5 Best Financial Decisions in Your 20s3 min read • January 14, 2019
For all that you learned in school, chances are it didn’t include much in the way of how to ace the personal finance stuff. It’s rare for high schools and colleges to focus on these vital life skills.
No worries. Follow these five financial moves and you will be off to a great start.
- Stay on Top of Your Student Loans Repayments. Falling behind in payments can make a mess of your financial life for years. Even if you declare bankruptcy, you’ll still be required to pay back the student loans. Not staying current on your payments will also hurt your credit score, and that is going to end up costing you in all sorts of ways.
Tip: No ostrich-ing, even if you have yet to land a job that pays enough. You still must contact the lender and get on a repayment plan, or formally apply to have your loan repayments temporarily suspended, though interest will continue to run up what you owe.
- Start Saving for Unhappy Surprises. Look, life happens. The great gig you’re enjoying loses its funding, or changes gears and you are out of a job. Your car needs a big-time repair. You wrench your knee in a pick-up game or on the ski slope, and “learn” that your health insurance requires you to pay part of your medical bills. This is where having an emergency savings fund can save you. When you’ve got some money tucked away, you won’t need to put an unexpected expense on a credit card that then charges you an interest rate of 15% or more.
Tip: Search online for “high rate savings accounts”—online banks offer much better rates than traditional brick-and-mortar banks. Sign up to have automatic monthly deposits sent from your checking account into your new online savings account.
- Start Savings for an Older You. Suggesting you start saving for retirement might seem highly clueless given everything you’re juggling. But every penny you save today will be far more valuable than money you start to save 10 or 20 years from now.
Right now is your one chance to make the most of compounding: money you save today has more time to grow. For instance, if you start saving $100 a week at age 25 and earn an annualized 6% you will have nearly $870,000 saved up by age 65. And most of that will be from compounding: your total contributions will be $208,000. If you wait until age 40 to start saving, you will have just $300,000 saved up at 65. To end up with around $870,000 you would need to start saving $290 a week at age 40.
Tip: If you have a workplace retirement plan that offers you a matching contribution, make sure you contribute enough to qualify for the biggest possible match. No workplace plan? Anyone with earned income can open a Roth IRA at a discount brokerage and set up monthly or quarterly direct deposits from a checking account.
- Make Sure You Have Health Insurance. Even if you’re currently covered on a parent’s health plan, you will be kicked off at age 26. Don’t get twisted in knots about all the headlines about how expensive health insurance is. You can likely use your age to great advantage. If you don’t have a workplace plan, you will want to buy an individual plan through the Affordable Care Act. Chances are your income will qualify you for subsidies.
Tip: Whether you have health insurance at work or the ACA, you may have the option to choose a High Deductible Health Plan (HDHP). If you’ve nailed step 2 –an emergency saving plan—an HDHP can be a great option as your premium costs will be lower, and you have your emergency savings ready to cover the deductible, if need be. When you have an HDHP you are eligible to save in a Health Savings Account. An HSA offers unbeatable tax breaks for paying any medical bills: those you run up this year, or decades from now.
- Set your Indulgence Budget. If you are a FIRE devotee, you are going to be resolutely focused on reducing your spending to the essentials. That’s great. But not everyone is up for FIRE. And it can be easier to stay committed to saving and building financial security if you also allow yourself to spend on “wants” once in a while.
Tip: The key is to have a conscious plan for how much you will allow yourself to spend on “whatever/whenever.” Maybe it’s 10% or 15% of your take-home pay.
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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.