In your twenties, you are shaping habits that will follow you throughout your life. This stage of life is when you may be establishing your career, getting married, or even preparing to start a family, making it crucial to set goals for yourself and begin saving. In brief, if you adopt good financial habits in your twenties, you will be in a better financial position in the future.
Building an Emergency Fund
One of the most important financial tasks you can accomplish in your twenties is to open an emergency fund, which is an amount of money you set aside for unexpected expenses.
When unexpected life events occur, the fund acts as insurance for your finances. For example, if you face a medical emergency, sudden job loss, or a breakdown of a household appliance, you can cover these costs using the money in the emergency fund. This way, you won’t have to dip into your savings or borrow.
The amount you save in your twenties will be determined by your job stability, income, any debts you may have, and whether you live alone or with a two-person household. Your ultimate goal should be to save an emergency fund that is equivalent to three to six months of living expenses. But when you first start budgeting, set a modest savings goal to allocate at least 2% of each paycheck for six months. Then, to build the emergency fund over time, increase this amount each year.
Remember, the emergency fund should be easily accessible, so keep it in a liquid, low-risk investment, such as a savings account.
Making a Down Payment a Savings Goal
Another financial goal to work towards is saving for a down payment on your first home. The down payment is a portion of the purchase price that you pay upfront when closing the deal.
The down payment is not a trivial amount – it usually equals at least 20% of the purchase price. But the higher the down payment, the lower your mortgage payments will be, bringing you one step closer to achieving your dream of homeownership. A reasonable down payment can also help you avoid needing private mortgage insurance (PMI), which you typically pay as a monthly premium added to your mortgage payment.
Note: For these reasons, it’s beneficial to start saving for a down payment even if you don’t plan to buy your first home until your thirties or later. Depending on your job stability and whether you plan to stay in the city where you currently work, your twenties may not be the right time to buy a home. No matter how far off home buying may seem, if you start saving early, you will be in a better position to buy a home when you are ready.
Contributing to Your Retirement
The key to having enough money for retirement is to start putting money into a retirement account early in life and continue to do so regularly until you retire. In fact, you should start saving for retirement as soon as you get your first job. In this case, compound interest is your friend – the more money you save in a savings or investment account when you are young, the more that money will grow, and the more you will have to enjoy in retirement.
You might start by contributing enough to match your employer’s contribution until you pay off your debts. Then, aim to contribute 15% of your income annually to a retirement account like a 401(k), traditional IRA, or Roth IRA.
Note:
The annual limit for your personal contributions to a 401(k) is $20,500 in 2022.
To stay on track with your retirement goals, consult retirement savings benchmarks. For example, a common retirement savings benchmark based on your age and income states that you should have the equivalent of one year’s salary saved in your retirement account by age 30.
Getting Out of Debt
While you may not be able to pay off your student loan balance in full by age 30, you should take the necessary steps to work toward that goal. You should also focus on paying down any credit card debt you have.
When you manage your debt well and pay it down, it can open the doors to other steps in your life, such as owning a home or buying a new car. Take the time now to set up a debt repayment plan so you can eliminate your debt, or consider using debt reduction software to help you become debt-free sooner.
Note: If you have significant student loan payments, look into the various repayment plans available that can help you save money on your monthly payment or even contribute to forgiving part or all of your student loans.
Starting to Invest
If you want to build wealth outside of your retirement accounts, consider investing some money that you might have put in a low-interest savings account or money market account. As with retirement saving, compound interest can help grow your invested money faster, and the earlier you start investing, the better positioned you will be.
You can choose to invest with the help of a financial advisor, who can recommend investment types and help you build an investment portfolio. If you understand the basics of the stock market, you can open a tradable brokerage account with a reputable online brokerage firm and invest in stocks, bonds, mutual funds, or other securities.
The key to successful investing is portfolio diversification. You can achieve this by holding a mix of assets (stocks, bonds, and cash, for example) and spreading your money among various investments across different industries. While you should only invest money you are willing to lose, asset allocation and diversification can collectively reduce risks and limit potential losses.
Before implementing these strategies, it is important to assess the risks associated with each type of investment. For example, stocks are generally the riskiest in the short term, so you may also want to shift to more conservative investments like bonds or cash as you age.
Focusing on Your Career
Your twenties are a great time to establish a strong career. As you decide on the career path you will follow, take the time to create a professional network and consider all the options available to you. And don’t be afraid to pivot as well. Just because you majored in business, for example, doesn’t mean you can’t pursue a career in communications.
Note: When applying for jobs in your field, look beyond the salary offer on the table. Consider the company’s opportunities for retirement investment, healthcare benefits, and the overall culture as well.
Establishing a Saving Habit
Another important goal to embrace in your twenties is to spend less money on a daily basis. You don’t necessarily have to deprive yourself to do this. You could set up a budget, start shopping at grocery and clothing stores that cost less, take advantage of coupons, and wait for items to go on sale (or even gas at your local pump), for example.
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Also, look for ways to reduce your biggest recurring expenses so that you have more money in your pocket to direct toward your savings and investment goals. For example, once you create a budget, you can cut back or eliminate spending on things that negatively impact the budget, such as dining out or that seldom-used gym membership if you start cooking at home more or exercising outdoors.
Embracing frugality will allow you to spend more on the things you consider most important to you now and will establish responsible financial habits that will serve you well after your twenties.
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