6 Financial Moves To Make In Your 20s
Saving for retirement may not be among your priorities when you are in your 20s, but the decisions you make now can significantly impact the shape of your financial future and hold the key to having the life you want.
If you don’t know where to begin, here are some moves for you to consider:
1) Create Healthy Spending Habits
This may seem self-evident but spending less than you earn is the bedrock of financial success.
If necessary, create a budget for yourself and stick to it. Keep track of how much you are bringing in versus how much you are spending and see where you might be able to cut down on expenses. This may sound like a lot of work, but there are plenty of apps that can do this for you these days like Mint.
Avoid credit card debt like the plague by paying off your credit card balances in full every month. This not only helps you to build your credit score, but you can avoid snowballing into steep debt.
2) Create Savings Strategies
If you are following #1, you will start to notice your bank account balance growing each month.
Protect yourself by building an emergency fund in the bank that will cover any unforeseen expenses like medical bills, car repairs, etc. Most financial planners recommend having a fund that will cover up to 3-6 months of living expenses.
If you haven’t done so already, switch to a no-fee checking account or earn a competitive interest rate with a high-yield savings account. Marcus by Goldman Sachs is a good option to look into.
Research credit cards with benefits like cashback and points.
3) Pay Back Your Student Loans
Make paying back your student loans a priority in your 20s. You never know what the future holds for you and by your 30s, your life could look drastically different. You may be looking at marriage, starting a family, or even buying your first home!
Did you know that student loans can affect your credit score by increasing your utilization rate? This refers to the percentage of credit you use. So if you want to build your credit up for a mortgage or anything else down the line, try to pay back your student loans as soon as you can.
Some experts recommend that about 20% of your take-home pay be set aside for debt repayment and savings, so figure out which is your priority and how you want to break that down.
4) Participate in Your Employer Retirement Plan
Take advantage of your employer retirement plan. It’s okay if you can’t contribute the max amount to your employer’s retirement plan. Starting with even a small amount is what counts.
As a general rule of thumb, try to save at least a percentage of your pay that is equal to your employer’s match. For instance, if they match 50 cents on the dollar up to 6% of your contribution each paycheck, you should choose to contribute at least 6% each pay period because that means your employer will put in 3%. If it’s free money, why not take it?
Most employer retirement plans offer a Roth option that allows you to contribute after-tax dollars and build tax-free wealth for retirement. As many tax experts and economists expect income tax rates to be higher in the future, it may make sense to pay taxes on your contribution dollars now and take tax-free withdrawals on the growth in the future.
5) Open up a Roth or Traditional IRA
If you are eligible, consider opening up a Roth IRA. Roth accounts are a great vehicle because you contribute after-tax dollars, which means that your earnings grow tax-free as long as you don’t withdraw them before you turn 59½. There are income limits that will determine your eligibility, so if you expect to have a higher income sometime in the future, it’s better to contribute now while you can.
On the other hand, it may be appropriate for you to contribute pre-tax dollars to a Traditional IRA. This may be preferred if your employer does not offer a retirement plan, and your income is too high to contribute to a Roth IRA. Your contributions can be deducted from your taxable income, and your money will grow tax-deferred.
6) Invest savings that you don’t need to spend in the near-term.
If you have built your emergency fund, maxed out your 401(k) contributions, and contributed to an IRA and still have savings leftover, consider opening a discretionary (taxable) investment account.
If you are saving for a near-term expense (e.g. purchasing a home, travel, a wedding, etc.), it may make sense to keep the money in a stable fixed income fund.
If you have money you don’t expect to spend for 10+ years, consider investing the money in equities/stock-based investments. Take advantage of the opportunity to invest before larger expenses like children and schooling come into the picture. A $10,000 investment with an annual addition of $5,000 at an 8% return over 10 years results in $101,774!
Following these simple but effective planning strategies can be enormously helpful for building long-term wealth! If you would like to learn more about financial planning in your 20s, please do not hesitate to contact us.
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