What should you do in your 20s? Start your job life, enjoy with your friends, plan enjoyable vacations, shop till your drop - to name a few.
However, there is another important thing you need to do - Work towards building a secure financial future.
Why your 20s are important - You can take advantage of compound interest
You should not wait till you are 30, to save money and invest. There’s an important reason behind it why you should start taking your finances seriously from your 20s.
If I tell you that you will earn interest on your interest itself - How will you feel? This is exactly what compound interest is all about.
It is easier to explain it with an example:
If you invest $1000 and earn a 10% return on it, then in the next year you have $1100. The next year you earn $1210. Surprised? It is because you earned 10% on the principal amount and additional 10% on the interest you earned. This is the magic of compound interest.
Now, you think if you start investing from 20s, how much it’ll be after your retirement.
You will understand it better if you have taken out a mortgage loan. During the beginning of the home loan payment schedule, the payments you make usually satisfies the interest payment. As the principal amount goes down, interest comprises relatively a smaller part of your mortgage payments.
How to secure your financial future
Here are a few things which you should start following from your 20s if you believe in building a secure financial future at a young age.
1 Plan a budget and revisit it
Without having a budget, it is relatively easier to spend more on unnecessary things. To plan a suitable budget, first of all, figure out your short and long term saving goals, such as building an emergency fund and retirement.
As per Lauren Locker, a financial Planner in New Jersey, "The big thing is really to differentiate between your needs, your wants and your dreams."
A proper budget can help you decide on how far you can go to satisfy your wants.
2 Save and build a fund for emergency purpose
Just having an emergency fund is not enough. According to Kiplinger, you should have at least 3-6 months of your expenses in a savings account that is easy to access, so that you can use the funds when you really need it.
As the name suggests, you should not use this fund unless it’s an absolute necessity, like a medical expense.
To build an emergency fund, deposit at least 10% of your paycheck every month to this account. Whenever you receive any extra amount, put it in this fund.
3 Work towards building a good credit score
You will be able to take out loans at favorable rates if your score is good. Moreover, nowadays, the organizations also sometimes check your score to assess whether or not you are trustworthy. According to them, if a person knows how to take control of finances and can manage his/her money well, he/she is responsible and can be a valuable member of an organization.
However, it won't happen overnight or in a fortnight. It will take some time to have a good credit score.
4 Buy required insurance coverage
If you are staying in an apartment, make sure you have the required renter’s insurance coverage. Along with it, have health insurance and car insurance, etc. with the required coverage.
5 Make the habit of arranging your financial documents
To build a secure financial future, you need to take control of your finances, and to do that first of all, you have to arrange your financial documents properly.
It is the right time to have your birth certificate with you instead of your parents. Along with it, have your SSN (Social Security Number) and other IDs properly filed.
I repeat, have a hard copy with you along with the important documents, and keep it a place where you can access it when you need it and won’t have to search for it.
6 Start saving for your retirement days
You must be laughing that you have just started your work life and I’m asking you to plan for your retirement - astonishing but a very practical thought. As I have already discussed - take advantage of compound interest.
Experts say that you should start saving for retirement right from the month you start your first job.
If it’s a little difficult for you save for your retirement, and every month you decide to save from the next month, opt for automatic payments. You will receive your take home pay after the deduction. So, you can plan your budget on the remaining amount and won’t have to forcefully save for retirement; automatically the money will be saved.
If you feel that it’s a bit confusing, do not hesitate to meet a financial advisor or a person who can guide you properly. You can also take help from your mom and dad. They have practical experience and they know you; so, they can guide your properly about what you should do in your 20s to have a rocking financial future ahead.