Your 20s are an exciting time. You’ve likely graduated from college, started your first real-world job and are making decisions on your own. While your adult life has just begun and retirement seems years away, it’s important to start discussing your financial options, managing your money responsibly and planning for tomorrow today.
This article will walk you through six suggestions on how to manage money in your 20s.
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1. Create a budget
Budgeting is the process of tracking your income, bills and expenses in order to assess how much you can spend and what you can afford each month. Creating a budget and sticking to it is the foundation for financial success, as it helps you live within your means and avoid debt.
“The first thing I recommend to most young people starting out is to understand a budget,” said Corbin Green, a growth and development director and financial adviser in Salt Lake City. “People need to understand what money is coming in and what money is going out each month, and have it laid out in an organized fashion.”
When creating a budget, you’ll want to write down:
- Your income: How much are you making each pay period?
- Your expenses and recurring payments: What does your rent/mortgage, utilities, groceries and gas add up to each month?
- Debts owed: How much do you owe for student loans, car payment and credit card debt?
Once you’ve assessed your income and expenses, you can make your budget.
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2. Pay yourself first
Once you’ve outlined your initial expenses, such as your mortgage, car payment and utilities, it’s crucial to add an “expense” of paying yourself first to start building up a short-term and long-term savings account. Treat your savings and retirement account like a utility bill — it must be paid monthly and on time.
“My recommendation is to pay yourself first. The first bill paid each month should be money to your savings account, then your essential bills and anything left over at the end of the month is fun money,” Green said. “The biggest mistake I see the younger generations make is not saving early enough. They tend to have a ‘kick the can down the road’ attitude and put off savings until their 30s.”
Let’s look at an example: Assuming you want to have $1 million in savings by the time you retire at age 65, you’ll want to save at least $381 a month starting at age 25. That number bumps up to $820 a month beginning at age 35, and $1,920 a month at age 45.
“This generation lives lavishly, so the number we coach people to save is around 20% of their income. That should help them maintain their current lifestyle in retirement,” Green said. “If you want more travel and more fun stuff during retirement, saving 30% of your income will help you live a lifestyle above what you’re currently living.”
Time is on your side when you’re young. A bit of money saved now is going to make a big difference later. Make your savings payments consistent, sustainable and automatic.
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3. Start an emergency fund
In addition to your retirement account, you’ll want to start an emergency fund. An emergency fund is money set aside specifically to cover the cost of an unexpected expense. This account usually consists of three to nine months’ worth of money that is easily accessible in case of an emergency.
If something unexpected happens (such as an illness or layoff), you’ll have quick access to cash that can sustain you long enough to pay your bills and allow you to find a qualified job.
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4. Pay off existing debt
The average millennial has $23,064 in debt. Debt — or money owed to a lender — can be crippling to your financial (as well as physical and mental) health.
Large amounts of debt can seem daunting, but it’s important to make a plan, start paying it off quickly and include those payments in your budget. If you have more than one debt, how do you know which to pay off first?
Green suggests consolidating debt to one payment with a lower interest rate when possible.
However, you may be more inclined to try the debt avalanche or debt snowball methods of repayment.
“The financial professional in me says to put more money toward the debt with a higher interest rate and some money at the debt with lower interests rates; but never focus on just one expense at a time,” Green said. “But, as a human, you may ask yourself ‘which of these debts is a moral victory to pay off?’”
If you owe money to a friend or family member and paying that debt off is a mental relief, Green suggests paying that off first before moving on to other debts.
As a young adult, it’s important to make a plan to pay off and manage your debt to avoid heavy interest fees.
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5. Build credit
A credit report shows your credit history and is used to determine your creditworthiness. Building a strong credit history and maintaining a high credit score are essential for your financial health. In your early 20s, it’s important to build your credit by paying your credit cards and utilities on time while also avoiding debt.
“Never live above your means and use credit for money that you don’t have,” Green said. “I never recommend buying anything on credit unless you have the means to pay it off in full at the end of every month.”
Using a credit card to build credit is a smart use case, but if you can’t afford to pay it off by the end of the billing statement, you probably can’t afford it in the first place.
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6. Protect yourself financially
As you enter adulthood, you’ll want to make sure that you are protecting yourself and your finances with adequate insurance. Take advantage of the benefits offered at your workplace — health insurance, life insurance, short and long-term disability insurance and 401(k) match, if offered. You may consider additional benefit packages outside of what your work offers.
“I always recommend that you have something outside of work so you have control and coverage, should you leave your employer,” Green said.
Managing your money and knowing where to get started with financial planning can be overwhelming and confusing — especially when you’re in your 20s. Finances can be complex, but it’s essential to educate yourself, find out what resources are available to you and start having financial conversations earlier rather than later in life.
This article originally appeared on MagnifyMoney.com and was syndicated by MediaFeed.org.
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