Your 20s are an exciting time. With numerous life changes in the transition to adulthood – from graduating college and entering the workforce to moving into a home of your own – this newfound freedom can be thrilling. However, this decade of life can also be very challenging from a financial perspective with sometimes overwhelming financial responsibilities piling on, including student loans, bills, rent, insurance, and more, often all at once.
But despite the adulting that comes with this independence, 20-somethings have an enormous opportunity to lay down a firm foundation from which to build their financial life. An easy way to kick start this is to work toward achieving a few key money milestones. As you complete one, move onto the next and before you know it, grown-up finances aren’t far out of reach. Some of those major milestones every 20-something should strive to reach include:
- Prepare for Emergencies – Do you have enough money saved to cover urgent expenses, such as car repairs, medical emergencies, job loss, and home repairs? If not, set up a savings account that will serve as your emergency fund and work to put away six months of expenses in it. This safety net will lessen the financial impact of any unexpected emergencies down the line. It’s important to note that this money should be saved for true emergencies, like medical expenses, job loss, and other similar situations. A last-minute vacation doesn’t count.
- Start Saving for Retirement – Retirement may seem a long way off, but it is important to start saving as early as possible to ensure you have enough set aside for when you retire. If your employer has a 401(k) or another retirement plan, start contributing a percentage of your salary to it now. Many companies match a percentage of your contributions, so it is a good idea to contribute at least enough to get the full match. For example, if your employer matches 3 percent of contributions, you should contribute 3 percent at a minimum. As your salary rises, you can increase your contribution to further build your retirement savings. Remember: the more you invest earlier on, the longer it will have to grow. There are numerous other retirement savings vehicles you can choose from, including Roth IRAs, traditional IRAs, and more. A financial planner can explain the advantages of each type, and which could work best for you.
- Make a Plan to Pay off Debt – Many young people enter the workforce with student loans and credit card debt. Make a plan to pay that debt off as quickly as possible – and stick to it. Ignoring debt can negatively impact your credit score and overall financial health, making it difficult to buy a car, get a mortgage, rent an apartment, and even get a job. If you need guidance, a financial planner can help you assess your financial situation and make recommendations to tackle your debt.
- Get Insured – Many people think they don’t need insurance when they are young and healthy. In fact, your 20s are a great time to establish a life insurance policy. Your premiums will be lower because of your good health, and you’ll be able to start building a solid nest egg to ensure your family’s financial security and to draw from later (depending on the policy you choose). You can read more about life insurance here, or contact our team for guidance with life insurance. It is also important to have health insurance – if your employer doesn’t offer benefits, look into securing healthcare coverage on your own.
- Build Good Credit – Start your financial life on the right foot by building good credit. Pay all of your bills on time, and if you use a credit card, monitor your spending and be sure to pay off your balance in full each month to avoid extra interest payments. These habits improve your credit score, which allows you secure better interest rates on mortgages, auto loans, and more.
- Establish Financial Independence – When you were younger, you likely received financial assistance from your parents or other loved ones. Work to become financially independent from them once you have a job. Move into your own place and start transitioning insurance payments, cell phone bills, and other expenses into your name. This may take time, and that’s ok.
- Start Investing – It is never too early to start investing, and you don’t have to be rich to do it. Once you have a handle on your debt and a solid emergency fund, talk to a financial planner about the investing options available to you. They will offer custom advice based on your current financial situation and short- and long-term goals.Investing in your 20s can be a big advantage – by starting early, you can build an investment portfolio that can grow your net worth substantially over your lifetime. You don’t have to have thousands of dollars to start, either. Try investing $100 each month and adjust that amount as your income increases.
- Keep Financial Documents in One Place - Establish a recordkeeping system for your financial documents. Make sure you have key documents in your possession, such as your birth certificate, social security card, driver’s license, car insurance information, savings bonds, tax information, and anything else your parents have held onto for you. Dedicate a drawer in your desk or purchase a file organizer from an office supply store – find a system that will help you keep these important documents organized for years to come.
- Keep Some Cash on Hand – While saving for retirement and paying down debt are important, they shouldn’t force you into a cash crunch. Create a budget that contributes toward retirement, debt, savings, and investments while allowing some wiggle room. It’s important to enjoy dinner out with friends, vacations, and other fun activities after all!
Starting your adult life with smart financial habits will pay off significantly in the long run. Use these milestones to kick start your financial journey. A financial planner can help you work toward achieving these milestones and keep you on track toward your goals, no matter your age.
Each decade of life is accompanied by its own financial rewards and challenges – check out our blog on financial milestones for your 30s as well.