How to Take Control of Your Money in Your 20s

Your decisions today forward will affect not only your life, but also your entire legacy.– Dave Ramsey

Some of the most memorable and exciting times of your life are in your 20s…as well as some of the biggest life decisions. At this time of your life you’ve entered the work force, have more responsibility and finally have some disposable income you can call your own. You may be entertaining marriage, starting a family, buying a home or even traveling the world.

As wonderful as all this freedom…independence sounds, it also comes with significant financial consequences that can be not so wonderful if you’re not careful. Building healthy habits around money management now, while you’re young, will help you meet your financial goals in the future.

Here are a few tips to get you started on the right path:

  • Control spending – establish a budget

Spending responsibly is the foundation of financial health. To get a sense of how much you spend and where you spend it, you need a budget. Without a budget, you risk spending too much on discretionary items and saving too little for the big-ticket items like a car or a house. 

In a recent survey, 67% of millennials said emotions cause them to spend more than they can reasonably afford. To curb this behavior, consider waiting 72 hours to make any impulse buys. This gives you time to look at the impact of this purchase on your overall budget. Differentiating between your needs, wants and dreams is the key to building a solid financial foundation.

In addition, monitor your spending on socializing or short-term gratification. Although going out to eat or going to shows is an enjoyable way to spend your leisure time, as you get older, you’ll realize this money could’ve been well spent in other places. Statistics show that millennials spend nearly 44 percent of their food budget on going out. Cutting back on this can be an excellent way to save money.

  • Build credit

Your credit report is your financial report card. An excellent credit score, 800 or above, allows you to qualify for loans with lowest interest rates, which is crucial when purchasing a new car or a house. Even if you plan to rent, many landlords use a credit report to evaluate prospective tenants. Today, many employers also use credit reports as part of their assessment of a potential employee. 

Many young adults don’t have credit scores because they don’t have a credit history. You can begin building your credit by opening a secured credit card or a credit builder loan. (Talk to your bank about these options.) Once you’ve done this, spend within your means, keeping your level of revolving debt, such as credit card debt, as low as possible, and always pay your bills on time. (Automating payments will help with this.)

In addition, you can build your credit score by reporting your rent. Nearly every major credit bureau today allows you to report your rent. This can increase your credit score tremendously. 

Check your credit report regularly to make sure nothing is blemishing your creditworthiness. You are entitled to one free copy of your credit report a year from each of the major credit bureaus – TransUnion, Equifax and Experian. If you stagger when you request your report from each bureau, you can check on your credit every four months.

  • Get insured

Like the Allstate commercials dramatize, mayhem is truly everywhere. When terrible things happen, like an unexpected trip to the emergency room, a car accident or a fire in your apartment, having good insurance can save you from an additional disaster – financial. Medical debt is the leading cause of personal bankruptcy in the U.S.

  • Establish a rainy day fund

Insurance alone won’t cover everything life throws at you. You still need to have liquid savings on hand as an added precaution. Most financial experts recommend stashing away three to six months’ worth of expenses in an easily accessible account…like a savings account. This should be a top priority…even before saving for retirement. The faster you can build this, the sooner you can begin your long-term savings plan.

  • Establish a debt-repayment plan

Debt is a reality for many young adults, especially student loan debt. But, letting it linger, or, worse, grow, can have devastating consequences on your long-term financial health…goals. Make a plan to pay off your student loan debt as quickly possible. If you have credit card debt begin tackling this now before it gets out of hand. The first step in paying off debt quickly is establishing a budget and reining in your spending. Begin by paying off your highest interest rate credit cards first.

  • Clean up your online presence

Now that you’ve made the great leap into adulthood, it’s time to scrub your young foolishness from your public image. Your social media activity is viewable by the entire Web-surfing world, including all your current and potential employers. Remember you never get a second chance to make a first impression.

  • Quit the bank of Mom and Dad

Putting your “big boy” and “big girl” pants on…becoming a self-sufficient adult includes severing the financial umbilical cord. This begins with a job and establishing the plans listed above. If there comes a time you need to ask your parents for financial assistance, do so maturely and responsibly. This includes devising a plan to pay them back.

  • Start saving for retirement – now 

Even though retirement seems like lifetime from now, the sooner you start saving the better. Because of the magic of compounding, there’s no time like your twenties to start putting your money to work for you. In fact, compounding of earnings is so powerful that if you start saving for retirement in your twenties you can amass a large nest egg with little effort, as long as you invest regularly. 

For example, if a 25-year-old invests $2,000 a year for eight years and never invests another dollar after the age of 33, he or she will earn more by the age of 65 than a 35-year-old who invests the same $2,000 for 32 years, even though the 35-year-old invests four times as much. This is the power of the time value of money. 

It may be wise to invest in Certificates of Deposit or a Money Market fund for your short-term goals and the stock market for your medium and long-term goals. Even though the stock market isn’t for the faint of heart, historically, it has out-performed any other type of investment over time.

Find out if your employer offers a 401(k) plan or other tax-deferred retirement plans. If so, take advantage of it as soon as you’re eligible. Your contributions will be made with pre-tax dollars and the taxes on earnings will be deferred until you begin withdrawing them in retirement. Many employers will match part or all of your contribution, which results in huge gains over time for you.

There is a wealth of information on “smart” investing on the Internet. Stocks and mutual funds can be thoroughly researched on sites like Morningstar. Now may also be a great time to sit down with a reputable financial planner to help you determine how much money you’re going to need to retire and create a road map to get you there.

There’s no time like the present to save for your future.

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