You’re finally out on your own. The world is your oyster! You’re a free agent, unburdened by many of the responsibilities that people in their 30s, 40s, 50s, and beyond are faced with. However, it’s also likely that you haven’t had time to build up many assets yet.
Many people associate “being young” with “being broke.” And while it’s true that many people start out with very little money and perhaps some student loan debt, there is an alternative: learning early on how to become financially savvy and get yourself off to a strong fiscal start. This way, when you reach your next decade of life, you can dispense with the debt issues people over 30 often confront. Here are five ways to start off strong financially while you’re still in your 20s.
1# Learn how to budget
Budgeting is an essential life skill if you don’t want to struggle from paycheck to paycheck, swimming with your head barely above water. The first thing to do is to define your financial goals. A well-thought-out plan can help you to devise a budget and then stick to it. Begin by asking yourself these questions:
- Do you want to focus on saving money or are you trying to limit overspending?
- Will you be paying off student loans or other debts?
- Are you hoping to establish long-term financial investment goals?
- Are you planning to buy a house or car?
Once you decide your primary financial goals, you can get busy putting together a workable budget to help you meet your objectives. Define your total income and expenses; don’t forget to include some wiggle room for unexpected expenses. Then delegate amounts for each expense (including a bit for your savings) and set schedules for payment. Your parents and grandparents probably used ledgers and spreadsheets to do this, but there are plenty of online tools and apps you can use nowadays.
2# Be smart about credit
Chances are, you’re probably already using credit cards. If you aren’t, you should get started because, used wisely, they can help you establish a good credit standing. Here are a few tips to keep in mind for responsible credit-building and credit card use:
- Don’t spend more on credit than you can afford to pay off each month. (Your budget will tell you how much that amount is.)
- Pay as much as you can afford each month on your balance. Making only the minimum payments will lead to owing high interest— and could lock you into jacked-up interest rates for years to come.
- Build your credit score. Keeping on top of your credit score not only ensures that you maintain a healthy number to secure future lines of credit, but it also helps you spot and eliminate any errors on your credit report as well as prevent identity theft.
Starting yourself off on the right track when it comes to credit can make the difference between a broke lifestyle and a financially comfortable one. Serious credit mistakes in your 20s can lead to big headaches in future decades.
3# Understand how the taxman operates
Your parents probably did your taxes for you if you were a working teen, but now that you’ve hit your 20s, that’s likely to change. You’re probably familiar with the old saying, “Nothing is certain but death and taxes.” This is the time in your life you’ll begin to understand what this means (well, the second part, at least).
Not only will your employer take taxes out of your paycheck, but also you’ll have to reconcile your tax bill with the IRS every year. It’s important to learn how to calculate and pay your taxes so you don’t end up struggling. There are many tax breaks available for people in their 20s, so be sure you understand how to take advantage of them when doing your taxes.
Ideally, you want to break even with every tax return. If you’re getting a super-large refund, this is money you could be wisely investing throughout the year, instead. On the other hand, if you’re owing large chunks of money, it means that either you’re not claiming the right deductions and credits, or you’re not having enough money taken out of each paycheck.
4# Plan your best housing option
Many people in their 20s opt to rent, but if you can swing it, why not look to buy property? Not only will you cut out paying someone else to build their own financial empire, but you’ll also begin building equity in your own. First, watch the housing market carefully. In 2019, it was a seller’s market, but that’s bound to change. Some speculate it will shift to a buyer’s market in 2020 and 2021. If your budget allows you to make a real estate investment, this might be the time to pounce. To keep your costs as low as possible, look for a fixer-upper, rent a dumpster, clean the place out, and learn the art of DIY. It might be rough at first, but your efforts can pay off big-time.
5# Always read the fine print
In the age of quick processing and click-wrap agreements, many people neglect to read the fine print when making a purchase, signing a contract, or making other decisions. There’s just so much text! Who has the time? It’s tempting to simply sign on the dotted line without reading — but this is a bad habit.
Start off right by not signing anything you haven’t read or don’t understand. Signing a document, either hard-copy or electronic, too quickly can result in terms that are not financially healthy for you. Always, always read the fine print; it’s rarely worded to come out in your favour. Your 20s are an exciting time in your life. You’ll experience a lot of changes between the beginning and end of this decade, making it a period in your lifetime unlike any others to come. While many will expect you to be bogged down with debt, it doesn’t have to be this way if you start off with strong financial habits and goals, and learn what mistakes to avoid. Be strategic about your finances now, and before you know it, you could be soaring into your 30s, living the lifestyle of your dreams.
The Carousel would like to thank Ann Lloyd from the Student Savings Guide for her article.