Financial independence is a rite of passage for 20-somethings. Yet, between student loans, expensive urban housing markets and pressure to start saving early for retirement, those first paychecks are in high demand and there's little room for error. Managing your finances as an adult should be viewed as an opportunity to create financial security for your future. All you need is a little know-how to keep financial stress at bay. Here are five steps toward achieving financial independence:
Remember budgeting 101. If you want to get out of mom and dad's basement, take a piece of their advice: Create a budget. Although you may feel that it is unnecessary, budgeting is essential for long-term financial health. No matter how much money you have, you can't make the best use of it if you're not aware of where it goes. You can easily spend hundreds of dollars a month on nonessentials such as fast food or pricey entertainment. That's not to say that you shouldn't enjoy these things, but spend in moderation and make thoughtful decisions about where you want your money to go. Put your mobile device or smartphone to good use, and take advantage of free personal finance sites and apps to help you track spending, establish a budget and manage your credit at home and on the go.
Ditch the debt. Many 20-somethings graduate college with a degree and debt from student loans and credit cards. While it's advantageous to pay off all forms of debt, credit cards should be at the top of the list so you can avoid high-interest debt. Millennials should focus on clearing their credit cards first, and then use all the money they've freed up to ditch student loans and car payments. It's best to avoid credit card debt altogether, but do keep the plastic in your wallet for the times you might really need it like an emergency.
Make savings a priority. When you're in your 20s, it's hard to find the balance between living in the moment and planning for the future. However, the same rule that you were taught when you were 5 years old still applies today: save, save and save -- even if it's just a few pennies at a time. Saving can be especially difficult when you're getting established in your career, paying down debt and planning for major purchases such as a home or car. The trick is to set aside that savings into your budget before you get accustomed to spending it every month.
If your company matches contributions to your 401(k), you're foolish not to take the offer. That's free money. The one caveat you need to consider is the vesting period. The money that you personally put into your 401(k) is yours, but some companies set a vesting schedule, which means the match will be earned over time (25 percent after one year, 50 percent after two years, etc.). But for companies that vest immediately, it's a no-brainer. If your employer offers a Roth 401(k), your contributions are made with after-tax dollars, meaning withdrawals in retirement will not be taxed at all. And if you don't completely understand the policies of your plan, make sure to speak with your human resources department -- otherwise you just might stumble into traps that could seriously devalue your retirement stash.
Think about the future. Budgeting will help you manage your day-to-day spending, but you need to have long-term goals in mind, too. While retirement seems like a dim light at the end of a very long tunnel when you are in your 20s, you'd be surprised by how fast time flies. So as you're setting your long-term goals, look beyond the next 20 to 30 years and start saving money now to allow it to accrue and grow by your golden years.
Setting aside $4,000 per year starting in your 20s could make you a millionaire by age 62, assuming an average annual return of 8 percent. Another piece of advice is to put your long-term goals in writing. Establishing meaningful goals -- both financial and broader life goals -- and prioritizing them based on what matters most to you will give tasks, like budgeting, more purpose and meaning. If pen and paper isn't your thing, try apps like CheckMark Goals or Strides that help you create and track life goals you care about.
Track your credit score. You may have graduated from school, but that doesn't mean that you're no longer being graded. Your credit score is the most important grade you'll get outside of school. These three numbers play a huge role in your financial life, as they represent how responsible you are as a borrower. The factors that go into your score include how long you've had credit, your payment history and your credit-to-debt ratio. Some basic rules to maintain good credit scores include: keep your oldest credit card open, pay your bills on time and avoid maxing out cards. Check annualcreditreport.com each year to receive a free copy of your credit report.
By starting your adult financial life on the right foot, you'll gain the confidence to wisely manage your finances today while saving for tomorrow.
Holly Perez is a consumer money expert at Intuit and mint.com spokeswoman, a leading Web and mobile money management tool that helps people understand and do more with their money.
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