You may not think of your 20s as a prime opportunity to get a handle on your finances. After all, your 20s are when you’re most likely to earn the least yet owe the largest amount of student debt. But if you get into certain smart financial habits when you’re younger, you’ll have a real opportunity to benefit when you’re older. Here are four practices you should aim to uphold during your first decade of full-fledged adulthood.
1. Following a budget
A budget is one of the most effective means of tracking your spending and identifying savings opportunities. If you don’t have a budget already, fear not — creating one is easy. Just list your recurring monthly expenses, factor in one-time bills that pop up during the year, and compare that total to the amount of money you bring home from work on a post-tax basis. If you find that you’re maxing out your entire paycheck, you’ll need to make some lifestyle changes — but having that budget in place will show you where you have opportunities to cut back.
But don’t just set your budget and forget it. As your expenses change, so too should your budget. This means that if your rent increases or your cable plan goes up, you may need to tweak other spending categories to allow for those upticks. You should aim to review your budget at least twice a year to ensure that you’re not only sticking to it, but that it also accurately represents your expenses.
2. Saving at least 15% of your income
It’s important to give yourself leeway in your budget so that there’s room left over to save money. And make no mistake about it — you’ll need those savings at some point in life, whether it’s when an unplanned bill falls in your lap or you’re retired and require money to live on. As a general rule, you should aim to save at least 15% of each paycheck, though the more you can sock away, the better.
Your first goal in saving should be to establish an emergency fund with three to six months’ worth of living costs. This way, you’re covered if an unexpected expense arises or you lose your job and need a way to cover your bills while you look for new work. Once your emergency fund is complete, your next move should be to steadily fund a retirement plan, whether it’s an IRA or a 401(k) through work. The more money you’re able to pump into your nest egg, the more you’ll have available when you’re older. And if you get into the habit of saving in your 20s, you’ll be more apt to do it throughout your career.
3. Avoiding bad debt
Certain types of debt, like mortgages and student loans, are often unavoidable — and aren’t necessarily a bad idea provided they’re taken out in moderation. But there’s a difference between the aforementioned types of debt and credit card debt, and it’s the latter you really want to avoid.
Not only can credit card debt harm your credit score, but it can also stop you from reaching other key financial goals in life. So while it’s OK to make purchases with a credit card, your personal policy should be to never charge more in a given month than what you can afford to pay off by the time your bill comes due. Staying out of credit card debt will ensure that you don’t throw away money on interest — money you can surely find plenty of good use for.
4. Being properly insured
It’s easy to let life insurance fall by the wayside when you’re young and seemingly invincible. But if you have people in your life who depend on you financially, you need life insurance to protect them. Similarly, while it’s natural to want to save money on health insurance, buying the cheapest plan out there might cost you in other ways. It’s often the case that low-cost plans impose high deductibles and offer poor coverage — coverage you might end up needing to pay for out of pocket. So rather than opt for the lowest premium possible, research your plan options and choose the one that’s most likely to serve your needs.
Remember, as you get older, you may come to find that there are other types of insurance you need, like long-term care coverage. So if you get into the habit of making insurance a priority early on, you’ll be better equipped to handle the expenses associated with it later.
The money-related habits you develop in your 20s can set the stage for a lifetime of financial success. And that’s reason enough to do the responsible thing.