What Every Twenty-Something Should Know About Personal Finance
Many people, especially in their early twenties, don’t think too much about personal finance. After all, those first “real job” paychecks have just started coming in. But experts unanimously agree: the sooner you start making and committing to a financial plan, the better and more stable your future will be. So once you have a steady income, here are the steps you should start to consider taking in your young adult years.
Always have a budget. Those first big paychecks are exciting. But now, as a twenty-something, it’s important to start budgeting each and every dollar coming into your bank account so you can plan for a prosperous future. Bonus: Always live below your means.
Become insured. Things happen in life, and sometimes your savings account can’t cover the bills. Having insurance coverage is a much less painful way to ensure you and the things you love are protected. We recommend health insurance, life insurance, car insurance, and renter’s or homeowner’s insurance.
Create a debt repayment plan. Chances are if you’re in your twenties, you have debt, whether it’s from spending choices in your teens or student loans. Putting off repayment can set you back from attaining your future financial goals so start tackling the balances that have the highest interest rates first.
Start retirement savings. It seems like retirement is painfully far away when you’re in your twenties, but starting to beef up your retirement savings now will have far more wealth-generating potential than if you put it off even just a few years. Because of compounding interest, the younger you are when you start contributing, the more money you’ll have when you retire. Try not to think of it as a paycheck reduction but rather as an auto payment to your future self. Bonus: Take advantage of any 401k matching your employer offers. This is essentially free money.
Build credit history. To some, having a credit line is counterintuitive. You are working to get out of debt, so why would you accrue more? The answer is actually quite complex, but no credit history is bad history where creditors are concerned. You might want to consider opening a small credit card and using it at small intervals. Remember to always pay off your balance every month to avoid fees and interest rates. Also, maxing out your credit card every month, even if you pay it off, is bad for your score, so use it sparingly.
Become financially self-sufficient. Your twenties are about striking out on your own. Therefore, you should also make it a goal to become financially independent of Mom and Dad. This includes transferring everything into your name: bank accounts, car insurance, cell phone, etc. It’s been wonderful to have your parents as a safety net in your teens and even throughout college, but financially stable twenty-somethings begin emphasizing “flying the financial nest.”
Get your documents in order. As you start entering into the workforce and adulthood, your important documents that have, for years, been kept at your parents house start disappearing or getting misplaced somewhere between their place and yours. Make it a priority to get all of your important paperwork together including IDs, passports, social security card, birth certificate, and any financial records like savings bonds and mutual funds.
Finally, have some fun. You won’t find this tidbit of advice on many other financial columns, because “fun” is usually the opposite of saving money. But, while you’re establishing a budget and an emergency fund, make sure you’re setting aside money for fun. You only experience your twenties once, so budget for that backpacking trip through Europe or that US road trip you’ve talked about with your friends for years.