Becoming financially savvy can take decades. Each stage of life poses different challenges, some of which can make smart financial choices seemingly impossible. While it’s inevitable that there will be financial slip-ups throughout your life, following these tips in your 20s and 30s can help build a solid foundation for healthy finances.
Create a Monthly Budget
It is very difficult to save responsibly if you don’t first learn how to spend responsibly. Establish a budget, even a simple one, so you can track where your money is going. Remember: no budget is set in stone. You can always revisit your budget in a few weeks, months, or years to reassess your income and needs.
One popular and simple technique for budgeting is the 50/30/20 method. First, use 50 percent of your after-tax income on necessities like rent, groceries, insurances, and auto payments. Next, 30 percent of your income goes to your wants like shopping, travel, and entertainment. The remaining 20 percent of income goes right into savings.
Avoid Credit Card Debt
Credit cards can be a powerful tool, but to avoid losing money on interest payments, you need to pay off your balance in full each month. Spending only as much as you can pay off by the end of the month limits your credit card spending and can prevent you from falling into a pit of debt.
If you are already in debt, set up a repayment plan now and no matter what, avoid paying your credit card bills late. Playing catch-up puts a heavy strain your budget.
Create a Retirement Fund
Many employers offer a matching program for 401(k) retirement accounts. If available, your employer will match your annual contribution to your retirement account, typically up to a certain percentage of your salary or up to a dollar for dollar limit. Now is the perfect time to take advantage of this program. With a traditional 401(k), your contributions will not yet be taxed, allowing additional savings to accumulate.
If your company does not offer such a program, consider setting up a Roth IRA. The benefit of a Roth IRA is the funds can grow tax free.
Investing in stocks while you’re in your 20s and 30s gives you plenty of time to let your money grow, but you should be careful not to put all of your eggs in one basket. The stock market is unpredictable and an undiversified portfolio carries a greater amount of risk. Consider multiple assets classes and products like mutual funds and ETF’s which spread your investment across a wider range of different companies.
Monitor Your Credit Reports
Even if you do not plan on making major purchases in the next few months, routinely check out your credit reports. Each reporting bureau must offer one free report per year, but you can stagger your reports from each agency to receive one every few months.
A higher credit score helps you receive better rates on loans and may help you avoid hefty deposits on rentals, utilities, and more as you work to establish yourself financially. When you check your reports, be sure to verify you have not been a victim of identity theft and no one else has taken out credit in your name. Consider placing a credit freeze at each of the three credit bureaus if you do not have a need to access credit soon.
Maintain Health Insurance Annually
Even if you are healthy, you don’t want to skimp on health insurance. Whether you get a plan through your parents, at work, or from the marketplace, you are potentially saving thousands of dollars on a trip to the emergency room.
Medical care is expensive, so any coverage allowing you to pay less for in-network health care is beneficial. Preventative care, like vaccines and check-ups, are often covered and not subject to your deductible. After you meet your deductible, your healthcare costs are reduced while individuals without healthcare coverage risk paying for serious medical care.
Build an Emergency Fund
An emergency fund should cover at least three to six months worth of expenses in case you were to lose your job or become unable to work. This fund also prevents you from going into debt because of unforeseen circumstances, such as your car or air conditioning unit breaking down. Statistics show that most millennials could not pay for a surprise $1,000 expense.
Consider Financial Planning
Having questions about your financial future is natural. Financial planners understand the challenges young people face when they begin setting themselves up for success. If you are ready to set up a complimentary consultation with a CERTIFIED FINANCIAL PLANNER™, contact Sharkey, Howes & Javer today.