If you’re in your 20s, you’re fortunate. You have plenty of time to build up a strong financial foundation, and by learning some important lessons early in life, you’ll be more likely to succeed financially.
Don’t Lend Money To Friends And Family
If you see that a friend or family member has a need, you might be tempted to give them a loan if they ask. This is not a good idea. If you have the financial means, you might just give them the funds. Personal finance expert Dave Ramsey notes that problems that can arise in a relationship if a personal debt does not get paid in a timely fashion.
Build An Emergency Fund
Financial problems and emergencies are inevitable and part of life. You may need to repair your roof after a storm, your HVAC might give out, or you might find yourself needing an emergency medical treatment. Unexpected emergency scenarios like these can result in expenses you may not be fully prepared for, and this is where a healthy emergency fund should come into play. Many experts recommend having between three and six months of your expenses saved to take care of unexpected emergencies. If you don’t have an emergency fund set up, you might consider looking into short-term financing alternatives such as applying for a credit card or an online cash advance to help in a financial pinch. If you do secure a short-term loan, always make sure you can handle the payment schedule to pay the loan back responsibly.
Pay Off Debt
Debt is one of the biggest drags on family finances. The more debt you have, the more you’ll have to pay in interest. Therefore, if you have any wiggle room in your budget, you’ll want to make sure to put any free money toward your debts. Once you have them paid off, you’ll have more flexibility with the cash flow that comes from your job.
Pay Yourself First
Some people refer to the idea of paying yourself first as taxing yourself. Regardless of how you choose to look at this concept, you’ll want to put aside some money each and every month. Most people pay all of their bills and then spend what’s left. When it comes time to save money, there’s nothing there to save. If you’ll take the simple advice to pay yourself before you pay your bills, you won’t be tempted to spend everything you have. Effectively, you’ll automatically adjust your spending to meet the money you have coming in. Even if you can only save $50 a month, it’s worth making that your first bill. Modern financial technology allows you to make such savings automatic.
Build A Budget
Many people come to the end of the month and wonder where their money went. This is less likely to happen if you set up a budget and religiously track your spending each month. A budget should show your fixed expenses like your mortgage, utilities and any car payments. It should also show variable and discretionary expenses like food and travel. Once you’ve set up your budget, you should have a good idea of how much money you can use to pay yourself first.
Don’t Forget To Save For Retirement
Putting money into your employer’s retirement fund is one of the best ways to pay yourself first. A 401(k) plan has tax advantages. You can elect to save before you pay taxes or after you pay taxes. If you choose the former option, you’ll cut your taxable income in the near term. On the other hand, saving after taxes will keep you from ever paying taxes on any of the money again. Both are great ways to allow your money to grow without having to worry about taxes until you start to make withdrawals.
Learning these financial lessons early in life can help you plan for the future. If you take them to heart, you’ll be more likely to succeed than those who go about spending money without a plan.