A person in their 20’s is a time of great opportunity—starting a career, advancing your education, living in a place of your own, perhaps meeting a life partner. This is a critical time for a young person to create good financial and investment habits upon which to build a strong foundation for the rest of their lives.
With that being said, here are 11 habits for someone in their 20’s, a grandchild or other loved one that can help set them on a course for financial success now and in the future:
1. Create a budget to ensure that you’re spending less than you make.
Go over your monthly spending to find savings. Ask your wireless and cable providers to “audit” your bills. Contact insurers about discounts and raising your deductibles. Cancel subscription services you’re not really using. Often, just tracking your spending can save hundreds of dollars.
2. Plan to eliminate high-rate debts (and chip away at lower-rate, long-term ones).
The fastest, cheapest way out of debt is to put all your extra cash toward paying off those with the highest interest rates, while making minimum payments on the rest. Refinancing your mortgage, student loans, and car loans—and transferring credit card balances to lower-rate cards—can speed the process.
3. Build your credit.
Your credit score reflects your financial health. Creditworthiness has a big impact on how much you’ll pay for big expenses down the road: Interest rates on home and car loans and insurance premiums are often based, in part, on your credit history. Potential employers may also check your credit history for a read on your financial stability. Review your credit score and credit reports on a regular basis. We recommend adding at least one credit-monitoring app to your phone—Credit Karma, Mint and Credit Sesame each monitor your credit score and provide tips on improving it.
4. Earn a decent living.
Research has shown that earning more than you need to live comfortably (e.g., paying for rent/mortgage, transportation, groceries, and the occasional vacation) actually doesn’t increase your happiness. But earning less than you need to live comfortably will make you stressed and even unhappy.
5. Start an emergency fund.
Nothing derails your finances quicker than an emergency. Two-income households should aim to put away three to six months of living expenses; one-income households need to double that. Consider putting this money into a savings or money market account, where you can access it, without penalty, if and when you need it.
6. Start—or continue to—invest for retirement.
While you’re starting your emergency fund, you’ll also want to take advantage of any matching dollars your employer is offering you for contributing to a workplace retirement plan. Matching dollars are “free” money and you don’t want to leave them on the table.
Your employer may provide a match on your 401(k) contributions or other benefits. Take advantage of savings wherever you can get them, including health savings accounts, life and disability insurance, and other perks like discounts on gym memberships or continuing education. Check with your company’s human resources department to make sure you are fully aware of all benefits available to you.
7. Invest Early and Often
When you start earning a paycheck, put away at least 10% of your pre-tax income toward retirement. This sounds like a lot, but keep in mind that this 10% also includes any matching funds you receive from your employer through, say, a 401(k) plan. Tap into the power of compounding by investing early and often and allowing the market to work for you. Check out or educational videos for this topic and many others https://www.commonfinancialsense.com/videos/
8. Invest for the Long Haul .
You can justify riskier investments with youth on your side; there’s more time to recover from—and capitalize on—inevitable market downturns. You won’t be touching your retirement accounts for decades, so make stocks or stock funds a major component of your portfolio.
9. Protect what you’ve built for yourself with the right insurance and a basic estate plan.
You need life insurance when others in your life depend on your income for support. No dependents? Long-term disability insurance is an important protection for being able to take care of yourself (purchasing a group plan through your employer is typically best). A basic estate plan consists of a will (where you’ll name guardians for minor children), a living will (which stipulates whether or not you’d want life support), and durable powers of attorney for health and finance (which allow other people to make decisions on your behalf). For more details read this article https://www.commonfinancialsense.com/2019/05/02/the-8-5-steps-toward-ensuring-your-estate-plan-is-in-order/
10. Have a family conversation to prevent surprises.
Ask your parents how their long-term planning is going. Do they have plans to insure a lifetime income? Have they put an estate plan in place (and do they have instructions for how you’ll need to execute it)? What are their wishes should they need long-term health care—and will they need help from you along the way? Simultaneously, share your plans for meeting your own financial goals. They may step in with advice, financial help, or both.
11. Schedule a repeat performance next year.
Just as you go to the doctor every year for a physical, you should sit down annually and go over the items on this list. It’s a good time to think about what you want your money to do for you this year, in five years, and in 10 years. You’ll be surprised at how good tracking your progress will make you feel!
These are great habits not only for someone in their 20’s, but as a friendly reminder for everyone so they can potentially achieve their financial goals.
Thank you for reading and sharing!
Until Next Time…
Related: The 8.5 Steps Toward Ensuring Your Estate Plan is in Order