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Graduating, getting your first job, moving out and maybe even getting married, buying a home or starting a family — your 20s can be a defining time full of milestones. This is the decade when many people are officially on their own financially, and that can be overwhelming.
That said, it’s also the time to buckle down and get a hold of your finances before life gets even busier. Here are a few key financial moves every 20-something should make, from starting an emergency fund to building credit and investing money in the stock market.
Start an emergency fund
An emergency fund is something we hope we never have to use, but it can provide peace of mind and save your finances if you lose your job. It takes time to build an emergency fund when you’re first starting out, but a gradual progression is better than nothing.
Experts generally recommend setting aside at least three months’ worth of necessary living expenses. This amount will likely change as you age. For example, a single 21-year-old living with roommates likely won’t need quite as much saved as a 29-year-old with a young family, so adjust according to your situation.
One way to accelerate your emergency savings is by storing them in a high-yield savings account. These types of savings accounts offer above-average interest rates (currently over 4% APY), helping you reach your savings goals quicker. It might not seem like much at first, but remember that as your balance grows, so will the interest you earn.
One of our favorite high-yield savings accounts is the CIT Bank Savings Connect account, which earns 4.6% APY on all balances. Just note there’s a minimum $100 deposit to open the account, but there are no monthly maintenance fees to worry about.
Related: CIT Bank Savings Connect review: Grow your cash with one of the best yields on the market
Save for smaller unexpected expenses
Unlike an emergency fund, a rainy day fund is for unexpected, lower-cost expenses like car repairs, broken laptops and home maintenance. The amount you set aside is completely up to you, but consider expenses that have come up in the past.
By setting aside money for those eventual bad days, you can save yourself from additional stress and rest easy knowing you’ve got yourself covered when an expense pops up. Plus, if you do run into an unexpected expense, you can pull from this fund instead of an emergency fund.
Like your emergency fund, store your rainy day fund in a high-yield savings account so it grows over time.
Invest in your future
If you want to build long-term wealth, you need to put your money to work and start investing.
There are a variety of options to choose from, but two smart places to start are with a 401(k) — especially if your company offers a match — and a Roth IRA. Both investment accounts offer tax advantages that can help maximize your retirement savings. However, note that both accounts have various limits, so do your research before investing.
If you’ve maxed out both your 401(k) and Roth IRA, you might consider putting money in a standard taxable brokerage account. You can open an account with any brokerage you like, but the Axos Self-Directed Trading account can be a good option if you want to pick your own investments or have a robo-advisor pick funds for you.
The earlier you start investing, the more time your money has to grow, so start small, gradually increase your contributions and let compound interest do its thing. Trust me, you’ll thank yourself later.
Related: Looking to build wealth? Here are some of the best ways to invest your money
Build your credit
Having good credit can help you qualify for better loans, lower interest rates, certain credit cards and even apartments. That said, it’s important to establish good credit habits early on. This includes being a responsible borrower by making all payments on time and in full. While it’s certainly easy to overspend on credit cards, just remember that rewards credit cards are only rewarding when used responsibly. Otherwise, credit cards can lead to costly debt.
To start building credit, consider the following:
- Open a credit card. Secured credit cards can be a good starting point if you have limited or no credit history.
- Become an authorized user. Ask a family member with good credit to add you as an authorized user.
- Sign up for a credit reporting service. Experian Boost allows those with no credit to start building credit by reporting on-time bill payments for things like your cell phone, electricity and subscription services.
There are a variety of good starter credit cards out there. Ideally, you’ll want one that you can use to earn either travel rewards or cash back on your everyday purchases. This can help offset your daily expenses, as long as you pay off your credit card in full every month.
Here are a few of our favorite beginner credit cards for 20-somethings with a limited credit history. Note that there’s no guarantee that you will be approved for one of these credit cards, even if you have a credit history already.
- Bilt Mastercard®: Earn travel rewards when you pay your rent and put everyday expenses on this card, all with no annual fee (see rates and fees).
- Blue Cash Everyday® Card from American Express: Earn up to 3% cash back on daily expenses with no annual fee (see rates and fees).
- Chase Freedom® Student: If you’re still in school, this credit card can be a good option for earning cash-back rewards on all of your purchases. Plus, earn a $50 bonus after you make your first purchase.
After building your credit, you might find it easier to be approved for a mortgage or a higher-end travel rewards credit card. With that in mind, it’s usually in your best interest to start building credit as soon as possible. Just take care to pay your credit card bill on time and in full.
Related: The 8 best credit cards for beginners to build credit and earn rewards
Pay down your debts as fast as possible
Debt can be stressful, but having a debt repayment plan is always helpful. This will also help you reduce the total amount of interest you pay, free up money in your budget for other things and get you closer to financial independence.
If you have private student loans, for example, you may want to consider refinancing them. Not only will this simplify your payments by consolidating multiple loans into one, but it will also reduce the overall interest you pay and could also potentially lower your monthly payment. If you score a lower monthly payment, additional payments can be applied directly to the principal of the loan, which can help you pay down your debt even sooner.
For credit card debt, you may want to consider doing a balance transfer to a credit card with a 0% intro APR, like the U.S. Bank Visa® Platinum Card which offers 0% APR on purchases and balance transfers for the first 18 billing cycles (then variable 19.49% to 29.49%). This will help you avoid paying additional interest as you work toward paying off your balance.
If you have multiple types of debt, consider using the debt snowball or debt avalanche method to figure out which debt to prioritize. The debt snowball method suggests listing your debt in order of smallest to largest balance, and paying off the smallest amount first while still making the minimum payment on all other debts. Once the smallest debt is paid off, move on to the next until all debts are paid off. This method is all about building momentum and can be good motivation for those struggling to pay off debt.
On the contrary, the debt avalanche suggests listing your debt from highest interest rate to lowest, making extra payments towards the highest interest rate while still making payments on all other debts. The goal of this method is to minimize the total interest paid across all debt.
Related: The 6 best ways to pay off debt so you can save and budget responsibly
Set specific savings goals for the future
One thing that buying a home, taking a weeklong vacation and buying holiday gifts have in common is that they require a good chunk of money that many don’t have on hand. That’s where financial goals come in.
Goals give us purpose and direction and help us figure out what it is that we want to prioritize. Everyone’s goals are different, but if you want to achieve any goal, you have to define it so that you can come up with an action plan.
For example, if you want to take a weeklong vacation, start by setting aside money so when it comes to book your trip you’re not dipping into your regular budget or going into credit card debt. In this case, setting up a “sinking fund” that’s specifically dedicated to this vacation is a smart idea. Similar to your emergency savings and rainy day fund, a high-yield savings account is a good place to store these funds as it could help you reach your savings goal faster.
Other financial goals may include retiring early, paying off student debt, starting an emergency fund, improving your credit score and so on.
Related: How to choose the best savings account
Focus on yourself
If you can’t afford it, don’t buy it. Keeping up with the Joneses can lead you down an expensive, debt-ridden road. For all you know, your peers with the flashy new clothes who go on lavish vacations could be swimming in credit card debt — or not.
Either way, try not to compare yourself to others and instead focus on your financial goals and what you need to do to achieve them. As the saying goes, comparison is the thief of joy.
Money can be stressful, especially when it’s your turn to manage it all on your own.
Thankfully, there are steps you can take to set yourself up for financial success that aren’t quite as difficult as society has made them out to be. You don’t have to make all of these moves at once, but you can take baby steps and use them as a guide to help you get your financial footing.
Click here for rates and fees of the Blue Cash Everyday card.
Looking for a new savings account? Read our guide to the best high-yield savings accounts.
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