When it comes to money, there is always more to learn. No matter how much we think we know, there are always new tips, tricks, and strategies to improve our financial well-being. In fact, especially in our 20s, we could use all the financial advice available to set ourselves up for a secure future.
At this point in our lives, we’re probably financially independent for the first time in our lives, with fewer responsibilities and more disposable income to spend whenever we want. However, the danger comes when we’re clueless about the fundamentals of personal finance because we were never taught in school. That’s why it’s important to start good money habits in our twenties so we can benefit from them later.
In this article, we’ll be sharing five hard truths about money that everyone wishes they knew in their 20s. Whether you’re in your twenties or older, take advantage of this article and learn a few hacks that will help you improve your financial situation in the future.
1- Budgeting is Key
One of the first hard lessons we’ll learn about our income is that if we don’t plan for our money, life will. And not in a good way! To avoid such unpleasant surprises, we need to learn how to budget. Budgeting is key, and it will help us learn how to live within our means.
Creating a solid financial foundation for our later years may be simpler than we think. All we need to do is learn the basics of personal finance that we can apply, such as developing good spending and saving habits, learning how to invest and budget, and so on. The end objective is to stay away from debt that isn’t essential and take advantage of compound interest to build wealth over time.
To start off, we can make a new budget each month and decide where we want our money to go. It may be frightening to learn and see how much we actually spend. However, if we pay no heed to our spending, we will eventually find ourselves living paycheck to paycheck without even realizing it.
Of course, the first few months of budgeting will not be easy. But we must understand that not being perfect at it is normal and part of the learning process. Like anything else in life, if we want to get better at something, we must practice. The more we practice, the more we learn about our expenses, motivation, and how to manage our income. However, all this starts with creating a budget to determine whether we have an income problem or bad spending habits. Once we’ve identified our areas of weakness, we can make various positive financial changes to boost our cash flow.
2- You Need an Emergency Fund
One of the main money lessons we ought to learn in our twenties is that we need an emergency fund. Accidents, medical emergencies, loss of a loved one, unemployment, and emergency home repairs are all examples of unexpected financial emergencies. These unforeseen bills, no matter how large or small, always seem to arrive at the most inconvenient times. That’s why we need an emergency fund. It’s one of the best ways to protect ourselves from such situations.
Saving money for an emergency fund in our twenties can be difficult, especially when money is tight. But one thing that can make it easier for us is to be specific about the expenses we need the emergency fund to cover. This will give us a clear guide on how much money to set aside. Research indicates that people who struggle to recuperate from a financial crisis often have fewer money reserves to protect them from future emergencies. Hence they rely on credit cards or take out loans, usually at high interest, which leads to debt that may be harder to repay.
3- Paying off debt builds a good credit score
Whether it’s medical bills, credit card debt, or student loans, you must understand that debt does not go away on its own. You’ll need to come up with a plan to get yourself out of this situation. The longer you wait to pay off your debt, the more money you’ll owe due to interest charges.
If you don’t pay back your loans on time, it could hurt your credit score and make it harder for you to get bigger personal loans in the future. So, how do you fix this?
Before you start planning, you need to figure out who, and how much you owe before you start planning. Prepare a list of all of your debts, no matter how small, including the unpaid balance, interest rate, and due dates for each creditor. Having a thorough understanding of your payment responsibilities will help you prioritize and figure out the best payment method to use.
Secondly, try to increase your monthly payments if you can. Paying more than the required minimum amount could help you save money on interest throughout the duration of the loan you’ll be able to pay off your debt faster because you’ll be making more payments each month.
Review your monthly budget to see how much you can afford to pay. Then, set up automatic transfers so that when money lands in your bank account, you can make frequent and gradual repayments.
4- Save for retirement
In your 20s, putting money aside for a retirement fund may not be at the top of your financial priority list. Yet, if you want to be successful in the long run, you need start putting money away for your retirement as soon as you get your first job.
When it comes to saving money for retirement, it’s best to start early so that you can take advantage of the power of compound interest. With compounding, you can save a little now and earn a lot in the future.
Let me give you a simple example of the incredible power of compound interest. Assuming two people, one a 26-year-old, and two a 35-year-old, who both plan to retire at age 65.
The first person, the 26-year-old, starting investing $2,000 per year, for ten straight years, then stopped at the age of 36.
The second person, the 35-year-old started investing $2,000 per year for 30 years!
Now here’s the mind-blowing news: the first person, who only invested for 10 years at the age of 65, had more money than the second person, who invested the same amount as the first person but for 30 years! That’s three times more than the first guy, yet he had less money.
That, my friends, is the power of compound interest. Essentially, the person who began saving earlier will make more money than the one who started later. This is because when you start saving early, your money has more time to compound.
Therefore, when negotiating your compensation package, you should consider asking for this job perk. However, if your employer does not offer a 401(k), or if you are self-employed, there are alternative retirement plans to consider. A good target to work toward is to set aside 15% of your income for retirement savings. If you are unable to commit this much right away, don’t worry. You can work up to it as your income grows and your debts are paid off.
5- You don’t need a lot of money to invest
Once you’ve paid off your debts and set up an emergency fund, you should now think about how to make your money grow.
In your 20s, it’s hard to imagine what your life will be like in a few years. However, this is the perfect time to invest in an asset. When it comes to personal finance and making investments, it is extremely important to build a foundation for your future while you are still young. By wisely distributing your surplus income, you can accumulate wealth and the free will to live the life you’ve always wanted.
However, before you think of investing, you need to first improve your financial literacy. Then you can apply it. To achieve this, you must actively seek resources that teach you about the various asset classes to invest in, risk assessment, asset allocation, and how to improve your capacity to obtain the principal amounts needed to make investments. As a young professional, you have the advantage of time. Therefore, you can take big risks and easily recover from any possible losses, unlike someone over the age of 40.
While learning and applying investing skills, keep in mind that you should look beyond basic investment products. For example, you could place your emergency savings in a savings account or join a savings group to improve your chances of qualifying for large personal loans when needed. Like I mentioned earlier, investing increases the value of your assets after a while. When you invest, you put your money into investments like stocks, bonds, collective investment schemes, and real estate, among others. While all investment opportunities involve some level of risk, diversifying your assets shields you from market fluctuations and even potentially disastrous losses.
Nevertheless, you are never too young to invest. In fact, the younger you are, the better your chances are if you follow the right advice.
In summary, it’s essential to learn about personal finance when you’re in your twenties. You have more freedom and less responsibility, which means you have the ability to take risks and learn from your mistakes. By following these five hard truths about money, you can take control of your finances, build a solid foundation for the future, and achieve financial freedom.
Remember to start by creating a budget and tracking your spending habits. Make sure you have an emergency fund to protect yourself from unexpected expenses. Pay off your debts and focus on saving for retirement. Finally, invest in your future by learning about asset classes and diversifying your investments.
With these tips in mind, you can be well on your way to a financially secure future. So, take the first step today and start building a better financial future for yourself. Remember, the earlier you start, the better your chances of success. Good luck!