During your 20s, retirement and building wealth might not be at the forefront of your mind. While it’s tempting to delay saving for your future, beginning to save and invest in your 20s is important to cultivate good financial habits for the rest of your life.
“It can feel easy to chalk up poor financial choices to being young and carefree, but it’s never too early to start planning for the future; careful financial planning can yield a stronger financial safety net down the line,” said Maria Perez, assistant vice president of personal finance management at Navy Federal Credit Union.
1. Get on a Budget
In order to start growing your money, it’s important to find a budget that works for you so you can keep your spending in check and continue building wealth.
“Be intentional about your budget. Proper management of your cash flow is important to ensure you’re maximizing your saving-to-spending ratio,” Perez said. “Focus your extra cash on saving and investing for a richer life in the long run. There are many different types of budgeting techniques — 50/20/30 budgeting, reverse budgeting, etc. — for you to choose from, so play around with your financial goals to see what works best for you.”
When trying to determine how to allocate your budget, many financial experts recommend following the aforementioned 50/30/20 rule.
“Fifty percent of your money should go to ‘needs’ like food, water and shelter,” said Brennan Schlagbaum, founder of Budgetdog, a financial website with resources that help people live debt-free. “If your needs do not require this, I would shift this to the 20%, and 30% of your money should go to ‘wants.’ Life is more than saving money. Go enjoy your hard-earned money. Just have a plan.”
Traditionally, the 20% is for debt pay down and savings.
“Saving and investing 20% from a young age will ensure extreme wealth,” Schlagbaum said. “And adding to the 20% is always a good idea. Having balance is key.”
2. Get Out of Debt (and Stay Out of It)
Prioritize paying down your debt as aggressively as possible. While this might seem like a no-brainer, the longer you are paying off old debts, the less time you will have to grow your money.
“Start by locking all of your credit cards and not taking out any more debt. It is possible to live a life without debt — it just takes planning,” said Jay Zigmont, CFP and founder of Childfree Wealth.
If you do choose to use credit cards, it’s important to use them responsibly to ensure you are not risking your financial future.
“Practice responsible credit card use to build your credit score,” Perez said. “Credit cards can be a powerful tool in your financial arsenal; building your credit score at a young age can set you up for success down the road. But it’s important to use credit cards responsibly. I recommend you make sure you’re paying off your balance in full each month.”
3. Save and Invest
Once your debt is paid off, you can start saving. A great place to start savings in your 20s is by opening a new account especially for setting aside money.
“Open a new savings account designated to build wealth,” Perez said. “It’ll be separate, so you don’t have to think about touching it unless absolutely necessary. Part of your budget should include setting money aside for that account. As little as $10 per month could be helpful as you look to plan for the future.”
In addition to saving in your 20s, it’s important to start investing. An advantage of starting investing in your 20s is having time on your side, and by putting aside money now, you’ll be able to enjoy a financially comfortable future.
“Take the time to learn how to invest,” Zigmont said. “Follow the general rule that you only invest in things you understand. Understanding investments includes knowing what you are investing in, how it fits in your financial plan and where to keep the investments.”
Investing may seem like a daunting task, but it allows you to build wealth over time. Just make sure to do your research before and figure out what type of investments work for you.
“Explore different savings and investment products,” Perez said. “In addition to savings accounts and a 401(k), see what other types of savings and investment products may be right for you.”
4. Create Good Financial Habits
Take the time in your 20s to learn as much as you can about finances and cultivate healthy spending, saving and investing habits that will allow you to build wealth over time.
“Work on yourself — money is behavioral,” Schlagbaum said. “If one can master impulse control, saying no and confidence, money becomes easy. From there, it truly is a math equation — but money is only about 20% of the equation. Behavior is the rest.”
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