If I could take a time machine and go back to my early 20s, I would put myself aside and give advice I wish I had learned sooner. Some of it might be “learn how to use the stove,” but a lot of it is about personal finances.
At that age, I had little interest in the topic other than intermittently paying off my ever-growing credit card balance. If someone asks you about your retirement savings, you might get a blank look.
In addition to my lack of foresight, I now realize that I was also afraid of managing my own money, something that school didn’t teach me.
It’s a shame because at the time all you really needed to know was the basics. Also, having lived with his parents for nearly half of his 20s, he spent less and missed out on a great opportunity to increase his retirement savings. oh oh
With that in mind, here are some financial things I wish I knew by the time I turned 30. Also, here are some things that I’m glad I learned early on.
Without a budget, it’s difficult to keep track of your spending, which can lead to unnecessary debt.
A budget in its simplest form is a tally of both your income and fixed expenses for the month, either through a budgeting app, a spreadsheet, or simply by writing it down on paper. Additionally, different types of budgets are available, such as the popular his 50-30-20 budget.
The goal of your budget is to allow your income to cover your expenses while possibly leaving room for other goals, such as retirement. Budgets can be used to identify and reduce specific expenses as needed.
Unexpected expenses can increase your credit card debt. That’s one reason financial planners generally recommend setting aside three to six months’ worth of cash in reserve.
However, since people in their 20s tend to earn less than those in their 40s and 50s, having a large amount of cash on hand can be a difficult goal.
If so, aim to set aside at least $1,400 for your short-term savings goal. That’s the average cost of an emergency expense, according to a study by financial services firm LendingClub.
You can’t make long-term financial decisions without knowing how interest affects your money.
Interest is the price you pay to borrow money for a certain period of time, usually monthly or annually. For example, at 1% annual interest, he would pay about $100 in interest on a $10,000 loan.
The annualized interest rate depends on the type of loan. Here are the current average rates:
- Payday loans: typically around 400%
- Credit card: 20.24%
- 30 year fixed rate mortgage: 6.91%
- 4.99% for federal student loans for undergraduates
Similarly, the annualized rate of return on investments such as 401(k) plans and individual retirement accounts (IRAs) is also called “interest rate.” In this case, instead of the cost of borrowing, the return on your investment balance is listed and compared to the interest rate on the loan to help you decide how to choose how to spend your money and what trade-offs are worth it. . to you.
In your 20s, if you don’t know what your credit score is, you won’t be able to take action to improve it, so it’s wise to get into the habit of checking your credit score regularly. is.
Your credit score is important because a low credit score makes you less eligible for loans, car loans, and credit cards. Additionally, the lower your credit score, the more likely you are to pay interest.
Most bank websites or apps have a tab where you can check your score. In addition, itemized summaries of credit scores, known as credit reports, are produced by his three major credit bureaus in the United States: Equifax, Experian and TransUnion. Copies are available free of charge from each office at AnnualCreditReport.com.
Check your credit report at least once a year. If you discover identity theft or other errors, you can report them directly to the credit bureaus using this handy list from the Consumer Financial Protection Bureau.
To improve your credit score or maintain an already good one, pay your bills on time, keep your credit utilization low, and don’t open too many lines of credit in a short period of time.
Credit cards are a convenient way to make purchases that you can pay later, but they also charge high interest, add up quickly, and can be difficult to remove.
Interest is charged daily on your balance, so we recommend using a credit card for purchases that you know you can pay off in full each month.
At the very least, always pay the minimum amount on time. Overdue payments can result in potential penalties, higher interest rates, and a 100 point or more drop in credit score.
On the plus side, credit cards have valuable perks and perks that can help improve your credit score if you keep your debt balance low and make consistent payments.
If you want to retire comfortably, it’s wise to save early by taking advantage of the power of compounding interest that occurs when your investment account earnings are automatically reinvested. As a result, revenue grows exponentially over time.
However, there are also trade-offs. To take full advantage of compound interest, you should start saving as early as possible.
Even if you only have $20 a month to spare, put that money into your retirement savings account, whether it’s an employer-backed 401(k), IRA, or other option. By doing so, you will get into the habit of giving every month. You can always increase the amount later.
A 401(k) is a good place to start if your employer offers a matching contribution. This is basically what you pay as a bonus on top of what you have already contributed. For example, a typical employer matching plan may match him 50% to a maximum of 6% of pre-tax salary.
Your goal should be to increase your contributions each year, especially when you start earning more money later in life. A commonly recommended benchmark is 10% to 15% of your income.
Insurance protects you from large unexpected expenses that can put you in huge debt.
Nevertheless, many young people skip health insurance payments because they are less likely to have health problems than older people. But considering that routine medical procedures can cost thousands of dollars without insurance, it’s not worth the risk. Try to find a plan.
Most employers offer subsidized health insurance, but if you can’t do that, you may also consider Bronze or Silver coverage through the Health Insurance Marketplace or Medicaid if your income is low.
If you rely on your car for work, you may need additional collision or blanket coverage in addition to the liability coverage required by law in most states. This ensures that if your car is damaged in an accident or natural disaster, it can be repaired or replaced.
Homeowners are usually required to have home insurance, but renters have renters insurance to protect their belongings and avoid legal costs if they are sued for property damage. You must join.
Also, if you have dependents or family members who depend on your income, consider life insurance or long-term disability insurance to make up for lost wages.
Finally, if you don’t want to spend thousands of dollars on veterinarian costs, pet insurance is a good option.
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