Your 20’s are a time of transition between being a child and becoming an adult. Most 20-somethings will become financially independent without having the stress of needing to provide for dependents. That said, there are many opportunities to succeed or fail with finances. Missteps with finances can linger into your 30’s and beyond.
Few mistakes are as challenging to recover from as financial mistakes.
Often, I advise clients on how to rebuild wealth after realizing financial setbacks in their 20’s. If you are in your 20’s (or maybe 30’s), now is the time to build a secure financial future. The following suggestions may help you to achieve financial success.
Keep Track Of Your Finances
Tracking your money keeps you connected with your spending habits. Did you know a daily $4 latte will cost you close to $1,500 in a year? Tracking your finances helps develop the habit of being a good steward of your income; a skill which will serve you well the rest of your life.
Commit To A Budget
Spending more money than you earn quickly creates a big, expensive problem. Debt is stressful. Interest on the debt can outpace the cost of your spending in a matter of years. Bottom line, make a budget and stick to it.
Don’t Treat Your 401K Like Personal Savings
Retirement may seem impossibly far away, but your 20’s is the time to tap into a potential gold mine: compounding interest. A $10,000 investment can grow to more than $100,000 in 30 years with compounding interest! Additionally, withdrawing funds from your 401K early will incur a 10% penalty on the total withdrawal. Loss of interest combined with the early withdrawal penalty equals a lot of money. Keep personal savings separate from your retirement savings.
Have An Emergency Fund
Emergencies happen at any age. Having money set aside for an emergency will give you peace of mind and could protect you from overwhelming debt. Ideally, set aside funds that can cover 3–6 months of expenses. Include your emergency savings as a line item in your budget until it is fully funded.
Skip The New Car
It’s tempting to purchase a new car with your income. Resist the urge. This single purchase can strain your budget for years. Additionally, when your new car becomes last year’s model, it will be worth less than what you’re paying for it. Embrace ride sharing, public transportation or a hand-me-down vehicle.
Insurance Is A Must
You pay for insurance so the unexpected does not bankrupt you: car accident, health crisis, home fire, robbery, the list goes on. Trust me, it’s less expensive to pay insurance premiums than it is to self-finance a $100,000 medical or home repair bill.
Credit Card Debt Is A Black Hole
Carrying a balance on a credit card is a slippery slope. A credit card with 20% interest can turn $10,000 in debt into $24,833 in just 5 years; and that’s only if you have no late penalties or surprise fees. Strive to be conscious about what you charge so you can pay your bill in full each month.
Good Credit Is One Of Your Greatest Assets
Your credit score today will affect your future. The interest rate you receive for your car loan, mortgage or small business loan are all determined by your credit score, good or bad. Take care of your credit now so it is strong when you need it.
Talk About Finances With Your Partner
Money issues are one of the main reasons marriages fail. Talk about your full financial picture; the good and the bad, goals and concerns.
Honesty will make your relationship stronger and help you work as a team.
Have A Plan Before You Start A Family
Kids are expensive. You need to plan for maternity/paternity leave and a post-delivery budget. Costs associated with childcare, baby gear, diapers, clothes, doctors, braces, assorted lessons and college add up quickly. Having your finances in order before the birth of a child will make welcoming the child into the world that much sweeter.
Your 20’s are often an exciting and carefree time, money matters may seem boring or intimidating. Ignoring them can lead to years of stress associated with repairing your financial situation. Tackle the items on this list one by one to give yourself the peace of mind that comes with financial security. Your future self will thank you.
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Do you think my tips were helpful in re-directing your focus and goals? Please share the article and shout out to me on Twitter!
You can also check out my firm LexION Capital for more tips on how to grow your wealth and become financially secure.
Elle Kaplan is the founder and CEO of LexION Capital, a fiduciary wealth management firm in New York City, serving high-net-worth individuals. She is also the chief investment officer and founder of LexION Alpha.