5 Smart Money Moves to Make in Your 20s
“Wealth is not about having a lot, it’s about having enough.”-Edwin Rajan
Your 20s are a crucial time for establishing healthy financial habits that can set you up for a bright financial future. From establishing an emergency fund to paying off debt and building credit, there are several key steps you can take to ensure that your financial future is on solid ground.
Start an Emergency Fund: Establishing an emergency fund should be your first priority. This will help you deal with unexpected expenses like car repairs, medical bills, or job loss without dipping into your savings or going into debt. Aim to save three to six months’ worth of living expenses. To make it easy, set aside a portion of your paycheck each month in a separate savings account designated specifically for emergencies.
Invest in Retirement: The earlier you start investing for retirement, the more time your money has to grow. Consider setting up a 401(k) or IRA and aim to contribute at least 10% of your income. For example, if you start contributing $200 a month to a retirement account at 25, by 65 you’ll have nearly $600,000 assuming an average annual return of 7%.
Pay Off Debt: High-interest debt, such as credit card debt, can weigh you down and prevent you from reaching your financial goals. Prioritize paying off this debt as soon as possible. For instance, if you have a $5,000 credit card debt at 20% interest, making the minimum payment of $100 a month will take you nearly 25 years to pay off and cost over $10,000 in interest. By paying off $200 a month, you can be debt-free in 2.5 years and save over $5,000 in interest.
Build Credit: Your credit score is one of the most important financial metrics you have. It affects everything from your ability to get a loan, to the interest rate you pay on loans, to the cost of insurance. Use a credit card responsibly, make payments on time, and keep your balances low. For example, if you have a credit score of 750, you can expect to receive a loan interest rate of 4%. But if your credit score drops to 650, your interest rate jumps to 8%. Maintaining a good credit score can save you thousands of dollars over the life of a loan.
Learn About Personal Finance: The more you know about personal finance, the better equipped you are to make smart money decisions. Read books, take classes, and seek advice from trusted financial professionals. Spending a few hours each week reading personal finance books or taking online courses can help you learn about budgeting, saving, investing, and managing debt. This knowledge will serve you well for the rest of your life.
