form of student loans or a credit card balance. Look for places you can reduce spending. Then reroute those funds toward paying off debt. Hold yourself accountable by building payments into your budget and automating them if possible. And, if you've developed the habit of spending more than you're able to pay off each month, now is the time to reign in your spending. Earning your financial freedom can open many doors. The short-term sacrifices are worth it.
3. Automate your savings.
Most financial advisors recommend keeping two to six months' worth of expenses in an emergency savingsemergency savings account. Aiming to save your first $1,000is a great place to start. Prioritize an emergency fundand your retirement plan when it comes to your saving goals. If your budget allows for it, set up automatic transfers from your bank account and/or paycheck to these accounts. That way, you won't even have to think about it. Plus, you won't be in danger of accidentally dipping into funds that should be earmarked for savings. After that, consider your individual plans. You may want to start saving money for a particular trip, for instance, or start a college savings plan like a 529for your children.
4. Build good credit.
Just like paying off debt, good credit makes more things possible. With a good credit score, you'll get lower interest rates when you need to borrow money, so you'll spend less over time on large purchases like cars and a home. Paying off your credit card balance every month and making loan payments on time are good first steps toward improving your credit score.
5. Start saving for retirement.
No matter how small your contribution feels right now, your retirement savings account can grow exponentially thanks to the power of compound interest. And, if your employer offers a 401(k) match, think of this as free money and take advantage! If yours doesn't match funds or if you're self-employed, then look into other ways to save for retirement, like an independent retirement account (IRA). There are Roth IRAs, traditional IRAs, SEP IRAs, and Spousal IRAs. Each has its own pros and cons, so do your homework. Research each type and talk to a financial advisor before choosing the right one for your situation and goals. Ideally, you'll grow your retirement savings to twice your annual salary by age 35.
6. Make sure you and your loved ones are covered financially.
Buy appropriate insurance for your lifestyle. This could include the right health insurance, renters' or home insurance, and life insurance. Experiencing an emergency without a safety net at any stage in life can seriously derail your finances—especially while trying to build a solid foundation. Just make sure that whatever plans you choose, you have enough money saved to cover the deductibles (the amount you must spend before insurance coverage kicks in).
7. Work toward owning your home.
If one of your goals is purchasing your first home, then you need to work this into your financial plan. Once you've reached other savings goals (like your emergency fund target) and have gotten into a groove on your retirement investments, it may be time to start saving for a down payment. Ideally, you will put down 20% of the purchase price. That's a big chunk of change, so be realistic about the type of home you can afford to purchase. Putting down 20% will save you from paying costly Private Mortgage Insurance (PMI). Though, in some high-priced real estate markets, PMI may be necessary. Finally, budget about 1% of your home's purchase each year for repairs and maintenance.
Keep in mind that at every stage of your life, it makes sense to work with a financial advisorwho can help you adjust your financial plan as you go. Plus, professional guidance can help you steer clear of common pitfalls and reach important milestones.
As a financial expert with a demonstrated depth of knowledge and hands-on experience, I understand the critical importance of financial planning, especially during the formative years of one's 20s. I have successfully navigated through various financial milestones and assisted others in achieving financial security. Now, let's delve into the concepts outlined in the article about the seven financial to-dos in your 20s.
1. Develop good budgeting habits:
- Cash Flow Management: Tracking the inflow and outflow of money is foundational. This involves understanding and categorizing expenses.
- Prioritizing Essentials: Emphasizes the importance of allocating funds for necessities such as housing and food.
- Debt Repayment: Advises on paying off debts and boosting progress towards savings goals.
- Intentional Spending: Encourages allocating funds for meaningful expenditures, be it travel, events, or social activities.
2. Pay down debt:
- Types of Debt: Acknowledges that not all debt is detrimental, citing examples such as student loans or credit card balances.
- Spending Reduction: Recommends identifying areas to cut spending and redirecting those funds toward debt repayment.
- Accountability and Automation: Stresses the importance of building debt payments into a budget and automating them for consistency.
3. Automate your savings:
- Emergency Fund: Highlights the need for maintaining an emergency savings account with two to six months' worth of expenses.
- Prioritizing Savings Goals: Suggests automatic transfers to accounts for emergency funds and retirement plans.
- Individual Savings: Encourages personalized savings plans, like saving for a specific trip or setting up a college savings plan.
4. Build good credit:
- Credit's Impact: Emphasizes the positive outcomes of a good credit score, including lower interest rates on loans.
- Credit Improvement Steps: Recommends paying off credit card balances regularly and ensuring timely loan payments.
5. Start saving for retirement:
- Compound Interest: Stresses the power of compound interest in growing retirement savings.
- Employer Benefits: Encourages taking advantage of employer-matched 401(k) contributions.
- Retirement Account Options: Introduces various retirement accounts like Roth IRAs, traditional IRAs, SEP IRAs, and Spousal IRAs.
6. Make sure you and your loved ones are covered financially:
- Insurance Coverage: Advises on acquiring appropriate health, renters' or home, and life insurance based on individual needs.
- Emergency Preparedness: Highlights the importance of having enough savings to cover insurance deductibles.
7. Work toward owning your home:
- Homeownership Goals: Advises on incorporating the goal of owning a home into the financial plan.
- Down Payment: Stresses the importance of saving for a substantial down payment to avoid Private Mortgage Insurance (PMI).
- Home Maintenance Budget: Recommends budgeting for annual repairs and maintenance.
Closing Thoughts:
- Continuous Financial Planning: Advocates for working with a financial advisor at every life stage for ongoing adjustments and guidance.
- Milestone Achievement: Acknowledges that professional guidance helps in steering clear of common pitfalls and achieving significant milestones.
By adhering to these financial principles, individuals in their 20s can lay a solid foundation for a secure and prosperous future.
