“The steps you take in your 20s can set you on a path toward financial security for the rest of your life,” asserts journalist Kimberly Lankford, and she’s right.
Kimberly recently interviewed Mari to identify high-impact financial moves that can lead to financial success later in life. You can check out the complete interview here.
Here’s three of Mari’s top tips for nailing down a financial head start in your 20s.
Tip #1. Get on the savings superhighway. Start saving in your 20s, or as soon as possible, to take advantage of long-term compounding. A Roth IRA, if you are eligible, is one of the most beneficial savings plans out there.
“Set up a Roth IRA and sock away your summer earnings, your internship pay, your income from your first job,” advised Mari. Your Roth savings can grow for decades tax-free, making it an effective financial building block.
In 2022, you can contribute up to $6,000 to your Roth or the amount of your work earnings, whichever is less.
“If you start putting aside the max of $6,000 per year from age 22 to age 30, and then stop and make no further additions, you’re still on track to end up with over $550,000 by age 65, assuming fairly modest returns of 6% per year,” said Mari.
Don’t have $6,000 to put aside? Don’t let that stand in your way. Even smaller contributions can make a big difference over time, counseled Mari. “The secret — start now,” she told Kimberly. “Start small if need be. Save on a schedule, set up automatic transfers. Invest for growth. Leave it alone.”
Tip #2. Avoid digging yourself into a hole. Want one big secret to building wealth while still in your 20s? Avoid debt. Paying high rates of interest is like saving in reverse. It’s ‘wealth destruction’ instead of wealth creation. Stick to a disciplined spending plan and spend less than what you make.
Social media puts huge pressure on young adults to blow money on trips, restaurants, cars and houses they can’t afford, but that’s a one-way ticket to being broke by 40.
Consider how liberating it would be to be firmly on the path to financial freedom and socking away 10% to 15% of salary each year into long-term investments. Follow the adage of “pay yourself first.” To prevent the urge to spend, direct money from your paycheck into your 401(k) or Roth IRA.
“Don’t dig yourself into a hole you can’t easily get out of,” advised Mari in the interview. “Too many 20- to 30-year-olds we talk to are already burdened by expensive debt, especially credit card debt, overly large car payments or student debt. Or they’re not even 30 yet and they have debt coming out of an expensive breakup with a partner. The best way to protect yourself is get a really clear idea of what you’re making and what you’re spending, and plan your lifestyle so spending is always less than earnings. Before you take on any new debt, whether it’s for school or to buy a car, make sure you understand the monthly payment and how it will affect your budget. People get into trouble because they make decisions without understanding the true cost.”
Tip #3. Make wise partner selections. At this age, says Kimberly, you may be building long-term relationships that can also have an impact on your finances. “If you live with a partner, make sure your money habits and values are compatible,” advised Mari. “It’s hard to keep yourself on the path you want if your partner risks derailing you with his or her bad money decisions.”
Alas, it’s no surprise that money disagreements and troubles can be one of the leading causes of break-ups and divorce. It’s hard to build a strong financial foundation if you and your partner are not in sync. If one of you is a saver, and the other a spender, you can still move ahead but you’ll need to work out a set of ground rules, shared goals, and communication techniques so your money moves are transparent and mutually acceptable.