The Twenty-Something’s Guide to Healthy Financial Habits
Navigating the complexities of adulthood can feel like a daunting task, especially when it comes to managing your finances. Yet, the habits you form in your 20s can significantly impact your financial future.
Whether you're just starting your career, continuing your education, or exploring the world, cultivating a strong foundation in financial literacy is essential. This guide provides practical advice and strategies for young adults on the path to financial independence and stability.
The Importance of Financial Literacy for Young Adults
Financial literacy is more than understanding how to write a check or use a credit card; it's about making informed and effective decisions with your financial resources. For many young adults, the 20s are a time of significant change and opportunity. It's also the ideal time to build solid financial habits that will serve you well throughout your life.
Setting Financial Goals in Your 20s
Your goals might include traveling, furthering your education, starting a business, or simply achieving financial stability. Goals give your financial plan direction and purpose, helping you focus on what truly matters and save or spend money in ways that most successfully match your lifestyle. Start by setting both short-term and long-term goals and break these down into achievable steps.
Identify Needs vs. Wants
Differentiate between essential needs (such as food or housing rent) and fleeting wants (like the latest tech gadget). Prioritize your needs and avoid impulse purchases that can derail your financial plans.
For those things that you really want, but perhaps don’t need, add those items to your wish list and work the cost into your monthly budget. It may mean trading one cost for another, however, so you’ll have to decide which items from your wish list get to wait a little longer when you add something new.
The Comparison Trap
Social media can create unrealistic spending pressures. Focus on your own financial goals and avoid falling victim to the comparison trap. Don't feel obligated to keep up with friends' spending habits.
You’ll also want to avoid oversharing about your finances. Your financial data, even simply the amount of money you have in your savings account, is confidential and should not be shared anywhere public. Personally identifiable information is a security risk, not a status symbol.
Tomorrow is Coming, Ready or Not
The money you have in the bank today can either grow or disappear by tomorrow; it all depends on the choices you make in the meantime. When you decide to spend money today, that’s money that won’t be there tomorrow.
However, the reverse holds true, too: if you decide to save money today, that money will still be there the next time you need it. If you save appropriately, that saved money will grow over time. That choice is up to you to make, which can make your 20s an interesting evaluation of what really matters to you.
Creating and Sticking to a Budget
In your late teens and early twenties, it’s time to delve deeper into the concept of budgeting. A budget is your roadmap to financial success. It enables you to control your spending, save money, and work toward your financial goals.
It all starts with understanding your financial landscape. Begin by tracking your income and expenses. Explore free budgeting tools and apps to help keep accurate tabs on how much money you earn (your income) and compare it to how much money you spend (your expenses.) Then, prioritize your spending, focusing on needs over wants.
Remember, a budget isn't just about restricting yourself; it's about making sure you have enough planned for your needs and setting realistic savings goals. A flexible budget is a sustainable budget—one that can adapt to life's changes.
The Role of Emergency Funds and Insurance
Life throws curveballs. Part of good budgeting is preparing for unexpected expenses by establishing an emergency fund. An emergency fund is your financial safety net, designed to cover unexpected expenses without resorting to credit. Aim to save three to six months' worth of living expenses to cover car repairs, medical bills, or other emergencies.
Additionally, ensure you have adequate insurance coverage to protect yourself from unforeseen events. This could include different types of insurance, from health insurance to disability insurance. Keep your auto insurance current and your home or rental insurance up to date to help safeguard against economic disasters hitting at the same time as other emergencies.
Building a Strong Financial Foundation for the Future
Your financial habits in your 20s lay the groundwork for your future. By managing your money wisely, investing early, and setting achievable goals, you're not just planning for your financial future—you're taking active steps to secure it.
Smart Shopping Strategies
Become a savvy shopper! Explore comparison shopping techniques, identify and avoid impulse purchases, and utilize coupons or discounts to stretch your money further. You might also consider buying store brand options when available. Often the quality is just as high as the name brand, for a fraction of the cost.
Delayed Gratification
Sometimes waiting to buy something allows you to save more and potentially get a better deal. You might also discover that what you thought was a really important or desirable purchase is maybe not as necessary as you first believed.
Take time to consider your purchases, especially major ones, and save up money for them in the meantime. While you could put these purchases on your credit card and pay it off over time, that’s a slippery slope into high interest debt—your future self will thank you for avoiding it!
Banking on a Budget
If you haven’t already, consider opening a checking account and using your debit card for everyday expenses. Debit offers the convenience of a credit card without the burden of extra interest on your purchase. The money comes directly from your account and the payment is complete, no further installments on a monthly bill.
