You’re young. You have all the time in the world to get your financial life straightened out, or so you think.
Well, you’re wrong.
When you start developing smart money habits in your twenties you can set yourself up for financial freedom at a faster rate. You’ll also avoid major mistakes that can ruin your relationships, cause huge amounts of stress, and unnecessary worry. And even better, the habits that you develop now will stick with you for the rest of your life.
There are a certain set of financial moves you should be making in your twenties. While the list might seem overwhelming at first, realize that you don’t have to do all of these things at once.
Take your time to get your finances organized now so that you can live your life without worrying about money.
Learn to Budget
Living below your means is the golden rule of personal finance. Your outgoings need to be less than your income. Unfortunately, this is a rule many learn later in life only after racking up mountains of debt and creating a huge financial mess.
Start budgeting now. You don’t have to watch every single penny but it’s important that you know where your money is going. You need to be aware of the way you use your money.
A simple way to budget is to use a free program like Mint.com that will track your expenses for you.
Create an Emergency Fund
You don’t want to live a paycheck to paycheck life. But if you don’t have an emergency fund that’s exactly where you’ll end up.
Cars breakdown, appliances go bad, unexpected expenses pop up, that’s how life works. When you’re prepared these emergencies are only slight inconveniences. If you’re unprepared these emergencies can break you financially.
Start by saving at least $1,000 that’s specifically earmarked for emergencies. Over time try to get your emergency fund to cover three to six months’ worth of your expenses.
Make a Debt Pay-Off Plan
If you’ve just graduated from college chances are you’ve racked up some student debt. Now it’s time to get rid of it.
Having debt and those extra monthly payments prevents you from really building your wealth. Make a debt pay off plan.
Start paying off your balances according to interest rate. It might take a lot of hard work and a few years to wipe out all of your debt but you’ll be so glad that you did.
Start Building Credit
Eventually you’re going to want to buy a house. In all likelihood you’re going to have to borrow money from the bank to do this.
If you want to get the best interest rates and save yourself thousands of dollars over the lifetime of your mortgage you need a good credit score.
If you don’t already have a credit card you can take one out to help build your credit. Charge a small amount on the credit card every month (in expenses you already have) and pay the balance in full each and every month.
To get personalized recommendations on how to build your credit you can open a free account with credit karma or credit sesame.
Open a Retirement Account
The earlier you start saving for retirement the less you’ll have to save. This should be a big motivator to start stashing money away for retirement now.
If you have an employer sponsored retirement plan like a 401(k) go ahead and put in the maximum contribution. If you don’t have an employer sponsored retirement plan you can open up an IRA and have automatic deposits put in each month.
Put whatever you can afford in a retirement account now. Even if that’s only $20 a month. Overtime that money will add up.
Create Financial Goals
Once you get all of the basics out of the way like creating a budget, building an emergency fund, making a debt pay off plan, and contributing to retirement it’s time to make your own financial goals.
Money is a tool and should be used to enhance your life. This is the fun part.
What do you want? A fancy vacation? A new car? A new guitar? A house?
Think about your short term and long term goals and make a savings plan. When you save cash for the purchases you want to make you respect the stuff you buy so much more.
Making smart financial moves is a lifelong process. If you can master the basics in your twenties you’ll have set a solid foundation for yourself. But don’t forget to stay educated.
Review your budget and financial goals every few months, read personal finance books, and stay on top of the game when it comes to your money.