Your early 20s are likely your first taste of financial independence—as you graduate from college, jump into the workforce and move out on your own.
Adding to the pressure: How you manage your money now can have a significant impact on your bottom line for years to come. So it’s important to develop habits that set you on the path to a secure financial future.
Here are four smart-money concepts experts say it’s important to grasp by the time you hit the quarter-century mark:
Four in 10 Americans couldn’t scrape up $400 for an unplanned expense, according to a recent survey from the Federal Reserve. Think of an emergency fund as the financial equivalent of “in case of emergency, break glass”—one that could save you from taking on debt or making other desperate moves.
To get your rainy-day fund started, set up automatic transfers so part of each paycheck gets funneled into a high-yield savings account. “Stash your emergency fund somewhere other than your primary bank,” recommends Ian Bloom, a certified financial planner (CFP) and owner of Open World Financial Life Planning in Raleigh, North Carolina. That separation will help you avoid the urge to dip into your savings.
Would you rather have $1 million today or a penny that doubled every day for 31 days? “Most people choose $1 million, but a penny doubled ends up being more than $10 million,” says Levi Sanchez, a CFP and founder of Millennial Wealth in Seattle.
The penny puzzle highlights the power of compound interest, which enables your money to grow at a faster clip because you’re earning interest on interest as well as on your savings. Basically, it’s a fast, reliable way to make bank—and savers who start earlier can make the most of that force.
But there’s a warning here, too. “Compound interest can work against you when it comes to high-interest debt, which is why it’s so important to pay off your credit card balance every month,” Sanchez says. Otherwise, it will snowball.
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Simply put, this means don’t spend more than you earn. The sooner you get on board with a budget, the better. “Tightening your belt when you’re used to a certain lifestyle, like eating out multiple times a week, is a lot harder than structuring a sensible cash flow for the first time,” Bloom says.
You can start simple, by following the 50/30/20 rule: Earmark half of your income for basic living expenses, 30 percent for fun stuff like shopping and travel, and 20 percent for long-term goals like paying back student loans or building retirement funds.
Make sure you’re nailing the “20” portion of the 50/30/20 rule by automating your savings so that the money is whisked out of your checking account before you have a chance to miss it (or spend it). Prioritizing savings helps you hone in on long-term financial targets (retirement, down payment on a house) over in-the-moment desires (internet impulse buys, dinners out).
If 20 percent seems steep, start small and scale up. “A good savings benchmark is 10 to 15 percent,” says Barbara O’Neill, a CFP and a financial management specialist with the Rutgers Cooperative Extension. “If you have high housing expenses or debt obligations, even 4 to 5 percent can make a difference. I advise people to save until they feel a pinch.”
That helps ensure you’re on the path to meet your long-term financial goals.