Choices you make in your 20s can set you up for financial success in your 30s and beyond.
"Money is really simple," says Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors in South Barrington, Illinois. "But most people respond to it, they don't plan for it." By taking control and making a few smart decisions early on, you can put yourself in a much more secure position.
Here are four things you can do in your 20s that you'll thank yourself for later.
Developing good cash management habits is crucial, says Janet Stanzak, a certified financial planner and owner of Financial Empowerment in Burnsville, Minnesota. "In your 20s, you've got to establish your discipline — otherwise it will haunt you for a lifetime."
First, track your finances to make sure you understand where your money is going. Then be deliberate about your priorities, so you know you're spending wisely on regular financial obligations like rent, utilities, and phone bills, and keeping your spending on the fun stuff in line with what you can afford.
Stanzak suggests a version of the 50-30-20 budget, which divides your income among basic living expenses, discretionary spending, and long-term savings and investments.
If you don't commit to saving, it's easy for other expenses to eat up your cash. Set up automatic contributions so that a portion of every paycheck goes into your workplace retirement account and gets pulled from your checking account into savings for other goals, Stanzak says.
An early start gives your money more time to grow and allows you to take advantage of compounding — when you're earning interest on your interest as well as on your savings. In this classic example from the Federal Reserve Bank of St. Louis, someone who starts investing for retirement at age 25 ends up with more money at retirement, even though someone starting at age 35 contributes three times as much over the years.
The power of compounding works against you when it comes to debt: Mounting interest charges can make it harder to pay off your balances. Limit your credit card spending to what you can pay off in full each month, and be smart around borrowing for big purchases like a home or car.
Experts recommend that when it comes to financing a car purchase, for example, you stick to a borrowing term of five years or less — and then driving your car for at least another five years beyond that. That sets you up for years in which you don't have to make a monthly auto loan payment.
The average monthly payment on a new car is about $550. Putting that back in your budget could go a long way toward helping you meet other financial goals like saving for retirement or paying off student loan debt.
Using a Roth is an especially smart move for young workers, Stanzak says. Your current tax rate is likely lower than what it will be at the time you retire, so you'll have decades of tax-free growth ahead.
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