Planning for their financial future isn’t usually the top priority of people in their twenties, but it really should be. Making smart financial decisions in your twenties sets you up for financial success for decades after, and can drastically improve your ability to cover the larger purchases and costs many encounter later on in life. Even if you don’t yet have your dream job or can’t afford to put much money away, the benefits of sound personal finance in your twenties can pay off throughout your life.
The reason is that younger people have time on their side when it comes to financial security. By putting a little money aside every month starting when you’re 24, you will have a dramatic head start on people who only begin saving in their 30s and 40s. You establish good saving habits early, which you will hopefully carry with you as you earn more money later in life. For investing purposes, you can afford to be more aggressive because you have less to lose; riskier investments have the greatest potential for huge payoffs, but you won’t be financially devastated should it go the other way either.
So now that we know you should begin planning for your financial future in your twenties, what’s the best plan for getting started? Here are the top four things you should be doing:
1. Setting up an emergency fund
This is the absolute first and foremost step you should take. An emergency fund gives you breathing room and opportunity; if you need to move, quit a job, get laid off, or face a medical emergency, having an emergency fund keeps you from draining your entire bank account to survive. A good emergency fund can cover three to six months’ worth of expenses (rent, utilities, cell phone, car insurance – everything) and a great one can tide you over for a year. Set aside as much money as you’re comfortable with every month to build this fund in a cash isa.
2. Saving for retirement through work
If your employer offers a 401k or similar retirement plan – use it! It may seem premature to start saving for retirement in your twenties, but your 65-year-old self will thank you for it. Many employers offer simple investment programs for employees to make automatic contributions to through each paycheck. Some employers even match employee contributions; this means that for every dollar you put in your fund, your employer puts in a dollar too (up to a specific amount). This is free money and you should absolutely contribute the maximum amount that they will match.
3. Investing in a target-date fund or Roth IRA
If your employer doesn’t offer a 401k plan, or you simply can and want to save more for retirement, you can set up an outside fund through an investment firm. Target-date funds and Roth IRAs are great options for young investors because they are simple and offer the opportunity for great long-term returns. They operate on compounding interest which means that by giving your money many decades to grow, it can become vastly larger than it would in a traditional savings account. Many investment firms offer fee-free accounts and have pre-determined portfolios for you to choose that make sense for your age and income.
4. Avoiding (bad) debt
Not all debt is a bad thing – sometimes getting a student loan for school, a business loan to start your dream company, or getting a mortgage to buy a house can be part a positive long-term investment – but today’s twenty-somethings are using credit cards more than any generation before. Accumulating credit card debt can set you back financially for years in the future; with interest racking up, unpaid balances can keep you from being able to get good credit in the future and can also be a major cause of lifelong stress and anxiety for cardholders. Track your spending, make a budget, and don’t use your credit card unless you have a plan for paying it off.
Making sound financial decisions in your twenties can have immense payoffs – literally – throughout your future life. Set yourself up for success by taking small steps today; when it comes time for major life expenses like a car, a house, kids, their college, and your retirement, you’ll be glad you were prepared.
This article was written by Ella Davidson of Coupons.org. Coupons is a coupons and deals website that regularly publishes consumer awareness pieces. Coupons have been featured on the prominent finance channel, CNBC.
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