In your twenties, you are out of college, starting your career and maybe will be starting a family soon. What is most essential is to realize is that financial planning is not just for people your parents’ age who are getting ready to retire. Financial Planning is for YOU!
The steps you take in your twenties will lay the groundwork for the rest of your life. Will you become wealthy or will you be just one step ahead of your bills and debt like many Americans? A lot of us older folks wish we could be twenty-five again but with what we know at 45 or 65. Then we could get an early start and be in much better position later.
So, let’s get organized, educate ourselves about money, investing, and taxes. Define your goals and create a written financial plan. It’s an exciting time to be seeing your hard work starting to pay off. There are plenty of money issues that create a lot of stress: student loans, credit cards, buying a car, housing affordability, low paying entry level jobs, etc. We need to tackle those issues head-on.
Here are five crucial steps for being in your twenties.
1. Emergency Fund. Keep three to six months of living expenses in a safe, liquid account that is separate from your regular checking or bank account. Unplanned expenses are an inevitable reality of life. Cars break down, houses need repair, injury or illness happens. It’s not really a matter of “if” these things will occur, but just when. An emergency fund is a prerequisite before you can start to invest for long-term goals.
2. Manage Debt. Avoid taking on new debt and be smart about managing your existing liabilities, such as student loans, car payments, and credit cards. You have to plan for how to pay off your loans, while still having a plan for the rest of your financial goals, too.
3. Annual Net Worth Statement. Adding up all your assets and liabilities is a key step to managing your financial life. Understand where you are today and direct your cash flow to grow your net worth. By tracking this annually, you are not only measuring your progress, but creating a sense of urgency that will help align your short-term decisions with your long-term goals and dreams.
4. Start Investing NOW. Don’t think that you can make up for lost time later. Compounding works over time and the earlier you start, the earlier you can reach the finish line.
5. Term Life Insurance. You might not have significant assets today, but when you are young, you have the largest amount of future lifetime income. If you have a spouse or family, the greatest need for protection is at age 25, not at 65, when most of your earnings years are behind you. We don’t use insurance as an investment; it is to protect against potentially devastating and rare risks. So, buy a term life policy. If you are healthy, it may be only a few hundred dollars a year. And if something were to happen to you, the term policy would be the most important financial planning step we took. Don’t skip this!