Making small, avoidable mistakes with your money in your 20s can have a significant impact on your overall financial health as you get older. Creating good financial habits while you’re young will give you the ability to get ahead. Saving money in your 20s can give you the freedom to buy a house, switch jobs and even retire early. These 5 tips will get you started in the right direction.
1.) Start Investing
Compound interest is one of the most impactful financial assets available. Interest is the amount earned on the initial principle, compound interest then occurs when you earn interest on your interest and your initial principle. An extra few years of compound interest can amount to a massive amount of money.
2.) Contribute Enough Into Your 401(k) To Get The Maximum Match From Your Employer
The way 401k match typically works is the employer will match a percentage of employee contributions, up to a certain percentage of the employees total salary. For example, an employer might match 100% of an employees contributions up to 3% of their total salary. If the employee earns $50,000 annually the employer will match up to $1,500. This is essentially $1,500 for free. In order to get the maximum match from the employer the employee would need to contribute $1,500 to their 401k. Anything contributed past $1,500 would be unmatched. Contributions into a 401k are tax deferred so there are benefits past just the match from the employer.
3.) Send Some Of Your Paycheck Directly To Your Bank Account
Having an emergency fund saved is one of the most important parts of your financial health. Should a large financial expense arise or if you need to be without income an emergency fund will keep you afloat for a few months. An emergency fund is generally 3-6 months worth of expenses saved in cash or other highly liquid assets. Send enough of your paycheck directly to your bank account to replace all your expenses and maintain your emergency fund.
4.) Think Rationally Before Making Large Purchases
While saving money early on in life is imperative to financial success, spending large amounts of money can be detrimental. Before making large purchases it is important to weigh all of the options. If there’s a need for a vehicle, does it absolutely need to be a brand new vehicle or will a lightly used vehicle work? Is carpooling, walking or cycling an option? How soon is a vehicle needed? Rushed decisions tend to cost more money. If the large purchase is a want rather than a need think about what kind of value it will bring. How many hours of work will be required to afford the purchase? Is there any other option that will provide similar value? Considering many factors regarding large purchases can help to avoid regretful mistakes.
5.) Set Large Obtainable Goals
Set challenging but not unobtainable goals for yourself. Setting goals that you know are too easy won’t motivate you and instead will make you lose interest. Set goals that you’ll constantly have to work towards to make happen. Set both short term and long term goals to keep you focused on smaller immediate goals as well as larger, longer term goals.
The decisions that you make in your 20s will impact your financial health more than any other decade of your life. Now is the time to build a solid foundation to build lasting wealth on. With some discipline and forward thinking anyone can give their finances a great head start.
