5 Personal Finance Lessons Every 20-Something Should Know
Your 20s are a tricky period when you have to learn the many challenges and responsibilities of adulthood all at once. Find out how you can pay your bills and still have fun by mastering these lessons on personal finance while you’re still young.
Examine your cash flow
According toa study from the Bureau of Labor Statistics, the average American household spends up to $63,036 annually while the average household income in 2019 was $82,352. This means that Americans end up spending 76% of their earnings.
But do you know how much money you spend in relation to your income? As a young adult, you have to keep track of your monthly expenses to be able to identify how well you’re spending your earnings. Keep your receipts and create spreadsheets so that you can keep a tab on your monthly expenses. Watch out if you’re spending too much on any single thing, and see if your spending patterns truly match your own personal priorities and life goals. If not, think of ways you can cut back.
Master the art of budgeting
Once you get a sense of where you are financially, do get into the habit of budgeting. Budgeting will teach you how to manage and control your money so that you can afford to pay for your needs and wants while setting some money aside for your savings, as well!
An article on budgeting published by US News recommends different strategies, such as the Zero-Balance Budget and the 50-30-20. The former is the traditional approach wherein you will list different expense categories and strive to meet the target amount allocated for those categories each month. Meanwhile, the latter recommends setting aside 50% of your income on living expenses, 30% for your wants, and 20% for your savings.
Take advantage of compound interest
Your future self will thank you for investing in compound interest. Compound interest allows you to get a higher return on your investment by increasing the interest placed on your deposit over time.
Your 20s are the best time to take advantage of compound interest. You can choose to open a 401(k) account to prepare for your retirement, or you can also open a high-yield savings account — just be sure to factor the deposits into your monthly budget.
Improve your credit score
Your credit score helps creditors and lenders gauge whether you are financially responsible or not. Having a high credit score will give you benefits when you apply for mortgages, car payments, insurance premiums, and credit cards. And if you ever have to take out a loan in the future, this overview of personal loans by Marcus points out how your credit score will determine the interest rate you’ll get. Whether it’s for debt consolidation, moving, or home improvement, if you have a higher credit score, then you can benefit from a lower interest and a longer loan term.
There are plenty of easy ways to build up your credit score. You can prove that you are financially trustworthy by paying off your student loans as soon as possible. You may also get a secured credit card, which uses a deposit as a safety net in case you can’t pay your bills on time. Build up your credit score using the secured card by utilizing your credits and paying your bills when they’re due.
Save up for fun times
You’re still in your 20s, so don’t forget to have fun! Being responsible with your money does not automatically mean that you cannot enjoy your earnings.
If you have any leftover money after paying off your bills and setting aside some money for your savings, then you can put it in your fun fund. Reward yourself for making good financial moves by saving up for something that you want and will enjoy.