Rosalind Evans
The period of your 20s is a pivotal phase in a life filled with landmark events — graduating, securing your first job, stepping out independently, potentially getting married or buying a home, and maybe even starting a family. This is the era when financial independence becomes a reality for many, a notion that can indeed feel daunting.
Nevertheless, it’s also time to tighten the reins on your financial situation before your life becomes even more hectic. Let’s explore some vital financial steps every young adult should consider, from establishing an emergency fund to building credit and making investment moves in the stock market.
Create an emergency fund
An emergency fund is an essential safety net we hope we never need to use, but it provides a sense of security and can protect your financial health in the event of job loss. Starting an emergency fund may seem challenging initially, but any steady growth is better than none.
Financial experts suggest wasting at least three months’ worth of necessary living costs. This means the amount will vary as you grow older. For instance, a solo 21-year-old sharing accommodation with roommates may not need as substantial an amount as a 29-year-old with a young family. Hence, make adjustments based on your circumstances.
You can enhance your emergency savings speed by depositing them in a high-yield savings account. Such accounts offer above-average interest rates (currently exceeding 4% APY), aiding you in reaching your savings objectives faster. It may seem insignificant initially, but remember that as your account balance grows, so does the interest you accrue.
The Bask Bank Interest Savings Account, our preferred high-yield savings account, generates a 4.85% APY on all balances. There are also no monthly maintenance charges or minimum balance constraints to fret about.
Set aside funds for minor unexpected expenses
Unlike an emergency fund, a rainy day fund is for unforeseen, lesser-cost expenditures such as car fixes, laptop replacements, or home maintenance. The sum you set aside is entirely up to you, but consider the expenses you’ve experienced.
Allocating money for those inevitable rough days can alleviate additional stress, allowing you to relax knowing you’re financially prepared for an unexpected expense. Furthermore, when faced with an unforeseen expenditure, you can withdraw from this fund rather than your emergency fund.
As with your emergency fund, keep your rainy-day savings in a high-yield account for growth over time.
Invest in your long-term financial health
To build enduring wealth, you need to make your money work for you through investments.
There are many options, but starting with a 401(k) — especially if your employer matches contributions — and a Roth IRA are wise first steps. Both investment vehicles offer tax benefits that can optimize your retirement savings. Be aware, however, that both accounts come with certain restrictions, so be sure to research thoroughly before investing.
If you’ve reached the maximum contribution limits on your 401(k) and Roth IRA, you might consider depositing money into a conventional taxable brokerage account. The Axos Self-Directed Trading account can be beneficial if you want to select your own investments or prefer a robo-advisor to choose funds on your behalf.
Starting to invest earlier allows your money more time to grow. Hence, begin with small contributions, gradually increase your deposits and let the magic of compound interest work for you. Your future self will appreciate it.
Establish your credit
Good credit can qualify you for superior loans, lower interest rates, specific credit cards, and even apartments. Hence, instilling good credit practices from the outset is crucial. This encompasses responsible borrowing, which means making all payments promptly and thoroughly. While it can be tempting to overspend on credit cards, remember that rewards credit cards are only beneficial when used prudently; otherwise, they can lead to expensive debt.
To start building credit, consider the following:
- Get a credit card. Secured credit cards can be a suitable first step if you have limited or no credit history.
- Become an authorized user. Seek a family member with good credit to add you as an authorized user.
- Register for a credit reporting service. Experian Boost enables individuals with no credit to build a credit profile by reporting punctual bill payments for mobile phones, electricity, and subscription services.
There are various commendable starter credit cards available. Ideally, you want a card that enables you to earn travel rewards or cash back on your routine purchases. This can assist in offsetting daily expenses, provided you fully pay off your credit card monthly.
Following are some of our top beginner credit cards for young adults with limited credit history. Note approval for any of these credit cards isn’t guaranteed, even with an existing credit history.
- Bilt Mastercard®: Earn travel rewards when you pay your rent and everyday expenses with this card, all at no annual fee (see rates and costs).
- Blue Cash Everyday® Card from American Express: Earn up to 3% cash back on everyday expenditures with no annual fee (see rates and costs).
- Chase Freedom® Student: For students, this credit card is an excellent choice for earning cash-back rewards on all purchases. Plus, receive a $50 bonus after making your first purchase.
Once your credit is established, you might find qualifying for a mortgage or a high-end travel rewards credit card simpler. Bearing this in mind, it’s generally advisable to start building credit as soon as possible. However, remember to consistently pay your credit card bill on time and in full.
Quickly eliminate your debts
Debt can provoke stress, but a well-laid debt repayment plan can be a lifesaver. This strategy also assists in reducing the total interest you pay, freeing up budget resources for other needs and propelling you closer to financial freedom.
For instance, in the case of private student loans, you might want to explore refinancing options. Refinancing not only amalgamates multiple loans into a single payment, reducing your overall interest outlay, but it could also potentially diminish your monthly payment. If you secure a lower monthly price, any extra costs can directly reduce the loan’s principal, enabling you to settle your debt even sooner.
For credit card debt, a balance transfer to a card with a 0% introductory APR could be worth considering, like the U.S. Bank Visa® Platinum Card, which offers 0% APR on purchases and balance transfers for the first 18 billing cycles (variable APR of 19.74% to 29.74% after that). This strategy can save you from paying extra interest as you aim to clear your balance.
If you’re dealing with multiple forms of debt, consider implementing the debt snowball or debt avalanche method to determine which debt to prioritize. The snowball method advises listing your debts from smallest to most significant balance and settling the most diminutive first while making minimum payments on all other debts. This approach builds momentum and can motivate those struggling with debt management.
Contrastingly, the debt avalanche method suggests listing your debts from the highest to the lowest interest rate, making additional payments toward the highest interest while continuing to service all other debts. This approach aims to minimize total interest payments across all obligations.
Determine specific savings objectives for the future
Financial goals are the common thread between endeavours such as buying a home, planning a week-long vacation, or purchasing holiday gifts — they all require significant funds, which many do not readily have available. Hence
Remember, everyone starts somewhere. Just make sure you’re starting on the right foot.
Being in your 20s comes with an array of unique financial challenges. However, it’s also a period rich with opportunities to cultivate strong financial habits and make prudent decisions. By initiating an emergency fund, investing early, building credit, reducing debt, and setting tangible savings goals, you put a robust financial foundation that will serve you for the rest of your life. The journey may initially seem overwhelming, but remember, everyone starts somewhere. You’re bound to succeed as long as you start on the right foot.
