Life as a teenager is fairly easy. You wake up and go to school, play sports or hang with friends, and your parents help you when things get tough. When life’s gears turn and teenagers age into their twenties, a whole new set of responsibilities are added, including financial responsibilities. Developing solid financial habits early in life will set you up for success later in life, all it takes is knowing what moves to make. For the best tips for reaching financial security in your twenties, continue reading.
Budget = Freedom
Set a budget that accurately reflects your standard income and expenses each month. Start with the obvious expenses: rent, utilities, loans, car payments — all the “must pay” bills you have. Add those up and subtract the difference from your monthly income. To easily track your expenses, input your budget into a spreadsheet that you can edit.
You can also take advantage of mobile apps to easily track your biggest spending categories and set parameters for yourself. You can allocate funds to your vital expenses, then you can see exactly how much money you will have leftover each month. From there you can allocate extra funds to things like entertainment, clothing, or the occasional fun purchase.
You might have your eye on your dream car or a fancy apartment, but unfortunately, that might not be realistic at the beginning of your career. To avoid building up a pile of debt, live within or below your means. So maybe you can’t afford the shiniest new car — but do you really need it? Or could you opt for a more practical purchase and contribute the difference you would have spent to pay your bills?
When we spend our money consciously, we grow more confident in our decisions. When we pay for the things that we need before we spend frivolously, we can walk through life knowing we take care of business. Cultivate this attitude and you will go far; practice it with your financial habits.
Save for a Rainy Day
When all is said and done and all your bills are paid, you should save a portion of the additional money. Calculate what your vital expenses are each month and determine what will be leftover. Even if you are only putting away 2% of your monthly income into your savings, that money will accrue over time, but the recommended savings is between 10-25% of each paycheck. This ensures you will have an abundance of savings when you retire.
Get in the habit of setting the same amount of money aside each month, either for a rainy day fund or a specific big purchase. Once you create the habit of saving, it will become second nature, and you will find your savings rapidly increasing without you having to think twice about it.
Be Proactive With Your Loan Payments
Loans can seem daunting at first, so it pays to put it in perspective. One of the first steps to being proactive with your loan payments is understanding that paying the minimum balance is the slowest way you can possibly pay it off and might cost you more in the end, too. There are tools that you can use, like a loan calculator, to determine the payment schedule you’ll need to maintain to pay off your loan as quickly as possible. Knowing how long it will take to pay off your loan at your current rate will help you determine if you need to increase your monthly payments to pay it off sooner.
Does Your Work Have Benefits?
At the start of your career, retirement seems so far out of reach, but it is important to plan for the future. If your employer offers a solid 401K plan, it’s important to take advantage of it. Most employers will match a percentage of your pre-tax contributions to your 401K, so make sure you don’t miss out on the chance for extra money towards your retirement. An employee match is a 100% return on your money, it’s doubling just by saving it.
Also, make sure you understand the retirement plan you are investing into. Some plans require a certain amount of time before the money is fully vested, which means you are required to stay with your employer until it does. There are also options where you can take a portion of your retirement plan with you ahead of schedule. Look into what your company offers to know for sure.
Reduce Impulsive Spending
Having a budget in mind before embarking on any purchase is a great place to start, but it’s also helpful to do your research. Shop around for the best deal before purchasing higher-value items like cars, furniture, or electronics. Know the going rate and pay attention as sales and discounts pop up then use these in your favor. If you are able to hold off on making a purchase, you may be able to save more money in the long run when the price drops.
Build Sustainable Spending Habits
Give up coffee? Absolutely not. But ditching your usual Starbucks run will save you money over time (and help you stay healthier). Little purchases like buying lunch or coffee daily or always upgrading when the latest and greatest gadget hits the market can burn a hole in your wallet.
The easiest way to overcome this habit is to stop worrying about what others have and what they are doing with their money. Their spending habits do not have to be yours, certainly don’t let them become yours. If you are the type to feel like you’re missing out on a purchase, consider what that purchase will do for you. Maybe there are cheaper, off-brand options available to meet your needs without breaking the bank.
Learn How to Improve Your Credit Score
You need credit for lots of big purchases, but it’s easy to rack up credit card debt that you can’t pay off. Spend time researching different credit card plans and choose one that works best for what you need. Watch the interest rate, as your overall payment will increase the longer you don’t pay it off.
Once you’ve found the right credit card, use it for minimal purchases that you know you can pay back, such as gas or groceries. Make sure to pay at least the bare minimum amount each month (if not more) to avoid building up too much debt.
More Money, Less Problems
Think about ways you can bring in income in your free time. Neighborhoods always need babysitters and dog walkers. If you have skills, you can use them to do additional work on your own time like photography, design, or writing. Having multiple income streams can help secure financial stability and can even give you extra spending money to have fun with.
Be Sure to Have Fun
Alright, before you get to this step, make sure you’ve gotten control of all the others. At the end of the day, your hard work does translate into money, and it’s important to occasionally reward yourself.
One of the easiest ways to have money while saving is to set aside another tiny savings pile for fun purchases. Having money put away into savings can give you the financial freedom to treat yourself a little here and there, so long as you are on top of your primary expenses.