by Maurie Backman | April 25, 2020
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Here are a few important items to check off your list.
When it comes to personal finance, being young has its pros and cons. On the one hand, you may be grappling with a lower salary than, say, your parents, as well as a shorter credit history, which can make it hard to borrow money easily. But on the other hand, you have your whole life ahead of you to make smart money-related decisions, and you have the ability to learn from your older colleagues, neighbors, and friends.
In fact, the moves you make in the coming years could really set the stage for a lifetime of financial security. Here are a few financial goals you should aim to achieve while you're still relatively new to adulthood.
Financial emergencies can happen to the best of us. That's why you need a healthy amount of money in a savings account -- specifically, enough to cover three to six months of bills. If you're nowhere close, make building your emergency fund your chief financial priority. Cut back on spending from month to month to free up cash to put in the bank, or get a second job to boost your income. Or do both. Emergency savings will not only give you peace of mind, but also help you avoid debt when unplanned expenses strike. This leads right to our next goal.
Not all debt is created equal. Paying off a mortgage or auto loan over time can help you build credit. The same technically holds for a credit card balance, only with one key caveat -- too much credit card debt can hurt your credit score, making it harder for you to borrow affordably for responsible purposes. In fact, credit card debt is just plain unhealthy. It costs you a lot in interest, and you should aim to get rid of it as quickly as possible.
Once you've built your emergency fund, use your extra savings to chip away at the balances you owe, paying them off in order of highest interest rate to lowest. Or do a balance transfer and move all of those debts onto a single credit card with a lower interest rate.
Ridding yourself of credit card debt can help boost your credit score, but it's not the only way. You can also improve your credit by paying all of your incoming bills on time, and by correcting errors you spot on your credit report that work against you (like a debt that somehow got associated with your credit history but isn't actually yours). If you don't yet own a home or vehicle, having strong credit will make buying property or a car more affordable. And if neither purchase is on your radar, it still helps to have great credit -- it can increase your chances of getting approved to rent an apartment or take out a personal loan in a pinch.
Investing during your 20s or 30s could set you up to become a millionaire by your 60s. That may seem impossible, but it's true. Thanks to the power of compound interest, you can turn a series of modest contributions to a retirement savings plan or brokerage account into a sizable sum of money over time.
Imagine you're 27 years old and put $1,000 into a brokerage account that generates an average annual 7% return on investment (a reasonable assumption if you load up on stocks). If you sit back and leave that money alone for 40 years, factoring in inflation and taxes, it will have grown into roughly $15,000 by the time you turn 67.
Now, let's take things one step further and imagine that instead of investing $1,000 once at 27, you start investing $5,000 a year at age 27. Do so for 40 years at that same 7% return, and you'll be sitting on just over $1 million.
The moves you make as a millennial could position you to really enjoy your 40s, 50s, and beyond. Check the above items off your list as you navigate young adulthood.
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