Your twenties are a very exciting and exhilarating time. You’re fresh out of college, and you’re ready to conquer the world independently. By this time, you’re probably looking for or settling in a real career, exploring the world and living life on your own. Indeed, the twenty-somethings have a lot on their plate, that sometimes, they put personal finance matters to the backburner.
You’ll have so many things going on, but you can’t take money for granted. Now is the time to be thinking about your finances more seriously. You’ll be dealing with adult expenses like rent or mortgage, insurance, credit card, and insurance, and sometimes, you can’t help but feel overwhelmed. There’ll be so many things going on, but if you choose to lay the foundation in your 20s, your future self will thank you for it.
To help you sort out your financial house in your 20s and start living life like a real responsible adult, here are the top financial advice you should take heed of.
Top money advice for your 20s
Set and live on a budget
So, you’ve just landed a job you love, and you’re itching to start earning your first official paycheck. Now that you have a steady income, it’s essential to know how to divvy it up, so you don’t end up with more days than cash. And the one solid solution for this is popularly called the budget.
But the budget is more than just a tool that keeps you on track of your spending, it also tells you how to use the money on needs and wants. According to finance experts, you have to learn how to budget for recurring daily expenses like gas and food, and monthly expenses like credit card bills, utilities, and more. Apart from that, you’ll want to know how to save up for discretionary expenses like shopping and entertainment, and then for big-ticket purchases like a home down payment.
Budgeting can seem like a tedious chore, but once you learn the ropes, it’ll come to you like second nature. It’s a non-negotiable, especially if you want to know where your money is going and need to figure out during the days when money comes up short. If you want to control your spending and make sure you’re paying your financial obligations on time, then the budget is the first tool you should learn by heart.
Don’t take on unnecessary debts
You’re at a time in your life when everything seems exciting. You’re young and healthy, and you think you can conquer almost anything. You want to travel, shop and gain new experiences. Perhaps, you’re thinking of greater goals like moving into a better apartment or buying a car. Unfortunately, all these things cost money.
Lenders are quick to take advantage of the twenty-somethings’ impulsive nature, allowing almost everything to be charged to debt. You are young, you are gullible, and you think you can manage all these debts, only to find out that it has gotten way out of control.
Instead of controlling money, you end up with debts that control your life, and that can make the rest of your years seem more depressing.
So, before you jump into a new purchase or a promising experience, think how much it will cost you and whether or not it’s worth going into debt for. At times, debt can be welcome news, especially if you’re investing in yourself (think of higher education). But if you’re incurring debt because you didn’t want to miss out, then remember you’ll have to pay for it soon enough. Debt will push you away from the rest of your financial goals, so make sure you are getting into debt for things that count.
Build an emergency fund
Emergencies are not a matter of “if” but “when.” We are all susceptible to emergencies, and the last thing you want to do is get into debt for a sudden car repair, for instance.
Unfortunately, it’s not enough that you have a budget and you feel you’re amply covered by insurance. You need to have a contingency fund that you can tap into when things get messy, such as when your car suddenly needs a visit to the mechanic or worse, when you lose your job. The emergency fund is your financial cushion for the unexpected things in life, and it’ll help you sleep soundly at night.
Having an emergency fund of at least three months’ worth of your paycheck should give you enough room to stay afloat, even amid an unexpected expense. But that is if you don’t have dependents and your income is stable. However, you want to raise the amount higher to at least six months of your salary, especially if your income is unstable and you have other people depending on you financially.
This amount may seem too large to save up, especially if you’ve just started earning your paycheck, but you don’t have to come up with the amount in one go. You can save for it progressively, say 10% of your paycheck and place the money in a safe, liquid account. You can increase the savings once you’ve settled most of your high-interest debts, you’ve gotten a raise or when you come across a windfall (say a birthday bonus or huge commission).
Live within your means
Financial independence may be far from your mind in your 20s. After all, you’ve just acquired the freedom to do things your way. But if you’re not careful about how you handle your money, you could end up in a lot of financial trouble that you have to spend years fixing.
Living within your means allows you to tailor your spending within what you can only afford. It entails drawing the fine line between wants and needs and prioritizing your expenses. You also need to develop and stick to a budget to ensure you’re meeting all your bills. You also need to track your expenses, so you know where your money goes, as well as creating a solid savings strategy.
It’s wrong to think that living within your means puts a restriction on the way you live your life. Instead, it allows you to identify the areas of spending that are worthwhile – those that make you happy but are still well within your financial capacity.
Live with roommates (or even with parents)
You’re fresh out of college, and you’re dying to live a fully independent life, so the idea of having a roommate or living with your parents may not sound so appealing to you. But before you start scouting for a new rental home or apartment, you should consider the financial benefits of delaying “independent living” for a while.
