Navigating your finances in your early adult years is challenging. Maybe you’ve just graduated high school and are off to college for the first time, or you’ve just graduated college and have just landed your first real job. At this point, it’s likely that your financial concerns revolve around making ends meet with little planning for the future.
We’re here to tell you that now is the time to start planning for your financial future. While your income now might be limited to your entry-level salary or hourly pay, adopting good financial habits now will only benefit you in the future. If you can’t afford to save much, that’s no reason to give up saving altogether.
Starting an emergency fund and prioritizing your emergency savings is essential to avoid accumulating debt when unexpected expenses arise. You should aim to save at least three months’ worth of typical expenses in your emergency fund. If you’re still living with your parents and have limited expenses at the moment, then consider saving for your emergency fund at a higher rate now, if you can afford to, and adjusting as you go.
Your emergency fund should take priority over other savings vehicles like retirement accounts until you’ve built up a few month’s worth of expenses because you never know when a money-crunching situation might turn up, especially if you work in an industry with low job security.
While it may be tempting to spend what little money you may have leftover after bills and taxes, you should set aside a portion of your income for your retirement. If you have a job that offers retirement benefits, you should be contributing to your employer-sponsored retirement plan with the eventual goal of maxing out your contributions.
Many employers offer a match to your retirement contributions under their plan up to a certain percentage, so you should contribute at least the amount to maximize your employer’s match to avoid leaving that “free money” on the table.
Contributing the maximum annual amount of $19,500 (2021) to your 401(k) may be a good idea, but that’s not always the case. This depends on many factors, such as the type of account (Roth or traditional), fees, as well as your other financial goals and obligations.
You should also consider contributing to an individual retirement account (IRA) in addition to your 401(k). If you don’t have one, you can easily open one through a bank, advisor, or broker with minimal effort. While contribution limits are much lower than 401(k) limits ($6,000 per year in 2021, or $7,000 if you’re 50 or older), IRAs have tax advantages over 401(k)’s and generally have more investment options.
If you haven’t landed your first real job yet, you may still be able to start saving for retirement. You can set up a Roth IRA at any age as long as you have some type of income. If your parents are willing to help you out, take advantage of the opportunity to give yourself a cushion for gaining financial independence. Saving for retirement early will give your investments more time to compound.
If your individual income is less than $33,000, you may also be eligible for the Retirement Savings Contributions Credit. This program credits you a percentage of your retirement contributions to your IRA or employer-sponsored retirement plan based on your income. There are qualifications that you must meet to receive the credit, and there are income phase-out limits. Learn more about the Retirement Saver’s Credit here.
Opening an interest-bearing savings account to keep your savings isolated can help you generate some return on money that is essentially just sitting in your account untouched. Specifically, opening a savings account that can keep the money for your emergency fund separate from your checking account is key to not spending it in the short term.
You can open a savings account at your regular bank or you may consider opening a high-yield savings account online.
Automating your savings across your different accounts will make things simple for you by reducing the effort needed to hold yourself accountable. The same goes for auto-payments on your bills. This reduces the stress associated with deadlines because you won’t have to worry about missing a payment.
Getting a credit card while you’re young can be risky if you’re not using it properly, but it can also be a great tool for educating yourself on good credit card habits. Additionally, building your credit early on can benefit you when it comes to applying for loans and even jobs.
A good way to start building credit is to get a secured credit card and only use it to pay for expenses you know you can afford. These don’t have to be big expenses – gas or grocery expenses will even suffice. Additionally, make a point to pay off your credit card as soon as possible to avoid missing a payment and damaging your score.
For more tips on how to build your credit score and good credit habits, read 7 Tips for Improving your Credit Score.
If you haven’t considered saving for retirement before this, it’s likely that you definitely have not considered opening a health savings account (HSA) or even heard of one before. If you’re under the age of 26, you may still be on your parents’ health insurance, so this tip may not apply to you, but if you have a high-deductible health insurance policy, you should consider opening an HSA if eligible.
HSAs are useful for covering excess medical expenses that aren’t covered by your plan. While you’re young now and might not have any major health complications or expenses, these extra funds can be very useful for you as you age to avoid taking on more debt or dipping into your retirement savings.
These accounts are interest-bearing, meaning that your savings will grow over time and can grow exponentially if invested. HSAs also have tax advantages. Since medical expenses are one of the highest expenses for individuals in retirement, it doesn’t hurt to start saving early on, especially if you have children or are considering starting a family.
In 2021, individuals can contribute up to $3,600 to their HSAs, and HSAs that cover another family member have a contribution limit of $7,200.
Budgeting is a great habit to get into early on to set yourself up for financial success down the road. It can also help you quantify how much you can afford to save across your different accounts or if you have specific goals, it can help you allocate your income.
Knowing how to budget is helpful for keeping track of where you’re spending money, which can help you gain better control over your financial habits and help you identify ways to improve – subscriptions you can cancel, unnecessary expenses to cut back on. At the very least, it can help you become more in tune with your finances and learn what you can afford based on your goals. Check out our holiday savings guide and tips.
If you have a hobby or a talent that you enjoy, see if you can find a way to generate income by doing it. Having additional sources of income besides the income from your regular job(s) can help provide an extra cushion for you if you’re living paycheck-to-paycheck and can help you boost your savings in the meantime. If you were to unexpectedly lose your job or face another emergency, this may allow you some income to fall back on.
Doing something that you like or that you are good at and monetizing it is a win-win, so see if there’s any way you can generate income doing what you’re passionate about.
If you don’t have any income-generating hobbies, it may be worth taking the time to develop a skill that you can turn into a side hustle. There are many free training courses available online across different industries. Upwork is a great site for finding and posting freelance work online.
Studies have shown that we tend to spend more when paying with credit or debit cards compared to cash. This is because we aren’t experiencing the physical feeling of parting with our money at the moment, and in theory, it may seem that our funds are unlimited.
Paying with cash not only gives you a limit to your spending, but it also makes the amount you’re spending seem more real. Use cash to pay for “fun” purchases, such as outings with friends, to keep yourself from going over your budget.
Perhaps the most important skill you can utilize throughout your financial life is thinking long-term, which is why it’s so important to start planning your goals, future, and estate now. Having a long-term goal to work towards and keep you grounded can help reduce the stress associated with short-term market changes and unexpected expenses that may come up as you get older. It can also help you avoid making quick-minded decisions when you start to panic.
Considering your overall financial goals for the long-term and thinking about retirement might be a daunting task for your 20s. Getting into the planning mindset doesn’t have to start with your retirement goals. Planning your big purchases and saving up is a good habit to protect your credit and avoid debt. Even starting with planning your trips to the grocery store and mastering your budget can help ease you into the process.
Still, however, the act of planning might be easier said than done for many of us, which is why it never hurts to consult a financial advisor about your questions and goals for the future. Working with a fee-only fiduciary financial advisor in your 20s can help you maximize your resources to reach your goals and set you up for a successful financial future.
This article was written for information purposes only and its content should not be construed by any consumer and/or prospective client as rebel Financial’s solicitation to affect, or attempt to affect transactions in securities, or the rendering of personalized investment advice for compensation. No client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from rebel Financial, or from any other investment professional. See our disclosures page for more information.
rebel Financial is a Registered Investment Advisor that provides retirement planning, estate planning, financial planning, and investment management services to individual and institutional clients. To get a more detailed description of the company, its management, and practices, view our (form ADV, Part2A) and Disclosures.
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