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Your 20s and 30s can set the financial foundation for decades to come. The habits you build now, from budgeting and saving to investing and managing debt, can have an outsized impact on your future. A few smart moves early on can make it easier to handle emergencies, reach major goals and build long-term wealth. Here are some things you should know and start focusing on while you’re still young.
For more help planning your finances, no matter your age, consider working with a financial advisor.
1. Become Financially Literate
Financial literacy means understanding how to make profitable decisions with your money. Getting a handle on the basics by gaining financial literacy provides a solid foundation for your financial habits and goals.
For example, if you want to get out of debt, it’s essential to understand the fundamentals of doing so. Specifically, you would need a working knowledge of interest rates and budgeting, and understand how to compare the growth of your debts versus your investments. This way, you would know how much your debt costs per month, how much extra money you can put towards tackling your debt and whether diverting money from your investment contributions is worth it.
2. Don’t Pay With Credit
It’s essential for young adults to avoid relying on credit for purchases because it can foster financial habits that are difficult to break and may lead to long-term debt. Paying with credit makes it easier to overspend, as you don’t feel the immediate impact of the expense. If you’re not yet accustomed to managing personal finances, this can make it more difficult to stay on budget.
Additionally, paying with credit often comes with high-interest rates if the balance isn’t paid off in full each month. This means that a purchase could end up costing significantly more than its original price, as you’ll see with a credit card calculator.
For young adults who might still be building their careers and managing limited income, these additional costs can create unnecessary financial burdens. Once debt begins to accumulate, it can quickly spiral, leading to missed payments, late fees and a damaged credit score. A poor credit score can then affect future financial opportunities, like qualifying for loans, renting an apartment or getting better interest rates.
3. Start Saving and Investing
You might wonder what the point of rushing to save money is; after all, you’ve got 30 or 40 years to go until retirement. However, that’s exactly why it’s best to start contributing to an investment account now: You’ll compound your returns over several decades and grow your savings exponentially.
For instance, say you start investing $150 per paycheck at age 25. Your investments have an average annualized return of 8%. After 40 years, you’ll have about $1.1 million in your account. On the other hand, if you start at 35 and invest for 30 years, you’d end up with about $490,000 in your account. In short, it pays (literally!) to invest now instead of later. You can estimate the returns of your investments with an investment calculator.
If investing seems intimidating, you can start simply. If your employer offers a 401(k), contributing to it is an excellent choice, especially if you can get matching contributions from your employer. Don’t have access to a 401(k)? An individual retirement account (IRA) is also a good way to begin.
4. Learn How to Budget
Knowing where your money goes throughout the month is one of the most helpful tools to strengthen your finances.. Something as simple as reviewing your expenses, an essential step in making a budget, can reveal an unused streaming subscription, weekly restaurant trips and an old gym membership. Addressing these expenses can net you a quick $100 a month in your budget, allowing for more savings and investment.
Dozens of budgeting apps and tools make this financial habit easier than ever. You can start with your mobile banking app, which likely offers a free budgeting tool. Another option is online budget calculators.
5. Keep Track of Your Spending Habits
Tracking your spending can help you understand where your money actually goes each month. Small purchases, subscriptions, dining out and convenience expenses can add up quickly, and reviewing them regularly can reveal patterns that may be limiting your ability to save.
You can track expenses through a budgeting app, spreadsheet or bank and credit card statements. The goal is not necessarily to eliminate every discretionary purchase, but to identify which expenses provide value and which could be reduced without affecting your quality of life.
Once you understand your spending habits, you can set more realistic limits for categories such as housing, transportation, food and entertainment. Comparing your actual spending with those targets each month can make it easier to adjust before overspending becomes a recurring problem.
Keeping track of expenses can also help as your income increases. Rather than allowing higher earnings to automatically lead to higher spending, you can direct some of that additional money toward emergency savings, retirement contributions, debt repayment or other long-term goals.
6. Start an Emergency Fund
Surprise expenses can derail even the best-laid spending plan. Your budget might be chugging along for several months when all of a sudden you need a $700 car repair. As a result, your investment contributions are out the window. It can be hard to get back on track once the emergency is over, too.
To combat this situation, start an emergency fund alongside your investment fund. You can build it up over time in your savings account, ideally one with a high yield. A good rule of thumb is to have three to six months’ worth of expenses stashed in an emergency fund. This way, a broken furnace or surprise medical bill will be a minor bump in the road instead of a crisis.
