THE IMPORTANCE OF PERSONAL FINANCE IN YOUR 20S

By: John J. Bowman, Jr.

Why Is Personal Finance Important?

Organizing your personal finances during your 20s may seem unimportant and not worthy of your time now, but years from now you will look back and realize how important it truly is. Like many people in their twenties, you may be just out of college with have debt, making little money at your first job and very little assets to manage. However, there are still some great steps that you can take to build a strong foundation for the years to come. Laying a good foundation now will allow you to build wealth and create security in your life, that will continue to grow exponentially as you get older.

Educate Yourself About Personal Finance Using Free Online Sources

Many people graduate from high school, and even college, with little to no knowledge of how to manage personal finances. While it is unfortunate that many people still receive no formal education on personal finance in school, in this modern age we are lucky to have a ton of great resources available online. Gaining at least a basic understanding on what options are available for managing your money and accumulating wealth will be extremely helpful as start having to make important life decisions.

Create A Budget

Maintaining a budget is an extremely important part of organizing your personal finances and it should be a practice that you maintain throughout your life. You should have a firm grasp on the amount of money that you are brining in every month and what you are spending your money on. Creating a budget provides you with a visual of where your money is going, which helps you make responsible, informed and purposeful decisions as to how you allocate your money.

Eliminate Credit Card Debt

Credit card debt comes with an extremely high interest rate, with the average rate around 13%, which means that these purchases that you have not paid off can end up getting extremely expensive, really fast. Eliminating credit card debt will help your finances by increasing the amount of money you are keeping in your pocket and improve your credit score. When you pay off your credit card bill with an interest rate of 13%, you are essentially paying yourself 14% guaranteed and tax free. That is an incredible investment that you can make with returns you will realize right away.

Start Tracking Your Credit ScoreWhen you come to the point in your life when you begin making large purchases, such as a car or home, you will more than likely need to take out a loan to finance the purchase. Your credit score is what the banks will use to essentially determine how risky of an investment you are when they loan you the money. The worse your credit score is the more you will pay in interest payments. That is why it is very important to begin tracking your credit score and working to improve this score. By actively checking your credit score you will ensure that nobody has stolen your identity and taken out a loan in your name.

Start An Emergency Fund

Starting an emergency fund is an important step as you begin to push down your debt and actually accumulate wealth. An emergency fund will allow you to pay for any unexpected payments that could arise, helping you avoid having to take on even more debt when an unfortunate problem arises. Make it a goal to set aside around $1,000 to start your emergency fund. If you can afford to set aside more, then by all means go ahead! Having that extra cushion of cash will go a long way toward helping you achieve your long-term financial goals.

Start a Retirement Account

Another account that you should focus on funding is a retirement account. When it comes to investing, time is your biggest ally. Starting early with building a retirement account pays off big time down the road. If your employer offers a 401(k) plan, then sign up. Your employee likely offers 401(k) matching, you should try to contribute at least the minimum amount for which you are eligible to receive the matching funds. The more you are able to contribute, the more you employer will be funding the account as well!

No 401(k) Plan?

If your job does not offer a 401(k) plan or if you are self-employed then another option is to set up a Roth IRA account. Your bank likely offers these accounts or you can set one up with a online broker services such as Vanguard or Scottrade. Fund these accounts with index funds.

Why Is A Retirement Account Important?You should aim to contribute at least 5% of your gross income to retirement. To understand why funding a retirement is so important. Consider this example from the book Get A Financial Life:

“Suppose you set aside $1,000 a year from age 25 to age 64 in a retirement account that earns 5% a year (historically, stocks return about 8%, but we’ll be conservative). That’s $39,000 total you invest. By the time you turn 65, you’ll have $126,840. If you don’t get started with saving until you’re 35, you’ll only have $69,760. Starting just ten years earlier would have doubled your total. Yes, doubled.”