By the time you read this article I will be 27 years old. Deep into my 20’s and nearing the big 3-0. Despite my husband’s concern that I will have a complete mental breakdown on December 18, 2019 (the eve of my 30th Birthday) I am actually looking forward to turning thirty. I’m ready to be “thirty, flirty, and thriving” or so a chick-flick once told me. In all seriousness, thinking back over the past 7 years, my twenties have been pretty rough. Rough emotionally, mentally, and most definitely financially. Here are a few financial practices I have learned and would encourage everyone to start taking seriously in their 20’s.
1. Build an Emergency Fund – A solid emergency fund doesn’t have an exact dollar amount but should be enough to cover your bills and living expenses for 3 months. Intimidating, right? Start with a smaller, more reachable amount like $1,000 and go from there. I know that $1,000 is a LOT of money and you’re probably thinking, “who has $1,000 just lying around” believe me, I’m with you on this one. This is meant to be a short-term goal. Build this fund over time, not overnight. If you set aside $50 a paycheck (every other week), you will hit your $1,000 emergency fund goal in just 10 months! Look at it like this – that’s $25 a week aka eating lunch at Panera twice. Having an emergency fund is so incredibly important. You won’t have to rack up debt on your credit card when you need a major car repair or go crawling to your parents to lend you money when your gas and electric bill is through the roof over the cold winter months. It will it give you piece of mind, a sense of security, and feeling of accomplishment that you were able to reach your goal.
2. Start Contributing to Your Retirement – If you haven’t started a 401(k) or a Roth IRA you are missing out and here’s why. When it comes to saving for your retirement, waiting an extra 10 years can literally cost you hundreds of thousands of dollars in the end. Thanks to your new BFF, Compound Interest, you can save more money by contributing X amount a year from age 25-35 (10 years) than you will by contributing the same yearly amount from age 35-60 (25 years)! Sounds crazy, right? I won’t bore you with the details of how this works but, trust me, it works. If your company offers a 401(k) plan – stop what you’re doing – do not pass go – enroll now! If your company does not offer a retirement plan then a Roth IRA is the way to go. Here is the difference – money for a 401(k) is taken out of your paycheck before taxes; you will be taxed this money later when you are ready to use it. With a Roth IRA, you contribute money that has already been taxed and you won’t have to pay anything upon retirement withdrawals. A good contribution rate is 6%, however, if you are able to contribute 10% it will make such a difference in the long run. I started my 401(k) with a 6% contribution rate; once I adjusted to this slight decrease in my paycheck I bumped my contribution rate up to 10%. Since this money is taken pre-tax and automatically transferred before I receive my paycheck I don’t even see it or miss it and neither will you.
3. Build Your Credit – If you ever plan on taking out any type of loan be it auto, home, business, etc. then this applies to you. The great thing about credit is that it is never too late to start and there are always opportunities to improve your score. If you are just starting out and have little to no credit, go get yourself a credit card and use it wisely. Do your research and shop around for the card that best fits your needs i.e. secured vs. unsecured, travel rewards, 0% interest for the first 12 months, etc. Use your card consistently and only for things you can actually pay back – I use mine for gas. The trick to using a credit card to build your credit score is to not exceed 25% of your limit. If your total credit line is $1,500 then, be sure to keep your balance under $375 at all times. Also, be mindful that applying and opening multiple credit cards over a short period of time will negatively affect your credit score. I suggest waiting a year between opening cards. Another way to build your credit score would be to take out a small personal loan for $1,000 or $2,000. Put the money in your savings account and pay back the loan as agreed each month. Call your bank or credit union and ask what they have to offer regarding these types of loans. Simply put, in order to build and improve your credit you have to make all your payments – on time – every month – bottom line – end of story. Credit bureaus want to see that you are paying what you owe, timely and consistently over a period of time.
These may seem like simple lessons or maybe even common knowledge, but I learned these the hard way and am still learning. Your twenties are a pivotal and transitional season of life and being grounded financially can alleviate so much unnecessary stress and anxiety. Being knowledgeable about your finances is so important. It’s not something to be brushed off or to “figure out later” – learn now, form these financial habits now, and pass them on to others.