You've landed the dream job out of college, moved into a luxury apartment in the city, and weekends with friends sipping mimosa are more frequent than you care to count. You are young and finally having fun. Time is on your side when it comes to your personal finances...so you think!
Here's the real deal when it comes to getting a handle on your finances. It's always best to tackle them head on sooner rather than later, even when you are just starting out and don't have much money yet. It's probably best to thoroughly review your money situation and other future expenses (that student loan that's still in deferment) before you sign the lease on that luxury apartment in the city. The earlier you start, the less catching up you’ll need to do in future decades.
People of all ages make money mistakes and sometimes never get it right. Don't be too hard on yourself if you haven't started maximizing every savings opportunity.
Here are 5 financial moves you can make in your 20s that will relieve you of regret and heartache when you reach your 40s.
1. Pay Credit Card Bills In Full and On Time
If you can create the habit of paying what you owe each month, you will be leaps ahead of most consumers who have a difficult time handling credit card debt. Using credit can create leverage for you later when you are financially in a position to purchase larger ticket items and even property. The problem usually lies with how the credit is handled. Payment history makes up the majority of your credit score so it is important that you pay your bills (installment loans and credit cards) on time. Charging what you can afford and paying the balance off each month will help you build credit.
2. Create An Emergency Fund
Murphy's Law is inevitable. If something can go wrong, it will and usually at the worst time, so be prepared. Protect yourself by building up a cash cushion. Ideally, you want to have an emergency fund to cover 3-6 months of living expenses. That's nearly impossible when you are starting out so start by setting aside enough money to cover a month of living expenses (rent, utilities, car, phone, etc.) in an interest-bearing savings account that's separate from your checking account. You can gradually build up your cash cushion after it's initially funded.
One of the best sources to compare the various savings rates is on Bankrate. Make sure you set up automatic contributions from your checking account to your savings account. Don't trust yourself to do it. Something will come up and the money will never make it to your savings account.
3. Start Paying Your Student Loans
Go ahead and face what you've been avoiding since you started college, your student loans. You are now an adult with a career. Your parents are no longer paying your bills or your student loans. If you have more than one loan, which most students do, list them out, lining them up based on the size of the balance with the interest rates. If you can get the loans consolidated to a lower interest rate, that would be ideal. There are companies like Sofi and Credible that offer student loan refinancing. If consolidation is not an option, contact the loan company and see if the payments can be set based on your income. Once a monthly payment amount is established, start the snowball effect and make extra payments on the smaller loan first. Once the smaller loan is paid off, use that money to pay down the next loan. Paying off each loan will make you feel like progress has been made on your student loan debt.
4. Start Contributing to Your Retirement
When you are young, time is your friend when it comes to the power of compounding interest and returns.
Take advantage of employer-sponsored retirement accounts, especially if they come with an employer match. Your company 401(k) or 403(b) allows you to contribute pre-tax dollars, which is an additional benefit that will save you on your tax bill. Contribute enough to get the full employer match, with the eventual goal of contributing the max (which for 2018 is $18,500).
Another savings option for retirement while you are young and haven't quite peaked in income is the ROTH IRA. The contributions you make to the ROTH are after tax and can be withdrawn tax-free in retirement. The maximum contribution for 2018 is still $5,500 per year if you meet the income qualifications.
5. Stop Keeping Up With The Jones
Your twenties are your learning years, so I want you to take some wise advice from someone who has "been there and done that". Don't waste your money trying to keep up with your friends and their lifestyle. Think long and hard about your buying decisions and try not to find yourself in buying competition with your friends.
It is exciting to purchase a car, but just because your friend bought a new luxury automobile that cost more than a year's salary, doesn't mean you need to do the same. Even when it comes to spending money on housing, think long-term on where you plan on staying in the next five years. If you think you may want a change of scenery by moving to a new state, then waiting to purchase your first home may be wise. I am a firm believer in building equity in a home rather than paying rent, but you may find yourself on the losing end financially if you purchase a house and one year later decide to move across the country because you want to live near the beach where its warm.
Enjoy Your 20s!
This will likely be the most fun decade of your life, filled with stories of travel with friends and plenty of mimosas! It's your time to stand out in the crowd amongst your friends and make some serious money moves towards growing your net worth. Take baby steps and set aside money each month. Give your savings a raise when you get a raise. These steps will make a huge difference in your financial future!
About Terrell Dinkins, MBA, ChFC®
Terrell Dinkins, MBA, ChFC® is an investment adviser representative of and offers investment advisory services through OBN Wealth Advisors, LLC, a registered investment adviser offering advisory services in the State of Georgia and other jurisdictions where registered or exempted. Main Office: 950 Eagles Landing Pkwy, Suite 216, Stockbridge, GA 30281. Tel: 404-723-9780. Website: OBN Wealth Advisors