For many of us, our 20s are a time to experience somewhat of a financial wake-up call. As our 20s creep along, we go from being broke college students to potentially broke working adults, and somewhere along the way, we're supposed to figure out how to manage our finances for the long haul. But believe it or not, your 20s are the perfect time to start making some smart financial decisions that can set the stage for a lifetime of success.
Here are four targets to aim for.
1. Create an emergency fund
You never know what sort of curveball life might throw at you. Whether it's a sudden illness or unforeseen job loss, life's unexpected hiccups can really wreck your finances if you're not prepared. That's why it's important to have an emergency fund. Without one, you risk being unable to pay your bills if you're without an income for a period of time. If you don't own property and don't have any dependents, you can start by saving enough money to cover three to four months' worth of living expenses -- though six months' worth of expenses is really ideal. If you happen to already own a home or have children, you'd be wise to aim even higher.
Furthermore, be sure to keep your emergency money someplace safe, like a bank account, so it's there when you need it. While it's generally a good idea to invest any money you're not using right away, your emergency fund is the one exception since it needs to be immediately available to you at all times.
2. Start saving for retirement
When you're in your 20s, you may not be thinking about something as far off as retirement. But in reality, your 20s are a great time to start saving, because the sooner you do, the more time that money will have to grow. According to Moneyunder30.com, in 2015, only 46% of American 20-somethings contributed money to a retirement account like a 401(k) or IRA. Ideally, you should aim to save 10% of each paycheck for retirement, but if you can't swing that much, even a smaller amount will go a long way over time.
Case in point: Investing $200 a month over the course of 40 years will leave you with an ending balance of over $620,000 if your investments bring in an average annual 8% return. Furthermore, if your employer offers a 401(k) plan with a matching program, be sure to contribute enough to snag that match. Otherwise, you're leaving free money on the table.
3. Pay off your student loans
The average 2016 college graduate came away with over $37,000 in student loans. While federal student loans usually come with a repayment period of 10 years or longer, the sooner you're able to knock out that debt, the less money you'll wind up wasting on interest charges. Plus, once you eliminate those pesky payments, you'll have extra money on hand to invest or allocate to other major life goals, like buying a home. Imagine you owe $30,000 after graduating college. If it takes you 10 years to pay off those loans at 5% interest, you'll wind up spending over $38,000. Pay off those loans two years early, and you'll save close to $2,000 all in.
4. Improve your credit score
Building your credit score is important for a number of reasons. First, the better your credit score, the greater your chances of getting approved for an apartment rental, auto loan, or anything else you might need to function as an independent adult. Secondly, while buying a home may not be on your radar just yet, the better your credit, the more likely you are to score a favorable mortgage rate when the time does come to buy. Building up your credit is often a simple matter of using your credit cards responsibly -- namely, paying your bills on time and in full every month. Another way to improve your credit is to keep your credit utilization ratio below 30%. Your credit utilization ratio shows the extent to which you're using the credit available to you. If you have two credit cards with a combined $10,000 limit, your total balance should not exceed $3,000 at any given point in time. Taking steps to improve your credit now can work in your favor both in the short term and the long term.
As a 20-something adult, the choices you make today could actually impact the rest of your life, for better or for worse. Saving money and paying off debt may not be as fun as blowing paycheck after paycheck on life's many indulgences, but if you commit to a financially responsible lifestyle early on, you'll be thankful for it in the long run.
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