Your 20s is an amazing time of adventure, career building, self-discovery and building the foundation for a path to navigate your financial life. Reaching lifeâ€™s biggest financial goals requires a plan that starts with a series of important financial milestones. Follow along to learn about five major personal finance milestones in your 20s and how to achieve those important goals.
Building an Emergency Fund
The first financial milestone of your 20s involves savings. Specifically, emergency savings. A GoBankingRates survey found nearly two thirds of Americans have less than $1,000 in savings. That means they canâ€™t afford to fix a broken car, cover a surprise medical bill or replace a dead furnace without dipping into credit cards or struggling to pay for other bills.
At the bare minimum, you should have at least two weeks of cash or one paycheck in savings. This helps you avoid living paycheck to paycheck. Once you have that covered, it is important to save at least three to six months worth of expenses to handle a more serious emergency, like a major illness or layoff.
If you are self-employed or a freelancer, double that standard rule. You should have at least six to 12 months of expenses put away in an emergency fund if you canâ€™t count on a steady paycheck to cover the bills.
Paying Off Student Loans and Credit Cards
Once you save up your emergency fund, itâ€™s time to focus on debt. If you have any credit cards, those should go first followed by your student loans. This is because credit cards likely charge a higher interest rate than student loans, so those should be top priority to pay off.
If you can leave your 20s debt free, you are far ahead of most Americans. The average household with credit card debt owes around $16,000. 44.2 million Americans have student loan debt, and the average graduate leaves school with nearly $40,000 in loans, according to data at StudentLoanHero.
One of the best debt payoff methods is the â€œdebt avalanche.â€ With a debt avalanche, the primary focus is on paying off the highest interest debt and then moving on to pay off other debts in order of interest rate. This is mathematically the best option to pay off debt. Focus as many dollars as possible into your debt each month for the best results.
Starting Retirement Savings
Once you have your loan payoff strategy under way, the next place to focus is graduation. If you work for an employer with a 401(k) plan, it is even easier to get started. But no matter where you work and what you do, you can set up automatic retirement savings and investments.
If your employer offers a retirement plan with matching, make sure to sign up and take 100 percent of the match available. This is free money on top of your paycheck, so donâ€™t leave it on the table. Once you reach your match, focus your savings on a Roth IRA, which allows you to save up to $5,500 per year (the 2018 limit) and invest it for retirement without paying any taxes on investment gains or future withdrawals.
If you can max out your Roth IRA, thatâ€™s a great plan. If you can keep saving more on top of that, go back to your 401(k) (or 403(b) if you work at some universities or education institutions) and contribute what you can up to the maximum $18,500 per year (the 2018 limit).
Getting Life Insurance
Life insurance is a core financial protection for your family in the event of a worst case scenario. Even if you are still playing the field in the dating world, if you plan to get married and/or have kids in the future, life insurance is vital.
Life insurance pays a death benefit to your beneficiaries should you ever pass away during the life insurance policyâ€™s term. While you will probably be fine, things do happen. And even if kids might be far from your mind today, life insurance rates typically go up as you age. So the sooner you get life insurance, the cheaper it will be.
Do the math to figure out what it would take to replace your income for 10 years in the future and consider that as a minimum for life insurance. Also keep in mind if you get life insurance from work that is a great benefit, but you generally canâ€™t take it with you when you leave the employer. Only by getting your own life insurance policy can you truly guarantee your familyâ€™s future financial stability. Itâ€™s probably cheaper than you think!
Saving a Down Payment
The last big box to check off in your 20s is saving for a down payment to buy a home. You should aim to save at least 20 percent of the cost of your future home. If you want to buy a $250,000 home, that is a $50,000 down payment.
It takes time to save up that kind of money, but every little bit counts. Setting up a small recurring transfer every week from checking to savings can get you on track for a down payment. The more you can save, the better!
Build a Financial Foundation for the Rest of Your Life
Living it up in your 20s is great, but donâ€™t let a YOLO (you only live once) lifestyle ruin your YOLO shot at owning a great home, protecting your family, and living comfortably in retirement. With the right focus on your finances, you can use your 20s to build a solid financial foundation for the rest of your life.
It is hard to turn around a bad financial situation, so use your 20s to get your money to work for you. If you make the right choices along the way, you should end your 20s on the path to a wonderful financial future.
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