As a 20-something, you have amazing power to shape your financial future. The decisions you make today are impactful because they lead to habits. And habits get repeated, which magnifies their outcomes. Good habits help you save and meet your financial goals, while bad habits can be obstacles to building wealth.
You can see this magnification in action with your savings routine. Save $100 once and you have $100. But save $100 every month for 40 years, and you'll have $48,000 plus interest. That's a crucial, repeatable money move that can support a lifetime of financial empowerment.
Here are three more money moves to make in your 20s that can pay big dividends over time.
1. Build credit
A good credit history gives you access to lower interest rates and easier credit approvals. Over the course of your life, lower interest rates could save you tens of thousands of dollars. And easier credit approvals give you options when you need cash. Rather than borrow from your retirement account, for example, you could take out a short-term personal loan. A good credit history can also get you lower car insurance rates and lower deposit requirements from utility companies.
You can start building your credit history with disciplined use of a credit card. Best practices here are keeping the balance below 30% of your credit limit and paying off the account every month, before the due date.
If you can get a gas card, that's an ideal starter credit card account. Unless you're a long-haul trucker, gas should be a limited, budgeted expense. You're unlikely to run up the balance by accident, unless you love shopping in mini-marts.
Alternatively, you can get a secured card. These cards take a cash deposit, which is used to repay your balance if you miss payments.
2. Start budgeting
Learning to budget is easier in the early years of your career. Chances are, your finances are fairly straightforward right now. You could probably spend an hour or less recording your monthly and annual expenses (like car registration and holiday gifts). Contributions to your cash savings and retirement account should also be on that list.
Often, the first pass at a budget reveals a shortfall between your income and expenses. Resist the urge to force your budget into balance by trimming your savings deposits.
Instead, separate the other expenses into essentials, like rent, versus voluntary expenses, like shopping for clothes. Then, look for savings opportunities within those voluntary expenses. You can't eliminate your voluntary expenses (that wouldn't be sustainable), but maybe you could shrink them just a bit.
Once you balance your budget, you have the job of living within its limits. This will take some trial and error. With practice, you can get into a rhythm of earning, saving, and spending — in that order. Learn this skill and you can pursue nearly any financial goal with confidence.
3. Start saving for retirement
The numbers below assume you are investing the monthly contributions to earn an average of 7% growth annually, which is a conservative-estimate growth rate for stock market performance.
Age You Start Saving
Balance at Age 65
The million-dollar ending balance noted above is arbitrary. You'd see the same pattern whether your savings goal is $1 million or $4 million.
Here's the takeaway: If you start the retirement savings process in your 20s, you can probably get the job done with a modest monthly investment. If you wait, the required monthly contribution rises, eventually to the point of being unworkable.
You're in control
You control your financial future. You can also decide to put off learning how to use credit cards, budgeting, or saving for retirement. But these financial skills only get harder to adopt as your finances get more complicated. Do a little financial work now and you'll spare yourself a lot of work, and probably stress, later on.
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