Your 20s and 30s are a critical part of your financial journey. This fledgling period of life represents the bookend to your retirement. It marks the start of a lifelong financial journey. It comes replete with exciting money lessons as well as discouraging moments of harsh, calculating reality.
Regardless of how your initial financial path plays out, it’s important to give this period of your life its due attention. Let’s break down some of the most important areas that are worth carefully focusing on in early adulthood in order to set yourself up to live long and prosper.
Cultivate Good Financial Habits
The financial journey has many different facets. Wages and windfalls, credits and debits, budgets and bills all need to be studied and properly understood.
If you want to set yourself up for a successful life, there are four areas that are very important to consider as you begin your independent financial journey. These are:
- Creating and sticking to a budget;
- Staying healthy;
- Managing your credit and debt;
- Having a long-term plan in place.
By investing in these four areas, you can create healthy financial habits. These will continue to serve you throughout your life. Let’s break each one down, shall we?
Always Start with a Budget
A budget is a critical inception point for a long and productive financial life. Your budget is more than just a list of your income and expenses. It gives you a living blueprint to help guide you through some of life’s biggest decisions.
How to Create a Budget
Creating a budget is fairly simple — on the surface at least. In a nutshell, all you need to do is:
- Add up all of your income and then track and subtract all of your expenses from the total.
- Make sure that you’re living below your means — i.e., that you’re not spending more than you earn.
- Set goals, such as how much discretionary spending you have each month, how much you want to save in an emergency fund, or how much debt you want to pay down with each paycheck.
A budget helps you understand how much money you’re making, how expensive your lifestyle is, and how you’re managing things like your debt and savings.
How to Update Your Budget
Once you have a budget, you want to treat it like a living document. As your income and expenses shift, you want to reflect those changes in your budget.
It’s wise to schedule a consistent time to revisit and update your budget. One a quarter should be sufficient for this. Consider how your living situation has changed, whether your debt has increased or decreased, and so on. Then make adjustments where necessary.
Budgeting Benefits
Budgeting is a highly beneficial activity. It can:
- Teach you to manage money efficiently and effectively;
- Help you make smarter spending decisions and live on less money;
- Empower you to pay down your debts quickly;
- Help you stay motivated about your finances, career, living situation, and so on;
- Push you toward your short-, mid, and long-term objectives (more on that further down).
Building a solid and sustainable budget is ground zero for healthy long-term finances.
Make Plans to Stay Healthy
This next section may seem out of place in a financially focused list of recommendations. However, your health can actually have a profound impact on your finances. For instance, one of the biggest reasons people have debts go to collections is due to unpaid medical bills. By tending to your health, you boost your finances for years to come.
Eat, Sleep, and Exercise
A healthy lifestyle often revolves around three main activities:
- Eating: It’s important to make sure to take the time to set up a good diet that helps you stay healthy and operating at peak performance.
- Sleeping: Both the quantity and the quality of your sleep are very important for sustained health.
- Exercise: From reducing stress to keeping your body in shape, exercise is a must for a healthy lifestyle.
If you can find the time for eating competently, sleeping well, and exercising consistently, you can keep your body in fine form over the years and decades ahead.
Set up an HSA
On a more specific financial note, you can also boost your health with an HSA. An HSA, or health savings account, is a specific savings account that is set aside to pay for medical expenses in the future.
An HSA is tax-free in most cases and can be treated as a sort of retirement account targeted at your long-term health. If you can save now for future medical expenses, it can keep you healthy while also bolstering your finances.
Consider Your Credit and Debt
Your credit and overall debt are critical pieces of your financial condition. A low credit score or an excessive amount of debt can cripple your ability to function in the modern world. Here are a few considerations as you start borrowing funds on a regular basis and get your credit history off the ground.
Why Good Credit Matters
Avoiding the negative repercussions of bad credit is motivation enough to take care of your credit history. However, there are also many different benefits that come with having good credit. For example, if you have a credit score that is over 670 (that is, officially “Good” credit on the FICO Credit Scoring model), you tap into financial advantages like:
- Having a higher chance of approval when applying for all sorts of loans;
- Wielding greater negotiating power with lenders;
- Getting lower interest rates and higher borrowing limits;
- Being able to refinance loans when the opportunity arises;
- Qualifying for credit cards with better rewards;
- Being approved for an apartment and having smaller security deposits;
- Passing employer credit checks when they take place.
With so many benefits, cultivating good credit should be a top priority.
What Goes Into Your Credit Score
Your credit score is impacted by several different factors, including:
- Your payment history;
- Your total debt;
- Your credit utilization ratio;
- Hard inquiries made by lenders;
- Derogatory marks on your credit report;
- The variety of different kinds of credit that you have.
Additionally, the age of your credit matters. Unfortunately, this is an area where, as a younger individual, you have to be patient. However, the other six items listed above are all worth researching and perfecting throughout your ongoing financial activity.
How to Build Your Credit
Building your credit is a complex subject worth prolonged consideration. However, here are a few quick tips to help you get started with the task of improving your credit:
- Make timely payments and in full;
- Only take out loans when you need them;
- Use and pay off your credit cards every month;
- Update and stick to your budget;
- Review your credit report for errors and derogatory marks once a year.
Good credit is a lifeline that will serve you time and again throughout the rest of your life.
Create a Financial Plan
Finally, it’s important to create a personal financial plan. This should include short-, mid, and long-term goals. Some of these goals can be specifically about finances and others can be general life goals that are impacted by your finances.
Set Short-Term Goals
Your short-term goals should consist of things like:
- Paying off a credit card;
- Saving up an emergency fund;
- Getting a higher source of income.
These goals should be focused on addressing immediate financial concerns in your life.
Set Mid-Term Goals
Mid-term goals are often lumped in with short-term goals. However, they often look further out into the future. Examples include:
- Saving up for a mortgage down payment;
- Boosting your credit score;
- Starting a business.
Typically a mid-term goal focuses on where you want to be a few years from now.
Set Long-Term Goals
Long-term goals are where the magic happens. These are the objectives that you should stay focused on for the long haul, such as:
- Taking advantage of an employer’s 401(k) plan or setting up your own independent IRA to save for retirement;
- Setting retirement savings goals and deciding if you want to retire traditionally or adopt the F.I.R.E. model of early hybrid retirement;
- Saving for your child’s tuition;
- Paying off your mortgage.
Long-term financial goals can feel overwhelming at times. However, the name of the game here is pacing. These goals should take years and even decades to achieve. Having them in mind in your 20s and 30s, though, is a key part of actually achieving them sooner or later.
Conquering Your Fledgeling Finances
Money matters can be overwhelming at first. As is the case with most things in life, though, if you take the time to break things down, you can approach your youthful finances one step at a time.
Things like creating a budget, caring for your health, building your credit, and setting financial goals are all important steps in building a brighter financial future. Fortunately, even these categories can be split into more manageable sub-categories that you can tackle one at a time.
If you can patiently do that, you’ll be able to set yourself up for financial independence in the here and now as well as a comfortable retirement in the future — all of which you can begin to achieve right from the beginning of your financial journey.
