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Even at 20 years old, it’s not too early to start setting financial goals.
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For those starting their 20s, financial goals often aren’t a priority. The early years of adulthood are an exciting time, and personal finance sometimes takes a backseat. But this is also the best time to set financial goals, because good decisions now can make you a lot of money in the years ahead.
At this stage of life, most people don’t have much disposable income, so you’re not expected to tuck away $10,000. It’s more about building a strong foundation. Here are five financial goals that will help you do that.
1. Save at least a month’s worth of living expenses
From time to time, unexpected money problems are going to pop up. Your job could cut your hours, or your car might break down, to give you a couple of common examples. Sometimes these things are impossible to predict, which is why every adult needs an emergency fund.
Your emergency fund is savings that you use to cover surprise expenses. The normal recommendation is to have three to six months of living expenses in your emergency savings, but that can be a lot to manage as a young adult.
To start, aim for an emergency fund with one month of living expenses. If your essentials, such as rent, groceries, and gas, cost $1,200 per month, then work on saving $1,200. And if you need to tap into that savings for an emergency, make sure to replenish it as soon as possible.
2. Follow a monthly spending plan
One of the best habits you can get into is planning how you’re going to spend your money. Many people, of all ages, fail to do this. They spend every dollar they make, or worse, they overspend and get themselves into unnecessary debt.
To make a monthly spending plan, start with your income. Then, divide that up into the following categories:
Essential expensesWants (your fun money)Savings/investments
For example, a popular type of budget is the 50/30/20 method. You spend 50% on essentials, 30% on things you want, and 20% on savings and investments.
If money is tight, you might need to put a much larger chunk of your income to essential expenses. That’s fine. What’s important is that you have a spending plan you follow. You can always adjust it later as your income increases.
3. Start a retirement fund
Retirement may seem like something you can start saving for later on, but if you can start now, you absolutely should. When you start while you’re young, you give your money more time to grow. And if you invest, your money can grow significantly.
This is easiest to understand with an example. Let’s compare two people, one who starts investing at 20 and another at 40. Both of them invest $100 per month and earn a 7% yearly return, which is realistic based on average stock market returns. Here’s how much each would have at a retirement age of 65:
The difference is that the investor who started at 20 earned much more compound interest. That’s when you earn interest on top of the interest you’ve already earned. Thanks to compound interest, their account grew by over $288,000. The investor who started at 40, on the other hand, earned about $36,000.
Retirement accounts are popular ways to invest, because they help you save on taxes. Here are a few options to consider:
4. Get a credit card to build your credit score
Learning how to use credit is another smart thing to do while you’re young. Although some people have bad experiences with credit cards, they’re a useful financial tool if you don’t spend more than you can afford.
To get started, look for a credit card designed for consumers who are new to credit. Make sure to pick one that doesn’t have an annual fee, so you can use it without paying extra. Here are some cards that are good for building credit:
Starter credit cards for no credit historyStudent credit cards
Here’s the key to using your credit card — pay the bill on time and in full every month. If you do this, there won’t be any interest charges on your purchases. And by paying on time, you build your credit score. This can help you get approved for an apartment, pay lower interest rates on auto loans or mortgages, and possibly even get cheaper insurance rates.
5. Open a high-yield savings account
You need a safe place to keep your savings, which is why a good savings account is a must. If you have your money in one of the big banks right now, check how much interest they’re paying you compared to what the best high-yield savings accounts are offering.
What you’ll probably find is that high-yield accounts have much higher rates than what you’re getting. That’s because they’re available through online banks that don’t have physical branches. Since online banks don’t need to spend on bank branches, they can pay out higher interest rates. In some cases, they offer 10- to 20-times more than the national average.
Online banks are also just as secure as any other. They have the same FDIC insurance that covers up to $250,000 per eligible account. Your money will still be safe, and you’ll be earning a lot more interest.
It’s good to have financial goals at every stage of life. In your 20s, it’s all about getting off to a strong start. If you check off all five of those goals, you’ll set yourself up for success.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
