Cashology by FNBO
Managing Money in Your 20's
It’s never too soon to build good habits around money and, while your 20's may seem like the time to have fun and too early to get serious about things like retirement, the habits you develop now can have long-lasting impact on your quality of life and financial freedom. We’re going to take a look at four healthy financial habits to start practicing now – controlling spending, saving regularly, building credit and saving for retirement.
Habit 1 – controlling spending always seems to come first.
- The foundation for financial health
- Let’s talk about the 50/20/30 rule
- We’re talking about after tax income
- Budget 50% on necessities
- Budget 20% for savings
- Budget 30% for wants
- Track your expenses against this formula
- Are you spending too much on anything?
- Not saving enough?
- One bad habit can cost you, especially over time
- And check impulse buys
- Are you buying things based on emotion?
Habit 2 – saving regularly. How do we make this a habit?
- Direct deposit can be your ally when it comes to saving
- Have part of your paycheck direct deposited into savings
- Or into your retirement account
- There are three ways to think about savings
- One, setting money aside into an emergency fund
- Try to have six months of living expenses saved up
- Protection against emergencies
- Second, setting money aside for a goal, like buying a house
- It can take time to save up a down payment
- Third, setting money aside for retirement
- A 401-k gives you immediate and long term tax benefits, too
- Direct deposit can help you achieve these goals automatically
- You don’t have to think about it every paycheck
Habit 3 – building credit. How do we get a good credit score?
- Don’t overlook your credit score.
- A good credit score can make it easier to get loans
- And at a lower interest rate
- It can make life easier and save you money
- Car loans, home loans
- Landlords use credit checks on renters, too
- To get started, open a secured credit card
- Or get a credit-builder loan
- You build your credit score by making your payments on time
- Most in their 20s barely have fair or average credit
- Spend within your means
- Keep you revolving debt manageable
- Pay your bills on time
- Set up automatic payments to help with that
Habit 4 – saving for retirement. This is a real opportunity to build wealth.
- Might not seem urgent in your 20s
- Decades away
- Participate in your employer’s retirement plan
- Those decades of time mean growth for your money
- Simplest terms, compounded interest
- Real opportunity, growth in investments
- Example: $100 a month for five years, starting at 20
- Assuming 7% annual rate of return
- By 67, you’d have $118,000
- After only contributing $6,000
- If you wait until you’re older, the return shrinks
- And you have to put more away to have the same eventual total
- If your company offers a 401-k, contribute with every paycheck
- If they offer an employer match, contribute enough to qualify
- Get that match, it’s free money
It’s so hard when we’re in our 20s.
- We think about getting a job
- Finding a place to live
- Buying a car, getting married, maybe traveling
- Thinking about the future is hard
- And suddenly thinking like our parents is harder
- Saving for a house
- Saving for retirement
- Being prepared for emergencies
- When maybe we’re just learning to do laundry
- Or to scramble some eggs
- But you don’t want to live like you’re in your 20s
- When you’re in your 40s
- And these money habits are the key to getting ready
- Kiplinger: https://www.kiplinger.com/article/saving/t063-c006-s001-10-financial-commandments-for-your-20s.html
- The Balance: https://www.thebalance.com/financial-skills-twenties-2386029
- NerdWallet: https://www.nerdwallet.com/article/finance/manage-money-20s