If I could take a time machine back to my early 20s, I'd pull myself aside and offer up advice I should have learned sooner. While some of it might include "learn how to use a stove," a lot of it would be about personal finance.
At that age, I had little interest in the topic aside from making intermittent payments against my growing credit card balance. If you asked me about retirement savings, you might even get a blank look.
While some of that is a lack of foresight, I realize now that I was also intimidated by personal finance, which I wasn't taught in school.
That's a shame, because back then all I really needed to know were some of the basics. And since I lived with my parents for almost half of my 20s, my expenses were low, which meant I blew a golden opportunity to boost my retirement savings. Alas.
With that in mind, here are several financial must-dos I wish I had known by the time I was 30, as well as a few I'm glad I actually learned early on.
1. Know how to keep a budget
Without a budget, it's difficult to keep track of your spending, which can lead to unnecessary debt.
In its simplest form, a budget is a tally of both your income and fixed expenses for the month, using either a budgeting app, a spreadsheet or by simply writing it down on a piece of paper. Beyond that, there are various types of budgets you can use, like the popular 50-30-20 budget.
The goal of a budget is to make sure your income can cover your expenses while hopefully leaving room for other goals, like a retirement fund. You can use a budget to identify and cut back on certain expenses, if you want or need to.
2. Have some sort of emergency fund
Unexpected expenses can saddle you with credit card debt, which is one of the reasons financial planners commonly recommend a cash reserve equal to three to six months worth of your expenses.
However, a large cash reserve can be a difficult goal in your 20s, since you tend to earn less than those in their 40s or 50s.
In that case, aim to have at least $1,400 set aside as a short-term savings goal. That's the average cost of an emergency expense, according to a survey by financial services company LendingClub.
3. Know how interest works
You can't make long-term financial decisions without knowing how interest affects your money.
Interest is the price you pay to borrow money within a given period of time, usually monthly or annually. For a $10,000 loan with a 1% annual interest rate, you'd owe about $100 in interest, for example.
Annualized interest rates vary depending on the type of debt you have. Here's a look at the current average rates:
- Payday loans: Usually about 400%
- Credit cards: 20.24%
- 30-year fixed-rate mortgages: 6.91%
- Federal student loans for undergrads are 4.99%
Similarly, the annualized rate of return on investments like 401(k) plans and individual retirement accounts (IRAs) is also referred to as "interest." In this case, it describes earnings on the balance invested rather than the cost of borrowing money, and can be useful to compare to interest rates on debt to help inform how you choose to use your money, and which trade-offs may be worth it to you.
4. Keep tabs on your credit score
In your 20s, it's smart to get in the habit of checking your credit score regularly, since you can't make moves to improve your score if you don't know what it is.
Your credit score matters because you're less likely to qualify for loans, auto financing and credit cards if you have a low credit score. Plus, the lower your credit score, the more you'll likely pay in interest.
Most banks have a tab on their website or app where you can check your score. Additionally, itemized summaries of your credit score, known as credit reports, are produced by the three major U.S. credit bureaus: Equifax, Experian and TransUnion. You can get a copy for free from each bureau at AnnualCreditReport.com.
Aim to check your credit reports at least once a year. If you uncover identity theft or other errors, you can flag it directly with credit bureaus using this helpful list from the Consumer Financial Protection Bureau.
To increase your credit score or keep an already good score high, aim to pay your bills on time, keep your credit utilization ratio low and avoid opening too many lines of credit in a short period of time.
5. Use your credit cards properly
Credit cards are a convenient way to make purchases that you can pay off later, but they also charge a lot in interest, which can add up quickly and become difficult to eliminate.
Since interest is charged daily on your balance, you'll want to use your credit card for purchases you know you can pay off in full each month.
At the very least, always make the minimum payment on time. Overdue payments can result in penalty fees, higher interest rates and a lower credit score by over 100 points, in some cases.
On the plus side, credit cards offer valuable perks and rewards, and can help you build up your credit score if you keep your debt balance low and make consistent payments.
6. Start investing for retirement
If you want to retire comfortably, it's smart to saving early to take advantage of the power of compound interest, which occurs when the returns on an investment account are automatically reinvested. The effect is that earnings grow exponentially over time.
But there's a trade-off: To make the most of compound interest, you'll want to start saving as soon as you can.
Even if you can only afford $20 a month, put that money into a retirement savings account, whether that's an employer-sponsored 401(k), an IRA or another option. This will get you into the habit of making contributions every month. You can always increase the amount later.
A 401(k) is a good place to start if your employer offers matching contributions, which is essentially bonus money in addition to what you're contributing already. A common employer matching plan might be a 50% match for up to 6% of pre-tax salary, for instance.
You should aim to increase your contributions each year, especially as you start to make more money later in life. A commonly recommended benchmark is 10% to 15% of your income.
7. Make sure you have proper insurance
Insurance protects you from large, unexpected expenses that can burden you with serious debt.
Despite this, many young people skip paying for health insurance, since they're less likely to have health problems compared with older people. But considering that routine medical procedures can cost thousands of dollars without insurance, it's not worth the risk. You'll want to find a plan.
Most employers offer subsidized health insurance, but failing that, you can consider a consider bronze or silver policies through the Health Insurance Marketplace or through Medicaid, if your income is low.
If you rely on your car for your job, you might want extra collision or comprehensive coverage in addition to the liability coverage that is required by law in most states. This will ensure that your car is fixed or replaced if it's damaged in an accident or natural disaster.
Homeowners are typically required to buy home insurance, but if you're a renter you should sign up for renters insurance to protect your belongings and avoid legal costs in case you're sued for property damage.
And if you have dependents or family that rely on your income, consider life and long-term disability insurance to make up for lost wages.
Lastly, pet insurance is a good option if you don't want to spend thousands of dollars on vet fees.
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