Thinking about finances in your 20s — when you’re just out of school and perhaps beginning your first full time job, or working as a freelancer, as so many people are these days — can be crazy stressful, to say the least. (Hell, I’m in my early 30s and thinking about finances still sometimes makes me want to breathe in and out of a paper bag). There are a lot of different aspects of your financial life to consider all at once, from paying debt to budgeting to saving, and somehow there never seems to be enough cash to cover it all. It can be especially difficult to feel empowered to make good decisions about your financial future when you’re just doing your best to keep your head above water.
As tempted as you might be to shove your bills in the freezer and forget about them (à al Andy Dwyer), it’s important to develop good financial habits in your 20s. It might be painful at first, but, by doing so, you’ll give yourself a sense of control over your financial life, you’ll maximize the value of the money that you earn, and you’ll make your life a hell of a lot easier as you get older and add more and more financial responsibilities to your plate.
Here’s how you get started:
Create a budget and stick to it.
You won’t be able to stay within your means if you’re not sure what your means are. Take some time to figure out how much you’re bringing in and where that money needs to go. There are a variety of apps available that can help you to both create a budget and keep track of your spending. If you find yourself routinely spending outside your budget, it’s time to reassess both what you’re spending money on (Do you pay $100 a month on cable, and only rarely use it?) and how you’ve budgeted your income (Do you budget a certain amount for utilities and then always exceed that amount? If so, you need to remake your budget to reflect your actual expenses).
Pay your credit card bill — in full, every month.
Credit cards can be very handy — if you pay your bill every month. But if you rack up debts that you can’t afford to pay, you’re setting yourself up for major financial headaches in the future. Not only are you putting yourself in debt, which can be a difficult hole to dig yourself out of, you’re committing yourself to paying a lot of extra money in interest fees. And if you’re not able to keep up with at least your card’s minimum payment, you can end up negatively affecting your credit score, which can come back to haunt you when you try to make major purchases, rent an apartment, or even get a job. Long story short: Pay your bill every month, and, if you can’t resist buying things you can’t afford or going over budget with your credit card, stick to paying for things with cash or debit
Find simple ways to save money.
There are a lot of really simple ways to save money, from giving up cable, to buying in bulk, to cooking at home more often. Take a moment once in a while to assess your spending and think about ways you might easily make things cheaper. If you love going to the movies, stick to buying the regular tickets instead of the 3-D/IMAX/AVX/ Idon’tevenknowanymore tickets. If you love getting cocktails with friends, think about replacing some of your nights out with casual evenings next to your at-home bar cart.
Work on paying down your debts.
If you’re saddled with debt, you’re not alone (not that that’s really any comfort): 71 percent of college grads left school with student debt in 2015, loaded with an eye-watering average debt of $35 thousand (Some students leave with staggering amounts in the hundreds of thousands). Debt can be a huge burden that lasts decades, so do your best to start paying off those loans now. Depending on the amount that you owe, the steps you need to take to pay your loans will vary in severity — in some cases, putting aside an extra $25 a week might make all the difference, while in others, you may want to consider more drastic measures like living with roommates or with family, or ditching your car. If you have credit card debt and student loans, focus on paying off your credit cards first — they have higher interest rates.
Save, save, save!
Putting money in a savings account is a lot less exciting than buying concert tickets, or shopping, or doing, well, basically anything else with it, but the peace of mind you’ll have when you know that you have a financial cushion beneath you can’t be beat. If you’re just beginning to save, start by creating an emergency fund. This fund should be in a separate savings account (so that your don’t accidently spend it on something fun!); aim to fill it with, ideally, six months’ worth of living expenses (but obviously anything more than $0 will be welcome in an emergency). With this money stored away, you’ll be prepared if you suddenly lose your job, have an accident, or experience major property damage.
(And this point is slightly tangential, but, as someone who has experienced major property damage, it’s also a very, very good idea to have renter’s insurance. Renter’s insurance is usually fairly inexpensive, easy to get, and it’s a total lifesaver when, for example, your apartment building is engulfed in flames.)
Once you’ve got a healthy emergency fund, you can start putting savings toward other things, like building a next egg for a future down payment on a house, buying a car, or simply saving for some dream you have, like going to Machu Picchu. Or Dollywood.
Begin saving for retirement.
When you’re 25 and still trying to get a handle on your current expenses, it can be hard to feel all that concerned about your financial life forty years down the road. But now is the time to start putting money aside for retirement, because, although you might not be flush with cash, you do have time on your side — decades and decades, in fact, during which your early savings can grow with compounded interest. When money earns “compounded interest,” that means that you earn both interest on you original investment and on the interest you earn — and that adds up to a lot of cash in the long term.
When you’re thinking about retirement savings, there are two major types you might be hearing about: 401(k)s and IRAs. A 401(k) is a retirement savings account that you can only get through an employer. When you have a 401(k), you designate a specific amount of your paycheck to go into this account, which earns interest through a variety of investment types. The awesome thing about a 401(k) is that many employers will match how much money you put into your account, at least up to a point. The money your employer puts in is thus essentially free money (though some employers require a you to be employed for a certain number of years to get the full match amount). So if you have a 401(k) with an employer match, it’s a good idea to put as much money in your account as necessary to get your employer’s maximum match — after all, you don’t want to leave any free money behind!
Another option is an IRA, or “Individual Retirement Account.” You can get an IRA on your own, without having to rely on an employer, so IRAs are great options for freelancers and contract workers who don’t have the option of having a 401(k). In an IRA, your savings can accrue interest without being subject to taxes; you only pay taxes when you put the money in your account or take it out, depending on what kind of IRA you have.