If you’re getting a decent way into your twenties, then you’ve probably started thinking about your money in a slightly different way. When you become an adult rather than a kid in an adult’s body, you realize that money should be used for more than just partying. If you want to be comfortable through your twenties and beyond, you need to start putting some work into keeping your cash organized. Whether you’re becoming financially independent for the first time in your life, or you just want a quick refresher, then this post is for you. Here’s a complete guide to personal finances in your twenties.
We’ll start with the basic cornerstone to your finances: your personal budget. As a rule of thumb, your paycheque should break down neatly into a half and two quarters. One half should be dedicated to your basic living expenses. These are your rent, food, utilities, internet, and transport. One of the remaining quarters should be for your financial aims; loans, your retirement fund, paying off debt and saving. The last quarter you can set aside for your lifestyle choices. Hitting the clubs, shopping, eating out, and hobbies all come under this category. You should try to get into the swing of this budget as soon as possible. However, making such a big change overnight can obviously be quite stressful. Unfortunately, getting into your new budget is simply a matter of self-discipline. Try to be realistic, and don’t torture yourself by checking out all kinds of luxuries when you’re only working an entry-level job. When your boys invite you on some expensive night out, you’re going to have to practice saying no. Believe me, life’s luxuries are so much sweeter if you can wait for them! Reassessing your budget every month and evaluating how well you’re doing can also help with the stress of adjustment. If you find that you’re always going over your budget, then you may need to re-evaluate some of your lifestyle choices. Consider canceling magazine subscriptions for a digital solution, cutting down on the amount of takeaways you get, or looking for a cheaper alternative to your current TV tariff. If you really can’t help yourself, then consider a cash budget. Set yourself specific amounts of money for bars, clothes, moves and so on, take these out in cash and seal them in envelopes.
The next big part of your personal finances is savings. A lot of financial planners out there will recommend that you save 20% of every monthly paycheque. While you don’t have to start doing this straight away, you should still remember it, and keep it in mind as a good target to try and meet. Unless you have no choice but to live hand-to-mouth, (unlikely) you should be putting away at least some of your income for a rainy day. If you fail to save for financial emergencies, then you may live to regret it! If you’re financially independent and want to stay that way, you should be shooting for a fund equal to at least four months of your current net pay. Once you’ve built up a decent emergency fund, that 20% mark should go to the next long-term goal; a car, property, or some luxurious holiday. This may sound tough, but again you’ll just have to grit your teeth and get on with it. Besides, there are many different savings accounts which can be a big help in working towards your goals. Here’s what you should know about some of them…
Regular savings accounts are the beginner’s, basic kind of account. The perks and conditions vary from bank to bank, but are generally quite easy to understand. This will probably be the one you’ll want to open to start working on your emergency fund. There’ll be very little commitment necessary, and you’ll always earn more interest than you would with a checking account. However, the money you’ll earn through interest will be very low compared to other accounts. Certificate of deposit accounts, or CDs, are more suited to your long-term saving goals. You’ll be able to enjoy considerably higher interest rates than a standard savings account, which are rising as the years go by. However, there’s one big downside to them: they’re very inflexible. Depending on the account, you won’t be able to touch the money you’ve deposited for at least three months, and possibly five years! Withdraw early, and your bank may slap you with a fee. Then there’s money market accounts; a much more boring kind of “MMA”. These accounts occupy a kind of middle ground between CDs and regular savings. You’ll get more flexibility than you would with a CD in some ways. However, a lot of MMAs have high minimum balances, and there may be various limits on your withdrawals. You should be aware that whatever savings or checking account you choose, it will probably have a small maintenance fee. You can avoid this by setting up a recurring transfer, or by keeping the account’s minimum sum deposited.
To save as efficiently as possible, you need to have a keen understanding of how interest works as well. Depending on various factors, interest can be one of your best friends or one of your worst enemies. Interest is essentially a fee the bank pays for borrowing money. By depositing money with a bank, you’re agreeing to let it “borrow” the money temporarily, and lend it to various people or businesses. This works both ways. We pay interest on loans, car payments, credit cards and all that fun stuff. If you’ve come across the term “compounding interest”, and been a little confused about it, this just refers to how often the interest is worked out and added to your account balance. The more frequently it’s compounded, the more you’ll make, or owe in the case of a loan. High-yield savings accounts, MMAs, and online banks generally have higher yields each year compared to your standard savings account. However, high-yield accounts also tend to have high minimum balances and maintenance fees.
Next, we’ll take a look at debt and loans. Credit cards are now easier than ever to acquire, not to mention the feverish rise of the short-term loans business. Due to these factors, you may have some considerable debt before you reach 25. The good news is you’re not alone. The bad news is you’re going to need to tighten your belt! Make sure all your bad debt (car loans, credit cards, consumer loans) first, especially anything you have outstanding on credit cards. These can easily snowball out of control, and leave you in a worse position than you were in. Next, you need to put even more work into developing your self-discipline. By this, I mean you need to work on more frugal habits, and avoid any unnecessary debt like the plague. Don’t exceed your means, and think carefully before you take on any more bad debt. As you may have guessed, it’s incredibly hard for the average person to go through life without taking on a penny of debt. If and when you do take out that loan, be sure to shop around for one that compounds less often, and has a lower interest rate. There are countless banks, car dealerships and credit card companies out there, and you’ll almost always be able to find a better deal. Be sure to read the fine print before agreeing to any loan as well. I know that it’s more fun to watch paint dry, but if you fail to read all the T’s and C’s, you may walk into a very poor deal. Read everything you’re given, and make sure you ask about any jargon which you don’t understand. Finally, don’t treat your debt as a “financial priority”! Even when you’ve got crippling debt hanging over you, it’s important to keep saving. You’ll miss the bars and meals out, but further down the line you’ll thank yourself.
Finally, getting a retirement account in order. Retirement is decades away, but that doesn’t mean that you shouldn’t be preparing for it. I bet now, the fact that you’ll hit retirement age must be pretty surreal. Well, it’s a fact nonetheless, and the sooner you start preparing the easier things will be later on. There are three main types of retirement account you need to know about: Traditional IRA, 401k, and Roth IRA. There are various ups and downs to all of these, but the main difference to be aware of is how the contributions are taxed differently. If you choose a traditional IRA or 401k account, you’ll be taxed only when you withdraw the funds, after your retirement. However, with a Roth IRA or Roth 401k, the money is deposited after tax, and you won’t have to pay interest on either interest or contributions.
If you’re finding it hard to get a handle on your personal finances, then I hope this guide has helped you out. If you work at understanding your finances in your twenties, you’ll avoid all kinds of panics in your thirties and forties!