Are you in your 20’s and concerned about financial matters? Are you afraid you will make mistakes that could have a lasting effect on your financial future? Well, most people in their 20’s are just getting out of college or some school and starting their working careers. The truth is this is an extremely crucial period in someone’s life. If you make some intelligent decisions in your 20’s it can set you up with some financial freedom later in life. So the following are five areas where someone in their 20’s can make these everlasting decisions to improve their financial future.
One of the largest things that someone in college can do to hurt their financial future is to take out more than they need in student loans. Many people make this crucial mistake and take out more than they need to cover school expenses so they can have a new laptop or get a nicer apartment. The simple answer here is do not do it. Avoid the extra semester or year by taking as many classes as you can handle and pass with good grades. Get a part-time job or participate in the school’s work-study program to reduce the number of student loans you will need. Get roommates or live at home if the college is close to your family. The short of this lesson is to take simply out the bare minimum in student loans to cover only what you need to borrow to attend college and nothing more. A mistake most people tend to make it seems.
A second mistake that many younger people make is not signing up for their employer’s 401(k) plan as soon as they are eligible. Here you want time on your side and to work to your advantage. If you do not believe me go to Excel and open the Future Value function and plug in the numbers. Compare what the difference between 30 and 40 years regards how the funds will accumulate. I think you will be like most people and become extremely surprised and happy with what an extra ten years can do for your bottom line. Here you want the power of compounding interest to work in your favor and have your money work for you as long as you can. Save as much as you can but always at least what your company will match or you are leaving free money and an instant return out of your retirement account.
The third area where not just 20-somethings make a mistake is living beyond your means. This means saving up for the new car or buy an older used model. Do you need a 61-inch flat screen or is that something you merely want to have? Chances are most of the luxury items we purchase can be avoided or saved for and paid for in full if we plan properly. Think about this for a minute. Are most of the non-essential purchases ones that do not need to be made and especially not financed if possible. Live within your means and save the money in your 401(k) plan or an IRA. You will have plenty of time later in life to have the luxury items you think you need today.
Number four is everyone needs an emergency fund. And no this does not mean a series of credit cards you have no balance on. What you need is at least six months of savings to cover your essentials in the event you lose your job. Also, no one knows when an unexpected expense such as a new transmission in your car is going to be needed. The key here is to save even if a little on an automatic plan to an account that is secure and safe but extremely liquid in the event you need to access the funds. The goal here is not to make a profit on the account as an investment but rather security and safety for your emergency funds. And if you have to dip into your emergency fund the priority right after that period of your life is to replenish the fund as fast as possible.
And finally the fifth topic is similar to living within your means, and that is to avoid credit card debt. In fact, avoid this at all costs no matter what your age is as it is the same as having your 401(k) work for you but, in this case, compounding interest is working against you and at an interest rate that will break the bank. If you do use a credit card make sure to pay it off every month and do not carry a balance as the interest credit card companies charge is extremely high and will never work to your advantage.
These five areas of concern if addressed properly in your 20’s will set you up for a financial future that will enable you to be in the best position possible. Make smart decisions early and later in life you will be in a better position to have that nicer car or even retire early with a nice sized nest egg. It is never premature to be thinking about the future and start as soon as you possibly can. Never put these topics off for later in life and begin with these five now. There are more things that people should and can do to make their financial future better, but these are a firm foundation that need to be addressed now and not later.
If you have any questions or concerns, feel free to contact me at any time.
