Do you sometimes think back and regret some of your choices? Or maybe you are in your 20s and want to avoid some of the mistakes so many before you have made. Either way, I’m happy you are here because it is never too late to bring your finances in order. Looking back to my 20s, I didn’t care too much about most of the money tips I will talk about here. On the other hand, this also doesn’t surprise me too much. Talking about saving money, budgeting, and financial planning isn’t the most interesting topic to begin with. I get it!
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- Don’t take too much student loan
- Learn how to use Credit Cards
- Build your credit history
- Build up an emergency fund
- Track your expenses
- Invest a portion of your paycheck
- Don’t mistake Trading for Investing
- Never invest into anything you don’t understand
- Develop a Financial Plan
- Don’t buy an expensive car
- Conclusion – Money Tips that can shape your life
Don’t take too much student loan
Education is important. Very important actually. But it also comes with a high cost! Most students have to rely on student loans and take on massive amounts of debt before they know what they are going to make later on. It is not rare to deal with that debt well into your 30s or longer, depending on how much it is.
Besides student loans, you have a couple of alternatives that might be just right for you! You can apply for a scholarship or participate in a work-study. Some employers are also offering sponsorships.
Learn how to use Credit Cards
Getting your hands on your very first Credit Card can be very exciting! Especially early into your career (or even before). At that stage, you mostly aren’t yet earning a lot. This makes this tip even more important to bring home because Credit Card debt comes with the highest interest rate.
First things first: Create a habit to always pay back the entire balance every month. Don’t just pay the minimum balance! You want to avoid paying the card’s interest rate at all costs. You want to stay away from that as far as you can. Credit Cards have the highest interest rates, sometimes exceeding 20%! Using them wisely is essential to get ahead financially.
You should also ensure you are not using more than 50% of your credit limit. This is called your credit utilization rate, or CUR. Ensuring you are not spending more than you can afford is the easiest way to stay out of trouble. Think of your credit card as if it is a debit card. It’s not an endless supply of money.
Build your credit history
Many situations in life require a good credit score. This includes renting a place, getting a loan, and more. Because building a good score takes time, you want to start on that as early as possible.
The most crucial tip is to never miss any payment. Missing a payment can create an entry in your credit report that can stay there for 7 years and impact it negatively!
Next, your credit utilization also impacts your credit score, as discussed above. The utilization is the total amount of credit you use across all accounts at any time. Keeping that below 50% at all times is essential. If your utilization rises, try contacting your bank and get an increase. Sometimes, banks increase your limit automatically over time.
The length of your credit history also affects your credit score. Make sure to keep your oldest account around. If an account isn’t helpful, try changing it to a better card on the same account instead of closing it.
There are also services available that allow you to report your rent payments every month and use them to improve your credit score. Maybe your bank is offering much better benefits after a few years.
Build up an emergency fund
This tip is much easier said than done! I say this because, looking at the statistics, 31% of Gen-Z and 27% of Millennials do not have any emergency savings whatsoever! Amy Johnson from Broke+Budget+Girl discusses this in her article “Saving Is a Whole Vibe,” where she defines a plan to help you maneuver yourself out of financial distress.
Your goal is to not be part of that group. Built up an emergency fund three to six times your salary. If you aren’t anywhere close to that goal, that’s fine. Try to work out a plan to build it up over time. A small contribution into a savings account every month is all it takes.
But you don’t have to take my word for it. Here is a book tip that discusses that topic (and many more) in greater detail:
Track your expenses
I know it sounds dry and boring talking about this, and there are a million things more interesting, especially if you are young. But I want you to view this next tip as a tool in your toolbox, rather than a chore.
If you track where your money is going, you will get a better feeling about your overall financial situation. You can easily categorize your spending and define reasonable budgets. You can see your performance over time. Many apps also offer services like ending unwanted subscriptions for you. They are very good to get real time information about how well you are doing.
Invest a portion of your paycheck
For this next tip, I have to point out one crucial note first:
Never invest any money that you don’t have!
You must embrace this hard rule to be successful.
But let’s go back to the beginning. Maybe you are one of the people who think investing equals gambling. Or perhaps the thought of investing never even crossed your mind. If that sounds like you, let me teach you otherwise! You have a HUGE opportunity to get into the game of investing early on and learn it the right way. One way to do so is by reading some books on the topic. Educating yourself about investing is your most important step. It takes the magic out of the equation and makes the subject more accessible. We have an incredibly useful article about The 5 Best Investment Books for Beginners.
