For most people, their 20’s are a very exciting chapter in their life, marked by career beginnings and a deeper understanding of personal goals. However, it can also be a very challenging period, with ballooning student loan payments, higher housing, and food expenses. Many resort to credit cards or move back with their parents to make ends meet. Unfortunately, our education system has done a poor job teaching students personal finances. Some argue that it is the parents’ job to educate in this realm, however, some parents themselves lack proper education which leads to another generation unsure about their finances. My goal today is to help you build a strong financial foundation and create sound money habits that you can carry for the rest of your life to help you reach your financial and personal goals. Here are the 6 moves that you should make in your 20’s and 30’s.
- Create a Budget.
Being a Certified Public Accountant, I may be biased regarding this opinion of mine, but I believe the most important move you can make for your finances is to create a budget and be honest with yourself regarding your spending habits. It has never been an easier time to create and maintain a budget. Now a days, there are many apps such as Simplifi and YNAB that help you accomplish this, and many banks and credit card companies also provide you with a breakdown of your spending habits. If you’d like to learn more about budgeting, you can watch our webinar on budgeting here and also download a budget template here.
- Establish an Emergency Fund
In the financial planning world, the general rule is that an individual should save and put aside 3-6 months’ worth of living expenses. This fund will be accessible to you in the event of an emergency such as loss of job, sudden medical expenses, home repairs and other urgent financial needs. This will act as a cushion to protect your finances, so you don’t rely on loans and credit cards and hurt your long-term financial goals. We also recommend matching the time horizon for when you may need the money with the chosen savings product. For example, we recommend keeping some of your emergency reserve in a FDIC-insured savings account at your bank, an online bank, or credit union that offer daily liquidity. If you have excess reserves that you won’t need for at least 12 months, you can look at Certificates of Deposit, Treasury Bills, and Series I Savings Bonds. Policy tightening from the Fed has pushed yields on cash-like instruments to their most attractive levels in over a decade.
- Pay off Credit Cards.
The U.S. economy runs on consumption, Americans love to shop! I think there is nothing wrong with spending money on things and experiences that make one happy and enjoy life. However, we should spend within our means and avoid relying on credit cards. If you struggle to pay off your credit card in full every month you should watch this video on debt management. You should also rely on your budget to identify how to lower your monthly expenses and use the funds instead to pay off your credit cards. Credit card companies currently charge up to 30% in annual interest and having a habit of carrying balances every month can cost you tens of thousands of dollars in interest expenses in your lifetime.
- Build your Credit Score
As you start earning more income, you will also have access to more credit. Your credit score will play an important role in your ability to borrow money. A good credit score will help you get loans at lower cost and more favorable interest rates. Here are some simple steps to improve your credit score: pay bills on time, keep credit card balances low, and keep your old credit cards open. To learn more about credit scores, click here.
- Invest Early and Appreciate the Eighth Wonder of the World
Albert Einstein said, “Compound interest is the eighth wonder of the world” and Warren Buffett has said that compound interest is an investor’s best friend. These wise men understood that by investing early in life and allowing your money to accumulate interest and compound over a longer period it will help you have a much larger nest egg down the line. For example, if you start saving $200 per month at 20, it will be $390k by the time you turn 65 if it only earns 5% per year, however, you would have to save $350 per month if you decide to instead start saving at 30. Therefore, save early and take advantage of employer sponsored retirement plans and talk to an advisor to see if you qualify to contribute to IRA and Roth IRA accounts. Building a habit of saving even a small amount early on will yield substantial returns over time.
- Write Down Your Goals
There are number of studies conducted by researchers in universities such as Harvard and Dominican University of California that demonstrated the benefits of setting goals and writing them down. For example, the Harvard Business Study found out that the respondents in a study who wrote down their goals were three times more likely to succeed than the group that had their plan in mind. The study at Dominican University of California recommends not only to write your goals down but also share them with a friend. Their experiment has shown that sharing your goals with others gives you the best chance of success. Personally, I am a huge fan of writing goals down. I have found that by writing short- and long-term goals, not only provides you clarity of what it is that you’d like to achieve but it helps you stay committed and accountable. Also, as you accomplish smaller goals, it keeps you motivated to aim higher!
To reach your financial goals in your 20s and 30s, you should write them down and review them frequently. You should also be specific regarding your goals. For example, if you are aiming to save for a downpayment for a house, you should specify how much you are aiming to save as it will help you budget accordingly and reach that goal. Keep in mind that goals do not need to all be financial. In today’s environment to excel financially, you need to expand your network and set of skills as well. So, plan to attend more networking events and keep up to date regarding skills in your industry.
Sources:
- https://www.forbes.com/sites/annabelacton/2017/11/03/how-to-set-goals-and-why-you-should-do-it/?sh=16e49b53162d
- https://www.inc.com/marla-tabaka/this-study-found-1-simple-step-to-practically-guarantee-youll-achieve-your-goals-for-real.html
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