Your twenties can be a time of trial and error that allow for learning experiences to take with you as you age. Because your twenties can be a time of frequent lifestyle changes, it’s important to find ways to establish good financial habits that can support you through any circumstance. By using this time to lay a solid financial foundation, you can set yourself up for long-term stability and success in your future.
Establish a budget
Establishing a budget is a fundamental first step to promote financial responsibility and accountability. By understanding how much money you have coming in and weighing this amount against your expenditures, you have a better understanding of your financial standing. Tracking your expenses through a spreadsheet or a budgeting app can give you a document to easily refer back to and update as needed.
First, you will want to determine your income after taxes to calculate your take home pay. This is important because your gross pay (salary before taxes) will not give you an adequate figure to budget with. This is because in addition to taxes being taken out, you may also have pre-taxed deductions from your income such as health insurance and retirement contributions that can eat into your monthly budget. Once you have your take home pay documented, you will then subtract any monthly obligations such as rent, utilities, car payments, and credit card payments.
Remember to account for small amounts such as streaming services and other subscription apps as they can quickly add up. By understanding your financial makeup through budgeting, you can set goals and determine the best ways to save for bigger picture items or events such as paying off debt, buying a home, or funding a wedding.
Work on your credit score
Your credit score is the numerical figure that is calculated based on your financial risk. Every time you take out a loan, accrue debt, or make monthly payments on an obligation, your credit score can be affected. Lenders will use your credit score to determine how likely you are to pay back a potential loan and use this number to either approve or deny your application and calculate your interest rate. Establishing a good credit score when you are in your twenties is important, particularly if you are going to be applying for a loan within the next few years.
When you have a higher credit score, you are more likely to have a lower interest rate on a loan (resulting in a lower payment). This also informs the bank that you are financially responsible enough to pay back the loan. If you have derogatory marks on your credit report such as late payments or bills in collections, consider the ways that you can repair your credit so you can have a better financial standing moving forward. While building a strong credit score takes time, actions such as lowering your utilization rate, disputing misinformation on your report, or paying late payments can all help you work towards having a better financial makeup.
Set up safeguards
When establishing good financial habits, remember not to overlook the importance of protecting yourself and your finances. A straightforward way to do this is to ensure you have adequate insurance policies in place. For example, while you may be young and in overall good health, consider having some type of health insurance policy, even if it’s a catastrophic plan with a low deductible. While you may not need extensive health insurance coverage, having a plan in place to protect you from large incurred medical expenses can mitigate risk.
Another insurance coverage to consider establishing in your twenties is life insurance. Term life insurance serves the sole purpose of providing a lump sum of funds to a designated beneficiary if you were to unexpectedly pass away. Depending on your particular situation, securing life insurance coverage when you are younger and healthier can give you a better rate than if you wait until later in life to obtain coverage. If you have dependents that rely on your income, having a policy established can protect their future. Furthermore, if you are considering buying a home or getting married within the next few years, finding a policy sooner than later can be a smart financial move to make.
Build an emergency fund
Something important to consider when you are in your twenties is that even while you may have consistency in your day-to-day, life has a way of throwing unexpected curveballs. While it’s impossible to predict and prepare for every unanticipated event, there are a few ways that you can protect yourself from financial loss. By building an emergency fund, you give yourself a cushion if you were to lose your income or incur a large expense.
For example, job loss, relocation, sickness or injury are all reasons to have funds set aside to ensure that you would not face major financial loss or need to accrue substantial credit card debt to get by. Once you have an established budget, you can determine your necessary monthly expenses and work towards saving three to six months worth in a separate savings account. Building an emergency fund is one of the most important money moves you can make in your twenties to ensure that you are set up for long-term success.
Work towards retirement
While retirement may seem like an event in the distant future, it is a major financial milestone to start working towards, even in your twenties. An easy way to start preparing for retirement is to contribute to a 401K, if offered by your employer. A 401K allows you to contribute a portion of your income (pre-taxed) towards your retirement. The earlier you start contributing, the more your account will grow and put you on a path towards retirement.
Furthermore, if your company offers a match where they will also contribute a percentage of company funds towards your retirement, it’s important to take advantage of this benefit. Depending on your investment strategy, you may choose to invest some of your 401K in a mutual fund to maximize growth opportunities. It is wise to speak to a professional before choosing to invest your 401K, as each situation is unique. Remember that while you are younger, you may be able to take more risks with your investment portfolio, giving you the opportunity to watch your retirement savings exponentially grow.
As you advance in life and your career, financial mistakes and mishaps are almost always inevitable. However, using these moments as learning experiences and finding ways to plan for the future can give you a solid foundation to build upon. By taking actionable steps to create good financial habits when you are in your twenties, you can set yourself up for stability and security in your thirties and beyond.