Build an Emergency Fund
One of the first things you should be saving for is an emergency fund. An emergency fund is an “insurance policy” for your finances and makes it easier to stick to your budget and not go in debt. For example, you would use your emergency fund to cover an unexpected medical expense or house repair, or even to help cover your living expenses if you were to lose your job.
When you first start budgeting, you may start out with a small emergency fund of $1,000 but you should build this up over time; first, save enough to cover one month of total living expenses. Then increase that to cover to three months. The amount you save will be determined by the stability of your job, your income, any other debts you may have, and if you are a single or double-income household. Remember, your emergency fund should be fairly easy to access, so keep it in a liquid investment vehicle or savings account.
Save Up a Down Payment for Your Home
Another goal you should work on in your 20s is saving up a deposit for a house/apartment. This does not mean that you need to purchase your first home in your 20s. Depending on your job stability and whether or not you want to stay in the city where you are currently working in, you may not want to buy your first home in your 20s.
Usually, a down payment is between 10-20% of the purchase price of your home, but that can vary. However, the larger the down payment, the lower your mortgage payments can be, and the nicer the house you can afford. Remember, if you start saving early, you will be in a better position to buy a house when you are ready, so perhaps a structured 10 year Savings Plan when you are 18-21 is a good idea…………consult your Independent Financial Adviser! If you are a parent with Children in their 20s, either get them to do this or perhaps start funding it for them?
Start Contributing Regularly to Your Retirement
The key to having enough money for retirement is to start saving early and then continue saving regularly until you retire. You should start saving for retirement as soon as you get your first job. In this case, compounding interest is your friend; the more you save when you’re young, the more that money will grow and the more you will have to enjoy retirement.
You may start by contributing up to what your employer is contributing for you (if applicable). Then, you should aim to contribute 15% of your gross income. You can reach this goal by increasing your contributions each time you get a raise or even just increasing it by 2% annually.
If you want to build wealth, you need to think beyond saving money and begin to invest it. Try to start investing before you hit 30. As mentioned, compounding interest will help your money grow more quickly, and the sooner you start, the better off you’ll be.
You should choose to invest with the help of an Independent Financial Adviser, who can recommend investment types and help you build an investment portfolio. If you understand the stock market, you may opt to invest yourself through an online brokerage firm, but this is fraught with “warning signs” and will take a lot of your time. Usually best to give this job to a Financial Expert in the same way you would go to a Doctor to treat an illness, rather that fix it yourself using the Internet!
The key to investing is to diversify across different companies and different types of stocks. It is important to understand the risks associated with each type of investment and to move to more conservative investments as you get older.
Establish the Habit of Saving Money
Another key habit to establish when you are in your 20s is the habit of saving money. This means that you are always looking for the most affordable option. You shop at the most affordable grocery stores, take advantage of coupons and wait for items to go on sale, so ask your Independent Financial Adviser for similar deals with financial products – they do exist!
You can also look for ways to reduce your daily expenses, so you have more money to put toward your savings and investing goals. It will also prevent you from running up excessive amounts of debt. Embracing a frugal lifestyle will open doors and allow you to spend more on the things that are the most important to you.
How many of you know someone who is older, who seems to have spent their money on “wine, the other sex, and having a good time” and will be left with not much more than fond memories when they are old(er)? Out of every 100 people, only one will be rich at age 65, four will be well off, 15 will be “comfortable” and the rest will be poor – who do YOU want to be?
When you are in your 20s, you are establishing the habits that will follow you throughout your life. This is especially true for your finances.
In short, if you practice good financial habits in your 20s, you will be in a much better place financially in the future