6 Things to Do With Money in Your 20s, According to Financial Experts
The dollars you save today are likely the most valuable dollars for your future.
Summary
Ron Tallou stresses the importance of starting a saving plan early, noting there's never a perfect time to save. The article covers money mindset, budgeting, emergency funds, early investing, and the power of compound growth for people in their 20s.
Between graduating, starting a career, potentially moving to a new city or into a new home, getting married, and countless other life-defining events, your 20s are years filled with new experiences, opportunities, and life lessons.
Among the most important, and confusing: Figuring out your finances. And while everyone's situation is different, there are some general financial habits and skills that experts recommend honing in your 20s. Now is the time, they say, to establish a sound financial foundation to build on for the rest of your life. "It's easy for younger consumers to kick the financial can down the road when they feel like they have their entire life to make better choices," says Rod Griffin, senior director of consumer education and advocacy for credit reporting agency Experian. But "the choices they make and habits they form while they're young will follow them throughout their adult life."
With that in mind, here are the tips and tricks financial experts say recent grads and twentysomethings should know.
1. Consider-and possibly rewrite-your money story
One of the most important things to consider when you're starting your financial journey is your money mindset, says Nicole Wirick, a Michigan-based certified financial planner. What is your relationship to money-for example, are you a spender or a saver, do you consider it scarce or abundant-and how does that shape how you treat it? What money scripts, or unconscious beliefs about money, do you follow?
"For many people, money could be seen as something that was used as a means of control, or maybe money was something that was approached willy nilly, or maybe it was really scarce," she says. "Those memories of money from childhood can be really important to understanding what money means as an adult."
Once you have that knowledge, you can use it to form better habits.
"We have the power to rewrite our money script, but we have to be aware of it first," she says. "Otherwise the patterns can repeat themselves."
2. Understand inflows versus outflows
Once you understand your feelings about money (and how they may help or hurt your finances), you can move on to building a solid financial foundation for the future, says Wirick. The most important: Understanding how much money you have coming in, and ensuring it's more than how much you're spending. Sounds simple, but it's easy to start overspending-and difficult to reign in once you start. Just look at total credit card debt in the U.S., which topped $1 trillion last year and keeps growing. Of course there are nuances, but Steven Conners, founder and president of Arizona-based Conners Wealth Management, says to avoid that kind of debt at all cost.
To do so, you need to know what you're earning. Conners says to use your net income-meaning post-taxes-as your baseline for how much you can spend each month and what you can afford.
Having that understanding early on will help you start saving early. Saving money is like any other habit, Wirick says, in that it takes practice and patience but becomes easier over time. "Carve out a portion of the inflows for savings and investing. Treat it like any other bill and automate," suggests Wirick. "We're forcing ourselves to create good habits and treating saving as any other bill because it's just an important." Ideally, you want to start building toward having a few months' worth of expenses stashed away in a high-yield savings account. Financial planners differ on exactly how much to put away, but most commonly will suggest enough to cover three to six months of essential expenses, including any debt or loan payments. The more nervous you are about a potential layoff or loss of income, the more you'll want saved, simply for the peace of mind.
This stash of money is typically known as an emergency fund. But Wirick says another way to think about it is as an opportunity fund.
"Opportunities are the good things, like a destination wedding. There's a lot of that in your 20s," she says. Try to have some money set aside to pay for the unplanned expenses that crop up.
And though you might feel like it's too difficult to save money when you're just starting out, all of the financial experts interviewed for this article stressed its importance, with many saying their biggest personal regret was not starting to save sooner. "One important thing I always tell younger clients is that there's never a good time to save money," says Ron Tallou, founder and owner of Michigan-based Tallou Financial Services. "I try to get them on some kind of a saving plan, and they want to put it on hold. If that's your mindset, you're never going to get into it. There's always going to be a new bill, so you just have to do it."
3. Start investing as early as you can
It's hard to overstate how important it is to start investing early. Though that might seem like a scary prospect, it's easy enough to get started. The entry point for many is a 401(k) or other retirement account, like an IRA. Buy low-cost, diversified index funds within these accounts and consistently contribute a portion of your paycheck (10% is great, but at least up to the employer matching contribution percentage, if you get one; 1% is a fine start, too, if that's what you can afford), and you're off to a roaring start, financial advisors say.
The good news is that many members of Gen Z are already investing for retirement. In fact, reports find that they are doing it earlier than previous generations did at the same age, including a February survey from the Investment Company Institute. "Our research found that younger households are more likely to prioritize saving for retirement, have retirement accounts, and have more in those accounts, compared with similar-age households in 1989," Sarah Holden, senior director of retirement and investor research at ICI, said in a statement about the survey.
That pays off in the long run. Time in the market is one of the most important factors in investing. The money you invest early in life has the longest opportunity to grow and compound, meaning "the dollars you save today are likely the most valuable dollars for your future," says Wirick.
Here's an example: Let's say you save $7,000, the max amount you're allowed, in a Roth IRA each year for the next 25 (that limit is increased, but for simplicity's sake, we'll use the same figure each year). With a 7% annual return, you'll have around $450,000 by the end, while only contributing $175,000 of that.
That said, even if you can only afford to invest $50 per paycheck when you get your first job, it's better than nothing, says Wirick. As you age and earn more, you'll be able to invest more.
"It can be really exciting to get the larger paycheck after school, but make sure you don't become accustomed to spending all of it," says Wirick.
Avoid investing in the latest craze, like crypto, meme stocks, etc., until you have a solid foundation built around low-cost index funds, says Justin Stivers, a financial advisor and founding attorney at Florida-based Stivers Law. Be boring. To read the full article visit: https://fortune. com/2024/02/10/6-things-to-do-with-money-in-your-20sexperts-say/