The financial decisions you make in your 20s can have a big impact on your future. While you figure out what you want in life, this decade presents a good opportunity to start building the foundation of a good life in the future. Yes, you’ll make mistakes but the lessons you learn will allow you to make better financial decisions in the years ahead. Here are 5 smart money moves to make in your 20s.
1. Live Below Your Means
For some reason the phrase “living below your means” has a negative connotation. Many people believe once they get a job, they must display a lifestyle of luxury similar to that promoted on social media. They do this regardless of their income. When you’re young it’s easy to fall for the hype. However, the best gift you can give yourself and your future children is to live below your means.
Whenever you get paid, set aside a portion of your income for savings, investments, or an emergency fund. Developing this habit in your 20’s will pay dividends in your 30s and 40s. You’ll attain financial stability and flexibility because you’ve managed to build wealth for yourself during your 20s.
2. Buy An Affordable Car
One of the worst financial mistakes I made in my 20’s was to purchase a car that was too expensive. Because I had financed the car, I was subject to principal and interest payments on a monthly basis. Payments that, looking back, were too high. This prevented me from saving as much as I’d have liked to until I paid off the loan.
Unless it’s a “classic,” cars are one of those assets that depreciate very quickly. This means as soon as you drive the car off the lot it starts losing value. The more you use your car, the more value it loses. This becomes a problem if you purchase an expensive car. After some time, the balance remaining on your loan becomes higher than the car’s value. You’ll end up paying a lot more than the car is actually worth. The rule of thumb is your car expenses should be no more than 10% of your monthly income.
3. Open An Individual Retirement Account (IRA)
It’s never too early to start saving for retirement. Investing 1% – 10% of your salary in an IRA starting in your early 20s and continuing throughout your working years could allow you to retire with as much as a million dollars. This is one of the smart money moves to make in your 20s. In fact, if your employer has a 401(k) contribution match program, you should be contributing the maximum amount that you can. Another benefit to opening an IRA early is the money saved over the years can be used before retirement without penalty if the saver experiences financial troubles. This includes medical, permanent disability or education expenses.
4. Invest In A Diversified Fund
Investing in a diversified mutual fund is a smart money move to make in your 20’s. Unless you study financial management and investments, chances are you’ll be ill equipped to pick your own investments. Fortunately, there are many mutual fund providers who offer a plethora of fund options for their clients. The options include index funds, industry specific funds or even regional specific funds. Find out more about investment funds here [What They Don’t Tell Beginner Investors].
5. Pay Your Debt
The longer you have your debt outstanding the more you’ll end up paying. Paying off your debts early will allow you to save or invest money that would otherwise go towards interest on your loans. Additionally, the earlier you pay off your debts the more financially flexible you are when unplanned future events occur. For example, if you had an unexpected medical procedure done, you’ll be able to pay for it quickly because you are not concerned about making debt payments. However, if you do have existing debt, you may find yourself in the precarious position of having to pay your monthly debt payments and the medical bill.
Read more about debt management here [Effects Of Poor Debt Management In Your Twenties]
6. Build Credit
The average credit score in the U.S. is 698. This is considered a good score that could lead to more favorable credit treatment by lenders. Credit scores are very important in the U.S. because the economy runs on credit. A credit score is used to evaluate the credit worthiness of a borrower. If you start working on increasing your credit score in your 20s, by the time you’re in your 30s and 40s you will have an excellent credit score. The higher your credit score, the more access you will have to resources that can increase the quality of life for you and your family. Building a good credit score in your 20s is one of the smart money moves to make in your 20s.
Read more about credit scores here [4 Hacks To BOOST Your Credit Score].
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