This post is sponsored by Lexington Law.
Our twenties are a busy time. They are also a confusing, tumultuous, and let’s face it: a feeling like you’re broke all of the time, time. If you’re experiencing that right now, you’re definitely not alone! It’s something most of us go through in our twenties.
One of the best things I ever did for myself, though, was set lofty financial goals in my early twenties. I had a lot of
mistakes learning opportunities that helped me aim higher and learn more quickly about what it was I wanted to achieve financially.
To give you some background, I graduated college in 2012 at age 21 with around $25k in student loan debt. I spent a year living in an apartment at the very top of my budget which meant I couldn’t even afford furniture for said apartment. I’ve even had my identity stolen. And now at 29, I’ve learned quite a few things about the financial priorities that are important to focus on to set yourself up for financial success.
The Top 5 Financial Priorities You Should Have In Your 20s
1. Your credit score.
Credit impacts your life in so many ways. From the length of your auto loan to the interest rate on your mortgage to your employment, a lower credit score can cost you thousands of dollars (plus years of your life spent paying that borrowed money back!).
In general, the lower your credit score, the higher your interest rates will be. A lower credit score indicates that you are not a trustworthy borrower. Lenders can’t guarantee that you’ll pay them back so you’re a bigger liability to loan to. This means they charge you a higher interest rate, and with that, longer loan terms. It also means you’ll be paying more money back to your lender for longer than someone with a higher credit score.
I’ve heard some people say they don’t care about their credit score because they rely on cash to buy things. In my opinion, this is a mistake because you never know what situation you’ll find yourself in down the line. You might have unforeseen medical expenses, have to declare bankruptcy, have your identity stolen or even be widowed. Life takes us unexpected places, and it’s best to be as prepared as possible.
Building good credit can be done by practicing simple habits that work in your financial favor. Some of these include:
- Keeping your utilization ratios and balances low.
- Opening lines of credit strategically.
- Paying all of your bills on time.
- Keeping an eye on your credit report and score.
Even if your credit score isn’t in the best place right now, changing your money habits can have a massive impact on improving your score over time. Here are a few additional resources to help you:
- 5 Credit Facts That Work In Your Financial Favor
- How To Build Good Credit: Credit Building Basics
- 10 Ways To Improve Your Finances In 10 Minutes
- The Ultimate Financial Checklist For Your 20s
If you’re unsure about how to improve your credit, have unfair negative items on your report, or have been a victim of identity theft, I recommend contacting the credit repair professionals at Lexington Law for a consultation for your unique situation. It’s a mature thing (read: very #adult thing to do) to ask for help when you need it.
2. Saving for retirement.
Many people in our generation simply aren’t saving for retirement. Given how strapped we are financially, it makes sense that this has fallen down the list of priorities. According to a poll conducted by Lexington Law 83 percent of Americans expect to spend more than $3,000/month in retirement… but where will that money come from?
The earlier you start saving, the longer your money will have to grow. This is important because of compound interest. The earlier you start, the better off you’ll be.
To start saving for retirement, discuss with your employer your tax advantage account options (most often a 401(k) but an IRA is also an option). You can also begin your own investment strategy to plan for retirement. Figure out how much you’ll need (the general rule for retirement is that you should have saved 8 to 10 times your salary by age 67) and work backwards to establish how much you need to save every month starting now. Your future self will thank you.
3. Paying off debt.
It’s no secret that the millennial generation is heavily burdened by student loan debt. Oftentimes, we find ourselves with even higher balances from consumer debt, car loans, and mortgages. It’s daunting to try to get ahead when we already feel like we’re starting from behind. But remember: It’s never too late to try to tackle your debt, no matter how much you have.
By paying off your debt as soon as possible, you’ll be able to focus more on the things that really matter to you in life. And you’ll also probably be surprised to discover what your debt was truly costing you.
The longer you have debt, the more interest that will accrue, and the more you’ll end up paying over time.
For example, I have a friend who had poor credit, we’re talking a score below 500 here. She found herself without any emergency savings and in dire need of a new vehicle. Because she couldn’t afford it any other way, she had to finance it. Her loan term was seven years long with an interest rate above 13 percent. She’s only halfway to paying off her loan and has already paid more in interest than what the original loan was in the first place.
My first year out of college, I cried ever time I had to make a loan payment. I desperately wanted to put that money into savings or take myself on a trip. But my loan debt was holding me back. So my husband and I decided to cut back as much as possible (more on that here), including living with roommates as a married couple, to pay off our debt as quickly as possible. Over five years later, I can confidently say it was worth it 1000x over.
It should also be a priority to *not* accumulate any more debt. Those balances will add up and follow you for years to come. Be smart with the debt you take on and don’t let anyone convince you that you need something you can’t afford.
4. Establishing an emergency fund.
Your emergency fund is your fallback plan. It’s what you can count on in case you become unemployed or have an emergency expense that would otherwise decimate your budget and max out your lines of credit. You can also build your emergency fund while paying off debt. It’s a smart thing to do so that in case of an emergency in the future, you won’t have to rely on lines of credit to save you.
The general rule of thumb for what you need in your emergency fund is three to six months worth of expenses.
Make sure you’re including everything you absolutely have to pay for. All of your fixed and variable expenses should be covered. If it is really an emergency and you won’t necessarily need to include discretionary spending. Your emergency fund will cover your rent or mortgage, and insurance payments, car payment, utilities (water, electricity, etc.), internet or cable, plus your groceries, gas budget, and a buffer of 5-10 percent to be safe.
Here’s an example in action:
For example, say your expenses are $2,500. Multiple 2500 by .05 to get your additional five percent. Double that to get your ten percent number. So 2500 x .05 = 125. So your expenses plus five percent is $2,625. Your expenses plus ten percent is $2,750.
So, three months worth of your expenses in this example would come out to be $8,250. Six months worth of your expenses would be $16,500.
As a caveat, remember to adjust your emergency fund as your expenses change. For example, if you move, get a new car, or have a baby, these could impact your monthly expenses and therefore how much you need in your emergency fund. With a child, I would suggest tacking on an additional 20 percent to your emergency fund, just so you’re covered.
5. Increasing your income.
There’s only so much you can cut from your budget to save money, but there’s really no limit on how much you can earn. One of the goals I suggested in my post on five financial goals to achieve by age 30 is to double your income between age 25 and age 30. It might sound like a daunting task, but remember that small actions and increases add up!
There are a couple of primary ways you can start increasing your income over the next year:
- Start a side hustle: a side hustle outside of your 9-5 to a great way to diversify income streams and bring in additional cash. Your side hustle might be a service like tutoring, delivering goods, a product like selling embroidery on Etsy, or creating passive income through affiliate marketing or a pre-recorded workshop.
- Negotiate a raise: If you’re not prepared to ask yet, begin laying the groundwork to set yourself up for a promotion. Asking for a raise involves getting in the right mindset, doing your research, and having a concrete plan.
- Change jobs: When you change jobs or companies, that generally comes with a salary increase (usually of at least 20% but anything is possible). Do your research to prepare for upcoming interviews. Know what you’re worth and don’t accept anything less.
That extra income can go towards debt or savings as your goals change throughout your 20s and into your 30s. If you implement all three of these, you’ll be well on your way to doubling your income because age 25 and 30.
Knowing what to focusing on financially can be difficult, but hopefully you’ll walk away from this post with clarity and new motivation to get your finances in order.
Start by focusing on your credit score (and reaching out to credit repair professionals at Lexington Law if you need help). Start prioritizing saving for retirement, paying off debt, and establishing an emergency fund now while you’re in your twenties. And finally, take the initiative to begin increasing your income. You’ve got this.