7. Protect Your Wealth
While a conventional picture of success includes a paid-off home, a well-funded retirement and a high salary, this scenario lacks a critical element: protection. Generally, guarding your assets means purchasing insurance or sheltering your wealth from taxes (more on that later).
For example, an uninsured home could be a major liability instead of an asset if it suffers fire damage. A homeowners insurance policy can cover these disasters and help preserve your wealth.
8. Focus on Your Health
Healthcare is one of the fastest-growing expenses in the United States. As a result, keeping this cost low will boost your financial wellness. The best way to reduce healthcare expenses? Maintain good health.
A consistent diet, regular exercise and annual checkups can go a long way. Implementing these practices will not only enhance your quality of life and reduce the likelihood of spending time in the hospital but boost your financial health as well by minimizing the risk of sky-high medical bills.
9. Understand Your Taxes
You’ll be paying Uncle Sam for your entire career and retirement, so it’s best to get well-acquainted to minimize your tax burden. Your salary and other earnings sources place you in a tax bracket, which tells you the rate you’ll pay on your income.
In addition, your retirement accounts have unique tax implications. For example, a traditional 401(k) uses pre-tax dollars, lowering your tax burden while you work. However, you’ll pay income taxes when you withdraw money from your account during retirement. On the other hand, a Roth IRA uses money the government has already taxed, but as a result, you’ll pay no taxes on withdrawals when you’re retired.
10. Partner With a Financial Planner
Taking control of your finances is a serious endeavor. Luckily, financial professionals can help you develop a financial plan that’s tailored to your unique circumstances. In addition, their knowledge and expertise can fill the gaps in your understanding.
It’s best to understand how your financial planner makes a living before committing to working with one. SSome advisors charge per hour, while others have fees based on a percentage of the assets they manage. It’s important to find an advisor whose fees make sense with your situation. In addition, working with a fiduciary ensures the advisor puts your interests first.
11. Review and Monitor Your Credit
Building and maintaining strong credit is an important part of your financial foundation. Your credit score can affect your ability to rent an apartment, qualify for loans and secure favorable interest rates.
To keep tabs on your credit, start by checking your credit reports from the three major credit bureaus (Equifax, Experian and TransUnion), which you can do for free once a year at AnnualCreditReport.com.Look for any errors, unpaid accounts or signs of identity theft. If you spot something wrong, you can dispute it to have it corrected.
Going forward, aim to pay your bills on time, keep credit card balances low relative to your overall limit and avoid opening too many accounts at once. Responsible credit habits developed early can lead to better borrowing terms and improved financial flexibility in the future.
12. Get the Full Employer Match
If your employer offers a 401(k) or similar retirement plan with matching contributions, contributing enough to receive the full match can be one of the most effective ways to boost your retirement savings. An employer match is essentially additional compensation that goes directly into your retirement account, so failing to contribute enough can mean leaving part of your benefits package unused.
For example, an employer might match 50% of your contributions up to 6% of your salary. If you earn $60,000 and contribute 6%, or $3,600, the employer would add another $1,800. Over time, both your contributions and the employer match can compound, potentially adding significantly to your retirement balance.
Young workers may be especially well positioned to benefit because matched contributions can remain invested for decades. Even if you cannot afford to contribute a large percentage of your income, aiming for at least the amount needed to receive the full match can provide a strong starting point.
It is also important to understand your plan’s vesting schedule. Some employer contributions become fully yours immediately, while others may require you to remain with the company for a certain number of years. Reviewing the plan rules can help you understand how much of the employer match you would keep if you leave your job.
Bottom Line
Creating a financial plan requires effort, but it’s well worth it. Your financial habits will drive your lifestyle now and during retirement, so it’s best to get your finances under control sooner than later. A healthy budget, tax plan and retirement account will make all the difference when you’re starting off. And, fortunately, you don’t have to go it alone: You can hire a financial professional to help you establish your goals and put you on the right path.
Tips on Financial Planning for Young Adults
- Financial wellness can seem like juggling. After all, you need to prioritize a budget, retirement plan, debt management, insurance and more. Fortunately, a financial advisor can help you nail down each aspect of your circumstances and create a financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Investing strategies change as you age. Generally, it’s best to be aggressive while you’re young and more risk-averse as you age. For more, here’s how to manage your portfolio’s allocation at any age.
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