People in their 20s face a number of challenges, from launching a career to establishing good financial habits. At this age, individuals may put their financial wellbeing on the backburner.
However, it is important to take a few key steps that lay a solid foundation for the future. Ideally, individuals do not feel like they need to play catch-up once they are in their 30s. Some of the critical financial moves to make as a 20-something include:
1. Pay down high-interest debt.
High-interest debt includes any debt with interest rates greater than 5 percent. This usually means credit cards, personal loans, and private student loans. Many people in their 20s already have significant debt, including high-interest accounts like credit cards. Ideally, individuals leave their 20s without this type of debt so that they can save for financial goals like homeownership in their 30s or even before that time.
In general, individuals should prioritize paying off high-interest debt before they begin investing. This is because the interest on these accounts is typically higher than the return that can be earned on investments. To pay down debt effectively, individuals should list out all of their debts from highest interest rate to lowest and then pay as much as possible toward the number-one item on the list. Once that debt is paid, work down the list.
2. Take advantage of the employer match to retirement accounts.
The main exception to the rule of paying off debt prior to investing is taking advantage of any employer match program. Nowadays, many employers offer some sort of match on contributions toward a 401(k). These matches are basically free money, which means that people in their 20s who are decades away from retirement should still take advantage.
The most common offering in the United States is 50 cents for each dollar up to 6 percent of a paycheck. In this case, individuals should do as much as they can to hit that 6-percent mark. This offer provides an automatic 50-percent return on investment, which is virtually impossible to beat. While other investments can wait until people have paid down high-interest debt, taking advantage of the employer match needs to be a priority.
3. Purchase renters’ insurance.
While the majority of people in their 20s rent their homes, many of these individuals never purchase renters’ insurance, which can put them at significant financial risk. Part of the issue is that many people do not understand what exactly renters’ insurance covers. Homeowners’ insurance may seem indispensable, but renters’ insurance is not always seen as a necessity.
Renters’ insurance will actually protect an individual’s personal possessions. Imagine that a pipe bursts and floods an apartment. The landlord is responsible for repairing the pipe, but has no obligation to replace all the belongings that were ruined in the process. This is where renters’ insurance comes in handy. Some policies will actually pay for people to live somewhere else temporarily. These policies often also cover theft, even if it does not occur in the apartment.
4. Build an emergency fund.
Virtually everyone will need to tap into an emergency fund at some point, which is what makes it so important for the 20-something to focus on building one. Ideally, individuals save between three and six months’ worth of expenses in an account that does not get touched. This rough estimate can be adjusted depending on one’s personal situation and preference.
This fund will come in handy for an emergency like repairing a vehicle, covering unexpected medical costs, or even making ends meet during a period of unemployment. Not everyone will need such a fund in their 20s, but they will regret not creating one as soon as they do need it.
Plus, this is a fund that can be carried into future decades of life and expanded upon as monthly expenses increase and individuals eventually gain dependents. The money should be kept in a high-yield savings account for easy access when needed. Exposing this money to market risk through investment accounts is not wise.
5. Pay close attention to credit scores.
People in their 20s sometimes ignore their credit scores, especially if they don’t have a credit history. Doing this sets them up for disaster in the future when they need a loan for a car or even when they apply for a mortgage. Building a credit history is not difficult, but it does require some diligence and understanding of how credit works. Raising a credit score also takes time and patience.
People can start with a credit card that they use for small purchases. Importantly, this credit card should be paid off each month. Individuals may also ask to put their name on a parent’s account if feasible. Sometimes, people need to start out with a secured card, which means putting down some cash to cover available credit. Taking these small steps will lead toward a great credit score, which can help save a lot of money on interest down the road.