Your 20s is a time of self-exploration to gain a foothold as an adult – and likely to make some monetary mistakes.
To save you studying the hard way – and to pass some knowledge on when I get into my thirties – here are five money lessons from my last decade.
GET SERIOUS ABOUT GOALS
My main financial goal for several years was to go out as much as I wanted and have enough money left at the end of the month to cover the rent.
Ultimately, however, dazed mornings and meager savings turned out to be unfulfilled. My partner and I decided to set goals and plan for them. We wanted to buy a house, which meant we had to move to a cheaper city so we could start building savings.
TIP: Know your passions in order to know your goals.
Certified financial planner Pam Rodriguez in Sacramento, Calif., Suggests figuring out what you enjoy and then creating a financial plan to create more of those moments.
“Personal finances are a lot more emotional than a math equation,” says Rodriguez. “Even if the numbers have to add up, you will never take action unless you feel strong about something.”
For example, if you’re looking to buy a home to take in friends and family, figure out how much you need for a down payment and closing costs, and then work toward that savings goal over time.
FIND A BUDGETARY SYSTEM
For most of my 20s, my budgeting system was defined by the lack of it. At some point I soaked it up and started tracking my expenses. At first I felt like I was wearing off if I didn’t document where every penny went. But I quickly realized that a simple budget is more my style.
TIP: Choose a budgeting system that reflects your identity.
If you are a hyper-analytic person, a detailed spreadsheet might be for you. But if you’re more practical, a budgeting app can do the job.
Regardless of your budget, it is important to at least understand how much money is in and out of each month.
“When people see their expenses, they have an aha moment because they don’t know where their money is going,” says Sidney Divine, an Atlanta-certified financial planner.
TO LEARN FROM MISTAKES
Did you know that if you have a contract job and you don’t put enough money aside to cover the taxes, you may have to make monthly payments to the IRS for years? I learned that the hard way when I was in my early twenties.
TIP: Find the cause of a problem and find a solution.
In my case, the problem was ignoring my finances and not thinking about tax obligations. I solved the problem by proactively managing my budget and paying off my tax debts. It also helped get a new job that wasn’t a 1099 gig.
“You need to find out: is it the same mistake you keep making? Is it a pattern? ”Says Christine Papelian, certified financial planner in Phoenix. “If it is a new mistake, you now have the opportunity to get back on track. It is almost never too late to change a behavior or a habit. “
For example, if you have a habit of making late payments, consider setting up automatic invoice payment so you don’t have to worry about keeping track of different due dates.
BUILD FINANCIAL STRENGTH
Last year was a crash course in terms of instability. And while recent crises have been unusually severe, you can rest assured that unexpected financial challenges will arise as your life goes on. For example, a broken alternator on my car once used up my emergency fund, but at least I was able to avoid going into debt to cover the cost.
TIP: It is essential to save.
“Focus on building an emergency fund,” says Rodriguez. “Everyone needs one because everyone is going to have an emergency.”
Consider using a direct deposit to transfer a portion of each paycheck to an emergency savings account, or set up automatic transfers from a checking account to a savings account.
USE THIS LONG TIME HORIZON
The youth can be wasted on the youth, as can their financial time horizon – at least for those who do not use it.
Despite the various mistakes I made in my 20s, saving up for retirement is an area I haven’t neglected. After seeing the power of compound interest through an annuity calculator, I quickly set up regular contributions to my 401 (k).
TIP: Use these years to top up your retirement provision.
One way or another, your 20s are going to have an impact on your retirement years. And life can get more complicated later on, especially when you buy a home and raise a family, making it harder to save for retirement. Pocketing more money now can save yourself from catching up in later years.
This column was provided to The Associated Press by the personal finance website NerdWallet. Sean Pyles is a writer at NerdWallet. E-mail: firstname.lastname@example.org. Twitter: @SeanPyles.
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