Personal Finance
How to Build Healthy Financial Habits in Your 20s
Your 20s are a pivotal time for developing healthy financial habits. It’s typically the first time you are living without parental support, and you face the reality that financial choices have a serious impact on your future. By developing good practices now, you get a good start on securing your finances in the coming decades.
Statistics indicate that the average American is not saving enough of their income for the future. About half of Americans do not have enough savings to cover even a month’s worth of expenses. Building up adequate savings and controlling your finances early can be the difference between a tight month and a serious crisis. Learning how to build healthy financial habits can not only help you grow your savings account but also protect your future.
Learn How to Make and Stick to a Budget
In order to control you spending, you must sit down and plan out a budget. Planning out a budget involves balancing your income versus your bills. Budgeting helps you decide right away how much money has to be spent and how much money you can have left over. It is important to develop a realistic budget that encompasses your regular monthly necessities, such as food, utilities, housing and transportation.
Before attempting to create a budget, you should examine your spending habits from the past several months. Apps like Clarity Money and Mint make it easy to see exactly what you are spending your money on. This can give you a baseline for your spending. It can also prevent you from creating an unrealistic budget that does not reflect your actual monthly needs. However, examine your expenses carefully. Determine how much of your previous expenditures were necessary and how much were optional. Keep this difference in mind when designing your budget. Everyone’s exact expenditures will vary. However, in general you should strive to budget your income as follows:
- Needs (including housing, groceries and health insurance) – 50 percent
- Wants (including entertainment and restaurants) – 30 percent
- Savings (including retirement and emergency) – 20 percent
After creating your budget, it is important to stick to the goals you set. This means avoiding blowing through your entertainment budget halfway into the month. If you can only spend $350 on entertainment in a month, you should not eat out three or four times a week. If you do, you will quickly run out of money for other expenditures, such as events or new clothes.
Minimize Impulse Spending but Plan for Fun
Your 20s are when you are most likely to spend recklessly and impulsively. After all – your youth is about having fun, right? Although you should enjoy your early adulthood, it is important to do so in a measured and responsible way.
This doesn’t mean cutting fun activities and spending out entirely, but instead planning and budgeting for it. Rather than taking an unplanned weekend trip to a resort where you will visit multiple bars and rack up tabs, create a vacation budget. Plan a weekend trip in advance and decide how much money you can realistically spend when you get there.
Another way to minimize your recreational spending is to add physical impediments. When spending for entertainment, you might want to use cash and leave your credit cards at home. Using a credit card can minimize the impact of how much you are spending. If you have to hand over cash for a purchase, you may think twice about some of your expenses. Additionally, taking out more cash requires a visit to an ATM. This may encourage you to think twice about needless spending to avoid requiring additional ATM trips.
Pay Your Bills in Full and Early
When you get your bills, you should pay them in their entirety and as early as possible. It is tempting to avoid paying bills until the day they are due and stick to minimum payments. However, this option is a trap that leads to financial struggles. The reality is your credit and your finances are hurt when you avoid paying your entire bill.
Interest compounds rapidly and you will pay for much more than you purchased if you avoid paying it all in full. Additionally, paying early reduces the chance that any errors delay payment. Banks will typically charge fees for late payments. By paying early, you avoid unnecessary fines that could make getting out of debt feel even more challenging.
Paying bills early and on time also protects your credit score and credit history, which determines much of your financial future. Your credit score is affected by factors such as whether you make regular payments and how much of a balance you carry. You may have heard that carrying a balance on your credit card is good for you, but this is misunderstood.
Although regular credit activity is good, you should always pay off your credit activity in full. By paying it off in full, you show that you are responsible about paying off debt. Carrying a balance indicates that you cannot pay off all your debts, and may negatively impact your score.
Additionally, debts that go to collections can negatively impact your credit report. Banks and lenders use your report and score to determine whether to lend to you and at what rate. Maintaining a good credit score will give you access to lower interest rates for important expenses such as a car loan or a mortgage. If you have a low credit score, you may get higher interest rates. Essentially, you will have to pay more because you have struggled to pay bills in the past. This can make saving especially difficult.
Create Short and Long Term Savings Goals
Planning for your future helps improve your chances of successfully sticking to savings goals. You can developing concrete plans and a clear amount you want to raise for goals in the short term and the long term. The most common advice is to create three savings buckets – short, medium and long term. Typically, long term refers to retirement. However, you can create buckets that fit your needs and life plans.
It is important to budget out exactly how much you want to put away into each bucket monthly. The best way to encourage savings is to put away a set percentage away as soon as you get paid. For instance, if you plan to save 20 percent of your income between three buckets, save between 6-7 percent into each account. Setting up an automatic deposit can make this painless and reduce the chance that you forget or choose not to save that month. Once the money is stored, you should forget about it and concentrate on what you have in your checking account.
Building Your Financial Future Starting Today
As you can see making small changes today can have a major impact on your financial future. Setting a realistic budget and sticking to it and setting up automated savings aren’t that hard yet they can make your financial future dramatically better. Today is the best day to start so get going!
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