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- The first step to achieving financial success is to spend less than you earn by automating your savings.
- Once you have an emergency fund, learning to invest will help you cope with inflation.
- Make sure your cash is stashed in a high-interest, high-yield savings account.
Whether you’re a college student, a recent graduate, or years into your career, achieving financial security is likely one of your goals.
Just because you haven’t taken a step forward in your career doesn’t mean you can’t make significant progress toward financial security. I am a financial planner who can help you take a few easy steps toward financial success.
Consider these five ways to become more financially smart in your 20s.
1. Spend less than you earn
The first step to becoming more financially savvy is learning to spend less than you earn. This can be challenging, especially in today’s environment where inflation has been higher than usual in recent years. However, this principle remains the foundation of financial security. Finding ways to keep your expenses lower than your income and create more flexibility is key.
Consider using automation to your advantage. Set up a portion of each paycheck to be automatically transferred from the account your paycheck is deposited into to a separate, high-yield savings account. This will allow you to save a portion of your income before you see it, and sooner or later you won’t miss it at all.
Additionally, create a budget that includes a line item for savings. A budget helps you keep track of where your money is going and can reveal opportunities to cut unnecessary spending.
2. Create an emergency fund
Having a rainy day fund is essential for anyone looking to achieve financial security. An emergency fund is a cash reserve or separate savings account set aside for unexpected expenses or financial emergencies. These funds should be placed in an easily accessible, FDIC-insured, high-yield savings account.
A general rule of thumb is to save three to six months’ worth of expenses, depending on your risk tolerance and personal situation. Nowadays, I even recommend that some of my clients save 12 months’ worth of expenses. Life happens to all of us, and knowing that you have a rainy day fund to tap into when needed will provide added peace of mind.
3. Learn the basics of investing
With inflation higher than normal in recent years, growing your money to achieve financial freedom requires investment. While investing involves some risk, it is essential to building wealth. In your 20s, you have the advantage of time, allowing your money to grow and grow with compound interest.
To get started, familiarize yourself with investing terminology. There are many great resources available, including books, podcasts, and free or inexpensive courses. A good book for beginners is “The Intelligent Investor” by Benjamin Graham.
Online brokerages such as Schwab, Fidelity, and Vanguard also offer a wealth of learning resources. In today’s world, investing is a necessity for financial freedom, not an option.
4. Put your money in a high-yield savings account
A common financial mistake people in their 20s make is to let their savings sit in a low-yielding checking or savings account. This can cause you to miss out on thousands of dollars in earned interest. Many high-yield savings accounts offer interest rates above 4%.
In comparison, traditional banks offer interest rates as low as 0.01%. The difference could cost you thousands of dollars in earned interest. A high-yield savings account will help your money keep up with inflation.
Keep in mind that most online banks offer high-yield savings accounts, so you won’t have access to a physical branch. Also, make sure the bank is FDIC insured to protect your money in the event the institution fails.
5. Create a savings bucket strategy
To prevent ongoing credit card debt, create savings buckets for different goals. For example, set up separate high-yield savings accounts for vacations, medical expenses, car maintenance, and a new vehicle. That way, when it’s time to pay for a vacation, the funds are readily available. Automate a predetermined amount from each paycheck into these accounts. Many online high-yield savings accounts, such as Discover, allow you to manage multiple savings accounts under a single login, making this strategy even more useful.
These are expenses you know will come up at some point throughout the year, so saving ahead of time is a smart strategy. You can also earn interest on funds in a high-yield savings account, giving you extra cash to use. Use a rewards credit card to maximize the benefits and pay off the balance right away using your savings.
Becoming more financially savvy in your 20s requires making strategic, informed choices. By implementing these strategies, you can set yourself up for a successful and secure future.