Moving aside a portion of your paycheck every month is a precious step and habit for you. You can set it up so that when that paycheck hits your account, a portion of that money moves into your investment app. That way, you can’t spend it on other things. Investing a smaller amount regularly is called Dollar-Cost-Averaging. You are averaging out your buy price and, thus, the market movement over time.
It’s not necessary that this portion is significant from the beginning on! Start with a smaller amount, get some experience, and develop the habit first. You can constantly adjust the amount later.
Don’t mistake Trading for Investing
I hate to break this next tip to you, but you are probably doing something right if investing feels boring! If you are always on the brink of moving your money around between stocks or being doubtful about your investments, you are not doing yourself a favor. Only touch your investments if there is a need for it. In doing so, you are potentially creating short-term capital gains taxes. Any gain in a stock you sell before owning it one year will be taxed like ordinary income. If you hold them longer, you are paying a more favorable/lower tax rate.
Instead of doing more trading-like behaviors, stay on top of your investments and inform yourself about the companies behind them. Learn about the products they are creating and their business strategies.
You can also use a small percentage of your portfolio, say 5%, for more active trading. There is nothing to say against that. It’s just not the majority of your portfolio.
Never invest in anything you don’t understand
Every investment in an individual company makes you a part-owner of that company. You should be proud of that. Of course, you don’t want to be a part-owner of something you have no idea about! You should know what you are investing your money into.
If you want to get a portion of your portfolio invested in a sector you don’t know a lot about, you also have the option to invest in an ETF. Many ETFs are available with all sorts of specializations like healthcare, AI, retail, and many more. Investing in ETFs takes a bit of the burden from you of having to dive deep into a single company. It’s a great way to get exposure in areas you don’t know much about.
Develop a Financial Plan
Having a real financial plan for your future is great! It gives you a sense of control and freedom. Creating a financial plan is an ongoing process of examining your entire financial picture. It helps you to achieve your short- and long-term goals. Take the stress out of the topic by creating your financial plan.
You can absolutely develop your own financial plan. Another way to do it is by talking to financial planning professionals. You can also do so online using robo-advisory services.
The steps to develop a financial plan
- Create your financial goals
- What do you want your life to look like in 5, 10, 20 years?
- What about cars, student loans, a house, vacations, kids?
- Track your income and expenses
- How much do you earn?
- How much do you spend on needs (utilities, housing, transportation, …)?
- How much money do you spend on wants (dining out, entertainment, shopping, …)?
- How much do you spend on saving and debt repayment (student loan, emergency fund, …)?
- Pay-Off your debt
- Sort all your debt by interest rate
- Pay down the highest interest rate debt first
- Build up an emergency fund
- Build up a small emergency fund – $500-1000 can cover minor emergencies
- Medium/Long term, build up 3-6 months worth of savings
- Retirement planning
- Many employers offer 401(k) plans (and some even match some of your contributions)
- Try to max out any employer match on your 401(k)
- Consider an IRA (individual retirement arrangement)
- Tax Planning
- Review your W-4 if you are getting big refunds every year
- Learn about the topic to take out the fear of having to pay hefty tax bills
- Learn about tax incentives that matter for your situation (children, education, business, …)
Developing your financial plan involves many more details and even more steps. But the important thing is getting started.
Don’t buy an Expensive Car
As tempting as it might be for many people, there are better choices than investing in an expensive car in many scenarios, especially when you are young or just starting your career. New cars tend to lose 20% of their value when they drive off the dealership’s parking lot.
Instead of spending much money – potentially for many years- focus on your financial well-being first. If it takes you seven years to pay off your car, you bought a car outside your price range.
A car has one job: Getting you from point A to point B. Of course, it should also offer enough security features. Get a 3-5 year old car instead. There will surely be a better time to buy the fancy car you’ve always wanted. But evaluate if now really is that time.
Conclusion – Money Tips that can shape your life
In conclusion, your financial decisions in your 20s significantly shape your future economic landscape. From handling student loans and credit cards wisely building a credit history to understanding the essence of an emergency fund, tracking expenses, and investing wisely, every aspect carries its weight. It’s crucial to avoid the thrill of your early earning years steering you into financial pitfalls like over-expensive purchases. Remember, it’s about setting a solid foundation now for a worry-free, financially stable future. Knowledge is power – especially regarding finances – and the more aware you become in your early years, the brighter your financial future will shine. Let these 10 Money Tips shape your financial future.