With our Mobile Banking app, you can keep track of your spending and watch your balances anywhere you go. You’ll also be able to set up automatic transfers into your savings account to help you start saving for your next goal. We offer a variety of tools that make tracking your finances easy and convenient.
Cooking at Home vs. Eating Out
Eating out frequently can quickly drain your budget. Learning basic cooking skills can save money on meals and add variety and color to your daily diet. There are lots of tutorials available online to help you get started. By cooking at home, you can eat for pennies on the dollar compared to most restaurants.
Beware of Hidden Costs
In a perfect world, everything would come with its price clearly marked, and you’d never be caught off guard by a surprise fee. Unfortunately, that’s not how the world works.
Read the fine print when it comes to anything that might have a potential cost down the road. Whether it’s the overdraft fees for your checking account, the late charges on your credit card, or the subscription fees for that free trial you signed up for then forgot about, there will likely be an advantage included for the lender that might sneak up on you. These hidden fees can add up quickly and throw even the best planned budget out of balance.
Financial Planning for Renters
For young adults just starting out, the largest—and often the most shocking—monthly drain on finances will likely be housing. Be realistic when it comes to your search for an apartment or a house. A popular rule is that housing should cost no more than 30% of your monthly income.
When you’re just starting out in your career, that number may not allow you to rent a penthouse downtown but remember that your first apartment isn’t necessarily your forever home. As your career progresses and your income increases, you can allocate more of your monthly income towards this expense.
You can also find ways to cut down on housing costs, like finding a roommate or two. Just be sure you’re upfront about the expenses and how you plan to split them. And don’t forget to budget in the cost of utilities, internet, and any other expenses you might run into, including things like lawn care and snow removal.
Saving Strategies for Short and Long-Term Goals
Whether saving for an emergency fund, a vacation, or retirement, the key is to start early and save often. Consider opening a high-yield savings account or investing in a diversified portfolio. Automate your savings to make the process effortless.
Short-Term vs. Long-Term Goals
Saving isn't just about emergencies. Set goals for both the short term (saving for those concert tickets) and the long term (even though retirement is still a few decades away). Break down larger goals into smaller, achievable targets to stay motivated.
Planning for Retirement
While it might seem far off, starting a retirement fund early allows you to leverage compound interest. Explore options like a 401(k) offered by your employer or consider opening an IRA.
Even as little as $10 a week can have an impact on your future financial health. Compound interest works best with a long timeline, and starting when you’re young can put you ahead of the curve when it comes time to retire.
Investing for the Future
Investing may seem intimidating, but it's an essential part of building wealth. Start with low-risk investments, such as mutual funds or a Roth IRA. Educate yourself on the basics of the stock market and consider speaking with a financial advisor to help tailor an investing strategy that meets your goals.
Understanding Credit and How to Use it Wisely
Credit can be a powerful tool when used responsibly. It can help you build a credit history, necessary for major purchases like a home or car. However, misusing credit can lead to debt that's difficult to manage.
There are a few must-know rules for credit management. Pay your bills on time, keep your credit utilization low, and understand the terms and conditions of any credit agreement before you sign. Let’s take a closer look at how to manage your credit.
Building Good Credit
Your credit score plays a significant role in your financial future. Responsible borrowing and repayment habits contribute to a positive credit score, which can unlock better interest rates and loan opportunities when you need them, saving you money in the long run.
Pay Bills on Time
Building a good credit score starts with consistent on-time bill payments. This applies to everything from your phone bill to student loan payments. Timely payments not only avoid late fees but also demonstrate your creditworthiness (thus raising your credit score).
Credit Card Management
Ideally, pay your credit card bill in full each month to avoid accumulating interest charges. Charges carried over month to month get big quickly, ballooning a simple purchase like a coffee shop breakfast into months of finance charges.
Debt Dangers
Debt can be a significant barrier to achieving your financial objectives. It can start innocently enough, charging “just one little purchase” to a credit card. But interest rates change daily, and debt can quickly snowball out of control.
If this happens to you, don’t panic. Focus on paying off high-interest debt first and take advantage of any debt repayment assistance programs available for your situation. Be cautious with new credit and consider consolidating your debts if it makes financial sense.
Empowering Young Adults to Take Control of Their Financial Future
Cultivating healthy financial habits is crucial for anyone, but it's especially important for young adults just starting out. Understanding budgeting, credit usage, saving, and investing lays the foundation for a solid financial future.
By adopting smart financial habits now, young adults can set the stage for a lifetime of financial well-being. Good financial health begins with informed decisions and disciplined habits. The best time to start is today.