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- The first step to financial success is to spend less than you earn by automating your savings.
- Once you have an emergency fund, learning how to invest will help you beat inflation.
- Make sure your cash is kept in a high-interest, high-yield savings account.
Whether you’re a college student, recent graduate, or well into your career years, achieving financial security is likely one of your goals.
Just because you haven’t hit the stride in your career yet doesn’t mean you can’t make significant progress toward financial security. I’m a financial planner with some easy steps you can take right now that will set you up for financial success.
As you navigate your 20s, consider these five ways to become more financially savvy.
1. Spend less than you earn
The first step to becoming more financially savvy is learning how to spend less than you earn. This can be especially difficult in today’s environment, where inflation has been higher than normal in recent years. However, this principle remains the basis of financial security. It’s crucial to find ways to keep your expenses lower than your income, which allows 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 gives you a chance to save some of your income before you see it, and sooner or later you won’t even miss it.
Also, create a budget that includes a savings line. A budget helps you keep track of where your money is going and can identify opportunities to cut unnecessary expenses.
2. Build an emergency fund
Having a rainy day fund is important for anyone aiming to achieve financial security. An emergency fund is a cash reserve or separate savings account set aside for unexpected expenses or financial emergencies. These funds should be placed in an easily accessible FDIC-insured high-yield savings account.
A general rule of thumb is to save three to six months, 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 peace of mind knowing you have a rainy day fund in case you need it.
3. Learn the basics of investing
With inflation higher than normal in recent years, growing your money to achieve financial freedom requires investment. Although investing carries some risk, it is essential to building wealth. In your 20s, you have the advantage of time, allowing your money to compound and grow.
To get started, familiarize yourself with the investment terminology. There are tons of great resources out there, like books, podcasts, and free or low-cost courses. The Intelligent Investor by Benjamin Graham is a good book for beginners.
Online brokers such as Schwab, Fidelity and Vanguard also offer a wealth of educational resources. In today’s world, investing is a requirement for financial freedom, not an option.
4. Park your cash in a high-yield savings account
A common financial mistake people in their 20s make is letting their savings sit in a low-yielding checking or savings account. This can result in thousands of dollars in lost interest. Many high-yield savings accounts offer interest rates in excess of 4%.
In comparison, traditional banks offer interest rates as low as 0.01%. The difference could cost you thousands in earned interest. A high-yield savings account helps your money keep pace with inflation.
Note that online banks offer most high-yield savings accounts, so you won’t have access to a physical branch. Also, make sure the bank is FDIC insured to protect your money if the institution fails.
5. Create a savings bucket strategy
To avoid lingering credit card debt, create savings buckets for different goals. For example, set up separate high-yield savings accounts for vacations, medical expenses, car maintenance and a new car. This way, when it’s time to pay for the 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 occur at some point during the year, so saving ahead is a smart strategy. Plus, you can earn interest on high-yield savings account funds, giving you extra money to use. To maximize the 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.