Smart financial moves to make in your 20s.
Key takeaways:
- Developing good money habits early, such as budgeting, saving and building good credit, puts you on track toward financial independence.
- Opening the right combination of accounts in your 20s sets you up for long-term financial success.
- Understanding account features helps you choose options that support your current financial situation and future goals.
Are you feeling a bit stressed about being on your own for the first time? It’s understandable. Now you’re responsible for paying rent, buying groceries, and covering bills you never considered while living at home. Fortunately, there’s a way to set yourself up for future success. Set up the right accounts and suddenly managing your money becomes much simpler.
Step 1: Start with a realistic budget.
Knowing where your money goes is the foundation for every financial decision — and it helps you stay in control. A simple budget helps you cover essentials, save realistically, avoid overspending, and reach your goals. Start by listing your monthly income, subtract fixed expenses like rent and loan payments, then allocate what’s left for food, entertainment and savings.
To manage your budget, your checking account can be your financial home base. This is where you receive your paycheck and where you will pay your bills, buy groceries, and manage your daily expenses. If you have a checking account from your teenage years, it’s a good idea to confirm whether that account still meets your needs as a young adult.
Step 2: Start saving.
Aim to build a cushion of three to six months’ expenses. This may sound overwhelming, but it’s not. Even small, consistent deposits add up over time.
A checking account is for everyday spending, while a savings account is for saving money for future goals and unexpected costs. If you can only save $25 a month at first, starting this habit now will help you in the long run.
Your savings plan should include creating an emergency fund, which is money saved in a designated account for unexpected costs like car repairs or medical bills. Financial experts opens in a new window suggest saving enough cash to cover three to six months of living expenses, but don’t feel stressed by that amount. Begin with a goal of $500, and then slowly increase it.
Step 3: Build good credit.
This isn’t just important — it’s essential. Your credit history impacts your ability to buy a car, purchase a home, and even qualify for the best rates.
You need good credit to rent certain apartments, get better auto loan rates and terms, and eventually qualify for a mortgage. A credit card helps to build a positive credit history, but you should use it responsibly. Pay on time and only spend within your budget. These habits set the foundation for your financial future.
Secured credit cards are the easiest way to get started since there’s no credit check. You deposit money into a designated account. The balance will be your credit limit. Just like with unsecured credit cards, account activity is reported to major credit reporting bureaus.
Going beyond the basics.
If you begin investing in your 20s, your money has decades to grow through compound interest, which makes regular contributions much more impactful. Start with an employer-sponsored retirement savings plan. Many employers match a percentage of your contributions, essentially giving you free money toward retirement. If your employer provides matching contributions, make sure to contribute enough to receive the full amount they will match.
A Roth IRA is another option worth considering. This type of account lets you contribute money that you’ve already been taxed on and take it out tax-free when you retire.
Ignore the temptation to only choose one account and spend all of your extra money on lifestyle spending. Remember that employer-sponsored plans use pre-tax dollars, reducing your current taxable income, while a Roth IRA uses after-tax dollars for tax-free retirement withdrawals. Owning both accounts gives you the best of both worlds since you can withdraw from either account in retirement based on your tax situation.
Tip:
What to know before you open an account.
Setting up multiple accounts can help you stay in control of your finances, but only if you track your income and expenses so you know where your money is and where it’s going. Before you open any financial account, make sure you’ve reviewed how each one is affected by:
- Fees and minimums. Monthly fees for maintenance, overdrafts, ATMs, and minimum balances can add up fast. When choosing a checking account, try to find one with no monthly fees or easy options to avoid them, like using direct deposit. To save more money, try to steer clear of monthly fees on your savings account.
- Interest rates. Higher interest rates help your savings account balances grow more quickly. If you have a credit card and owe money, having lower interest rates will help you save money.
- How you’ll access your accounts. Think about whether you need physical bank branches or if you would rather use online banking. Check for mobile banking options such as depositing checks using your phone, sending funds to others using apps like Zelle®, and easily transferring money between accounts.
How they can work better together. Opening several accounts at the same bank can make it easier to transfer money and receive better interest rates.
Keep in mind that personal finance is not the same for everyone. What works for your friends might not be the best option for you. Your Commerce Banker can help you make a custom plan that adapts as you grow, and helps you meet your financial goals. Contact us today.
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