Congratulations! You’ve just started your career, and you’re learning how to manage your finances. Take control by keeping in mind these important factors:
1. Evaluate your debt, and determine if it makes sense to aggressively pay down your debt.
Typically, the higher the interest rate, the more sense it will make to pay down your debt. For instance, if you have a credit card with high interest and a large balance, you may consider getting this paid off so that you can redirect the money you are paying in interest toward savings.
2. Establish an emergency fund, which ideally will contain 3 to 6 months of your income.
If you feel that you’re in a career with less security, you probably want to lean closer to 6 months. Your emergency fund should be easily accessible and most often in the form of cash.
3. Protect your greatest asset: yourself.
When we are young, our greatest asset is often our ability to earn an income, and this ability can be severely disrupted by disability. Make sure you understand the long-term disability coverage you have through your employer. If you do not have any coverage through your employer, or if it’s inadequate, you may need to consider purchasing your own individual disability insurance policy.
4. Don’t overlook the importance of having life insurance.
When you are younger, you can typically secure life insurance at a lower premium cost. If you are starting a family, you want to be sure they will be able to continue their current lifestyle should you pass away.
5. Make sure you have a budget, and try to live below your means.
Living below your means allows you to save some of your income. A budget will give you a guideline so you know where your expenses are today, and it also gives you insight into how those may change as you move through your career.
6. Start investing.
There are thousands of calculators you can access online that will show you the power of compounding. The younger you are, the greater advantage you have because your money has more time to work for you.
Here’s a simple example: If I started saving $5,000 a year, at the beginning of each year, at age 20 and achieved a 6% rate of return, in 45 years at age 65 I would have $1,127,541. If I don’t start saving until 30, saving $5,000 a year until age 65, at 65 I would have only $590,604. As you can see, the cost of waiting is huge—and so is the benefit of starting early!
Your 20s are some of the most exciting years in your life, and the financial habits you develop now are the ones that stick with you for the rest of your days. Start off on the right foot by incorporating these six simple factors, and you may be well-positioned to achieve your ideal retirement.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