First, it’s important to note that housing will eat almost one-third of your paycheck, and that’s a lot of money. Living with your parents allow you to save at least a couple of hundred dollars from your housing costs, but with the added benefit of a fully furnished home, well-stocked pantry and regular homemade meals. You can contribute a portion of your income as “rent,” but still, you’ll have plenty to save towards your other financial goals. Your parents may not be your ideal roommates, but if you wrestle living at home for a couple of months, then you’ll have a greater potential to save that you might not afford otherwise.
If living with your parents is not at all possible, you can try to find a roommate during the first several months or a few years. Splitting the housing costs, as well as some utility bills like electricity, internet, and cable, with someone can be financially for you, and your roommate as well.
Pay off high-interest debt first
Many young adults have debts to deal with, even before they entered the workforce. Student loans, for instance, can impact their finances for the next several years to come. You might think that you’ve earned all the pretty purchases waiting for the swipe of your card, but when the debt blows out of proportion and becomes too much to handle, the debt can overwhelm you.
Having multiple debts can be stressful enough, so it’s essential to know how to deal with them. According to most finance experts, it’s wise to tackle high-interest debts first, like your credit cards. High-interest credit cards are susceptible to ballooning because every time you delay the payment, the interest also keeps rolling over, on top of the other charges that apply.
If you have high-interest student loans, then it’s best to face them sooner than later. Try to pay more than the due minimum so that you make a more significant dent into the debt than you would with just paying the minimum amount.
The important to remember is that you should never allow high-interest debts linger for very long because the interest can really hurt. If you are fond of using the credit card, make sure that you’ll have enough to cover the bill before the interest applies, or don’t swipe the credit card at all if you know you can’t afford it for the time being.
Minimize credit card use
Given its power and convenience, there’s a good reason why many people, especially young adults, are hooked on using the credit card. But young adults are particularly susceptible to credit card debt, and if they don’t do it nice and wise, they could die with credit card debt to their name. According to a study by the Ohio State University economics professor, Lucia Dunn along with Capital One’s manager of credit Sarah Jiang, people in their 20s and 30s and paying their credit card debt off at a much slower pace the previous generations.
If you need to a grip of your finances and rein in your credit card debt, you need to minimize credit card use, if not eliminate it. While this might be too tough to do, reducing your credit card usage can do wonders to your budget.
Consider using cash instead of credit card and use the cash more frequently. Seeing cash change hands can seem more painful than the quick swipe of a credit card, so you tend to think of your purchase more seriously.
It also helps to create a budget and track your expenses. If you tend to use the credit card often, you’d want to know what your purchases are so you can start saving cash for them instead. This technique also allows you to determine areas that you can cut or minimize spending on.
Additionally, make it a point to have a well-funded emergency fund. While you can always rely on the credit card for most emergencies, their steep interest rates can hurt your pocket. Having steady money parked in liquid savings allows you to deal with emergencies without going into credit card debt.
You’re probably not fond about the topic of life insurance at this age. You’re young, wild and free, and the grim thought of death isn’t appealing at all. But insurance is a crucial investment, not just for you but also your loved ones.
And hey, you’ll get a much greater deal on life insurance while you’re still young and healthy. And if you plan to get married and have kids in the next several years, having life insurance in place is a great way to protect your loved ones.
Apart from life insurance, consider getting renter’s insurance (or homeowner’s insurance if you’re paying the mortgage). Renter’s insurance protects you from spending unnecessarily on damaged, stolen, or lost belongings in your rental apartment.
Another important insurance worth considering is disability insurance. According to the Social Security Administration, one-quarter of the twenty-somethings will become disabled before retirement. This insurance will protect you from the cost of losing your job, whether temporarily or permanently, to disability, and protect your emergency fund in the process.
The disability is often cheap and may be available through your insurance benefits at the workplace.
When you’re fresh out of school, the last in thing in your mind would be your grades. But when you’ve entered the world of adulting, there’s another type of grade you need to take seriously: your credit score. While we may diss out about minimizing the use of credit cards, it’s essential to have some credit, than to not have any credit history at all.
Your credit history will play an essential role in your adult life, ranging from landing jobs, getting a rental apartment, obtaining the best home and car loans, as well as lowering insurance premiums. Lower credit score places you in the position of getting higher interest rates too.
If you don’t have a credit history yet, consider taking a secured credit card. To improve your credit score, use your credit wisely by not going over 30% of your available credit limit, settling your bills on time, and avoiding applying for new credit lines when not necessary.
You’ll encounter many things in life in your 20s: you’ll start building your career and probably find a partner who you will soon settle and build a family with. You’ll also discover the many things that life has to offer, like travel and living independently. But during this time, you’ll also start dealing with financial responsibilities. It can feel too much to have at the same time, but once you’ve mastered the best ways in handling your finances, you’ll enjoy life and feel secured for the next years of your life.