The 20s are an important decade in every person’s life. This is the time to have fun, but you will also be adopting many responsibilities. You will have your first permanent job and start your career. You can also decide to start a family and buy a home. Generally, most of the important steps which you will make in your 20s will be related to your income and spending. That is why managing your money effectively is essential. Here is a bunch of tips to help you with this.
Plan Debt Repayment
Nearly three quarters of college graduates complete their studies with debt and you are probably among them. It’s true that this isn’t the best way to start your adult life, but you should focus on repayment instead of worrying about the situation.
The most effective strategy in this case is to make bigger monthly payments. The earlier you repay your student loans the more you will save on interest. Of course, paying more every month is more easily said than done, but it’s crucial for you to avoid one costly mistake which many students make – investing while still having large debt. Here is an example. If your loan has an interest rate of 7% and your portfolio brings you 5% return on average, then you are actually on the losing side.
If you cannot pay larger loan installments, then you should consider alternative options. You can consolidate all of your student loans (bundle them together) into one loan with a longer repayment term. This will reduce your monthly installments, but you will pay a larger amount of interest. Another option is to choose a repayment plan which has smaller instalments for the first few years and then larger ones. This could be the right option for you, if your career prospects include considerable salary increase in the short term. Don’t miss to research different programs for interest and fee reductions designed especially for student loans.
What do you do when you receive your salary into your bank account? If you pay your bills and just spend the rest for whatever comes to your mind, you are definitely on the wrong track. Budgeting is one of the most important tools of money management and when you learn how to use it in your 20s, you will have much lower risk of financial mishaps throughout the rest of your life. It is all about allocating your income in the most effective way.
Your ultimate goal is to have some money to put aside at the end of the month. Experts recommend saving at least 20% of your monthly income in your 20s. The percentage may seem high, but it makes sense for two reasons. Firstly, you most likely don’t have any dependents yet so your expenditure is most likely smaller than it would be in your 30s, for instance. Secondly, you will need savings for making major purchases and investments in the short term. The most notable example is buying a home.
How do you achieve effective budgeting? Prepare a monthly budget in advance and a weekly one, if needed. Use a spreadsheet template or a specially designed app to make things easy. Try to spend only on items which bring real value to you.
Provide for Emergencies
You are no longer a child so you can’t rely on mom and dad to get you out of trouble every time. You have to find ways to deal with emergencies yourself if they arise. There are two fundamental methods and you should use both. Start by getting insured. You will need health insurance and property insurance. Your employer most likely offers some health insurance plan so it makes sense to consider it in the first place. Explore all other options to make the right choice. You should get property insurance if you own or rent a home. There are special plans for tenants which can protect all of your belongings. When you buy car insurance, make sure that your vehicle is covered in case of collision and theft.
The second method for dealing with emergencies is simpler to start with. It involves setting up an emergency fund. It could be in a special interest-bearing account which allows you to withdraw money whenever needed. Set a fixed percentage of your income aside for the fund every single month.
Be Careful with Credit
One of your major financial goals in your 20s is to establish and build credit history. That is why you should definitely get a credit card when you start earning income from permanent employment. However, this doesn’t mean that you should use is to satisfy whims as your debt can grow much bigger much more quickly than you can imagine. Try not to spend more than a third of your limit and to repay the borrowed amount in full before interest is charged.
Even if your credit score increases, you should be extra careful about using credit facilities. Here is an example. Leasing gives you the opportunity to drive a fancy car for an affordable monthly payment. However, when the lease period is over, you are left with nothing as you don’t own the asset (the car). It is much better to borrow a small amount via an affordable car loan to buy a vehicle which matches your means.
Plan in Advance
The second decade of your life is the perfect time to plan for the future. You are already an income earner so you have the basis. Now the goal is to provide for the next major periods in your life. It makes perfect sense to start saving for a home in your 20s. Homeownership brings more benefits than renting. From a financial point of view, you will acquire a major asset whose value will most certainly grow over time and this will give you financial stability and flexibility at the same time.
You should start saving for retirement in your 20s too. The sooner you do this the better. Most employers have very good plans in place and they make considerable contributions so this is an opportunity which you should not miss out on. It’s true that your disposable income will go down, but you will have invaluable financial protection when you can no longer work.
This is an effective method for generating income provided that you keep your debt, if you have any, under control. The next logical question is what to invest in and how to build your portfolio. The most importance concept to understand is that of risk and return. Financial instruments which can bring you higher returns hold higher risk and vice versa. You can learn more about this at https://www.investor.gov/outreach/teachers/classroom-resources/risk-return.
It is up to you to decide what level of risk you can handle. Generally, people in their 20s have greater risk tolerance compared to older adults primarily because they usually don’t have dependents. You can readily invest in stocks if you are more risk-loving. When you learn how to run analysis to make sound portfolio management decisions, you can earn a good amount of money. For starters, you need to diversify your portfolio of financial instruments. This is a fundamental tactic for offsetting risk.
Now you know the most important things for managing your money in your 20s. Apply everything which you have just learned.