In your 20s you probably get the full-time job for the first time. At last, you are earning a paycheck. Your 20s is the best age to lay the financial foundation. This is all about a right attitude to money. It is a big temptation to spend all the money you have when you are young.
You will have many earning years ahead of you. If you want to learn how to avoid financial mistakes or recover from them, this guide will help you form saving habits.
Establish a budget and be careful with spending
Some people find it too hard to plan their budget. However, without this, it is easy to overspend or under-save for unexpected events or big-ticket purchases.
Before planning, decide what is more important to you: freedom, security or financial independence? After answering this question, it will be easier to handle your budget.
Budgeting doesn’t mean spreadsheets or software packages, you can use a paper and a pen to create a basic financial plan. Do not use too many categories.
The main secret is differentiating between wants, needs, and dreams. Your needs include monthly payments, like rent, food, insurance, and transportation. Examples of wants are leisure activities, dining out or hobbies. Dreams define where you want to go with your life.
After paying your needs, aim at allocation some income percentage on your dreams. The money left can be used on your wants.
Create an emergency fund
It is essential to save money, but where is it better to save? Investing is a good idea. Yet, the first thing to do is to create an emergency fund. This is money that will help you out when an emergency situation happens. If you do not have an emergency fund, job loss, medical expenses or home repair can force you to run into debt or tap retirement assets.
Experts recommend having a liquid emergency fund that can be easily turned into cash. Investing is not the best option, while it will take a few days to transfer cash to your bank. Online banks have lower overhead expenses. That is why the interest rates for savings accounts are lower than the interest rates from the traditional banks.
It is necessary to have enough money to cover living expenses for 3-6 months in case of emergency. However, covering only three months is not enough in case of a long-term payoff or a job loss. The job search can last for five or six months. So, the fund you save depends on your income, expenses, the number of dependants and the ability to find a new job quickly.
Pay off debt and stay debt-free
Many Americans have debts because of different reasons and student debt is the most common issue. In the third quarter of 2017, student loan debt was $1.49 trillion and revolving credit debt was $977.
Paying off debt is on the second place after emergencies. According to Find Lender online service specialists, many young adults have student loans, car loans, and credit cards. If you don’t make timely repayments, the debt will grow higher and higher, and the credit score will go down.
Tips for paying off debt
- Pay more than the minimum balance. Each loan statement or credit cards includes minimum payment amount. If you do not pay more, it could take ages to repay it in full. Pay more than the minimum balance.
- High-interest debts are the first to pay off. Compile the list of your debts, rank them from highest interest to lowest. Repay extra toward the high-interest debts and minimum balance towards the lower-interest ones.
- Put “found money” toward your debt. If you cannot pay more than minimum balance, put “found money” toward it.
Save for retirement
When you are young, retirement seems to be far away. However, you should make retirement savings from the very beginning. If you are eligible to contribute to a plan such as a 401(k), 403(b) or 457(b), experts recommend signing up as fast as you can and contribute enough to receive the maximum yearly employer match.
What’s next
Generation Z tries many things for the first time: first full-time job, first flat, maybe first wedding, home or child. That is why it is essential to make right financial decisions from the very beginning.
Saving should be the priority in your 20-s. This is the best time to establish right financial habits. It seems to be complicated but building the habit of spending responsibly and regularly will give a direction to your finances in the future.