The easiest way to start improving your finances is to automate your savings so you don't even think about the money you're not spending.
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Jovan Johnson
Whether you are a college student, a recent graduate, or already years into your career, achieving financial security is likely one of your goals.
Just because you haven't yet reached your career stride doesn't mean you can't make significant progress toward financial security. I'm a financial planner with several easy steps you can take now that will set you up for financial success.
As you navigate your 20s, consider these five ways to become more financially savvy.
The first step to becoming more financially savvy is learning how to spend less than you earn. This can be especially challenging in today's environment, with inflation higher than normal in recent years. However, this principle remains the foundation of financial security. It's crucial to find ways to keep your expenses lower than your income, allowing for greater flexibility.
Consider using automation to your advantage. Set up an automatic transfer of a portion of each paycheck to a high-yield savings account, separate from the account where your paycheck is deposited. This enables you to save some of your income before you even see it, and sooner or later, you won't even miss it.
Additionally, create a budget that includes a line item for savings. A budget helps you track where your money is going and can reveal opportunities to cut unnecessary expenses.
Having a rainy-day fund is essential for anyone aiming to achieve financial security. An emergency fund is a cash reserve or separate savings account earmarked for unexpected expenses or financial emergencies. These funds should be placed in an easily accessible FDIC-insured high-yield savings account.
A common rule of thumb is to save three to six months of expenses, depending on your risk tolerance and personal situation. Nowadays, I even recommend that some clients save 12 months of expenses. Life happens to all of us, and you'll have more peace of mind knowing that you have a rainy-day fund available if needed.
With inflation higher than normal in recent years, growing your money to achieve financial freedom requires investing. While investing involves some risk, it's essential for building wealth. In your 20s, you have the advantage of time, allowing your money to compound and grow.
To get started, familiarize yourself with investing terminology. There are many great resources available, like books, podcasts, and free or inexpensive courses. "The Intelligent Investor" by Benjamin Graham is a good beginner-friendly book.
Online brokerages like Schwab, Fidelity, and Vanguard also offer a wealth of learning resources. In today's world, investing is a requirement for financial freedom, not an option.
A common financial mistake people in their 20s make is letting their savings sit in a low-yield checking or savings account. This can result in missing out on thousands of dollars in earned interest. Many high-yield savings accounts offer interest rates over 4%.
In comparison, traditional banks offer interest rates as low as 0.01%. The difference can cost you thousands in earned interest. A high-yield savings account helps your money keep pace with inflation.
Keep in mind that online banks offer most high-yield savings accounts, so you won't have access to a physical branch. Additionally, ensure the bank is FDIC-insured to protect your money in case the institution fails.
To avoid lingering credit card debt, create savings buckets for various goals. For example, set up separate high-yield savings accounts for vacation, medical expenses, car maintenance, and a new car. This 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, like Discover, allow you to manage multiple savings accounts under one login, making this strategy even more convenient.
These are expenses you know will arise at some point throughout the year, so saving ahead is a smart strategy. Additionally, you can earn interest on the funds in a high-yield savings account, providing extra money to use. To maximize benefits, use a rewards credit card and pay off the balance immediately using your savings.
Becoming more financially savvy in your 20s requires making strategic and informed choices. By implementing these strategies, you can set yourself up for a successful and secure future.
