Regardless of whether you enter the workforce after high school or attend university, most people start making a steady full-time paycheck for the first time in their 20s. By following these eight key tips for young adults, you’ll be primed to get off on the right foot right when it comes to finances.
1. Make a Comprehensive Budget
Before the ink dries on your first paycheck, you should have a budget that takes into consideration your needs, wants, and aspirations. According to Kiplinger, start by listing all your expenses, including those that occur daily, like food costs, and monthly, like rent, utilities, and student loan payments. This allows you to see where your money goes and identify areas where you may want to cut back. Whatever is leftover should be designated to short-term goals like establishing an emergency fund, mid-term goals like saving for a home down payment, and long-term goals like retirement.
2. Pay Off Student Loans Quickly
If you’re one of the more than 70 percent of college graduates each year who carry an average of $30,000 in debt according to Business Insider, these obligations can limit your financial freedom and even keep you from buying a home. Paying more toward the principal each month, even if it’s just $20, will shorten the term of your loan. If you have more than one student loan, consider consolidating if you can get a lower interest rate, but avoid plans that lower monthly payments by extending the term of the loan. These will cost you more over time.
3. Build an Emergency Fund
Financial experts recommend having at least six months of expenses set aside in an emergency fund to cushion the fall in case of job loss, illness, or other catastrophe. To save these funds, consider transferring $50 to $100 per paycheck to a savings account with an automatic deduction.
4. Save for Retirement
Even the smallest amount you save for retirement in your 20s will multiply with the benefit of compound interest, according to CreditSoup.com. And the longer the money has been invested, the more interest it gathers. If your employer offers a 401k match, take advantage. Missing out on this plan is like taking a pay cut. If you don’t have access to an employer-sponsored retirement fund, consider the tax benefits of saving with a Roth IRA.
5. Build Your Credit Score
Your 20s is an opportune time to learn to use credit responsibly. Because part of your credit score is determined by the length of your credit history, start once you have an income by signing up for one card with a small credit limit and paying it off on time every month. Make a habit of paying all your bills on time, since these are reported to the credit bureaus as well. Having a good credit score will mean lower rates on everything from mortgages to car insurance, while a low score will mean trouble qualifying for affordable loans.
6. Get the Insurance You Need
While insurance premiums are another monthly expense, they can save you from major expenses in case of an emergency. Health insurance is a must, as is auto insurance if you drive and either renter’s or homeowner’s insurance to protect your belongings.
7. Buy a Used Car Rather Than New
If you need to drive to get to work and school, a reliable car is a smart investment. That doesn’t necessarily mean buying brand new, however. Financial experts say your best bet is often a car that’s around two years old with 40,000 miles or less. This will get you serious savings but similar value.
8. Organize Your Documents
You’ll need your birth certificate, Social Security card, and other important paperwork to make big financial moves. Make sure these documents are in a safe place, along with a list of all your banking and investment accounts, household bills, and insurance policies and their online usernames and passwords.
