With the exception of a select few who can rely on family fortune, the way to create wealth is through saving your earnings with a goal to make investment moves when the timing is right.
This is easier said than done in a society that glorifies spending culture at the expense of financial prudence. Majority of those falling for this are the young people in their 20s. Under the illusion that they have plenty of time to make amend for the financial mistakes they commit now, many young people are not saving at all, or worse, are living beyond their means which leads them to a perpetual cycle of debt.
They make these often costly mistakes because they lack the requisite knowledge to manage their finances. This article seeks to remedy that. Here the financial lessons you should learn in your 20s.
Live within your means
You may not even know you are living beyond your means until you take an in-depth examination of your expenses.
Using the 50-20-30 budgeting principle for guidance, not more than 50% of your after-tax income should go towards your living expenses that include rent, utility bills, food and commuting to work. If you are spending more than 30% on rent then your living expenses will probably exceed this threshold unless you are making significant savings on transportation.
If you are living beyond your means then your expenses will overlap with the 20% allocation for savings and debt repayment being the one to be eaten up. If you don’t save money on your income every month then you are certainly living beyond your means.
Buy only what you need and can afford
A common money mistake many young people make is prioritizing wants over needs. Wants are stuff you can live without until you have the financial means to comfortably afford them.
In keeping up with your friends and peers, you will be tempted to spend your money on luxuries like a new car that you can ill afford and which messes up your finances.
Do not succumb to peer pressure. Instead, have a budget as Money Plate advises to guide your spending. Do not make impulse purchases and out-of-budget expenses. If you want to buy something you can’t afford now, then save money every month.
Start saving for retirement
With time on your side, the best time to start saving for retirement is in your 20s. You lose out on accumulating more money by postponing opening a retirement savings account until you are old enough and closer to retirement.
When you start saving for retirement early, the compound interest you’ll earn on your savings by the time you reach the retirement age is significantly more than when you start late. Moreover, you also lose out on your employer’s generosity if they have a policy their employees’ contributions.
Build your credit rating
Your credit rating plays a vital role in determining the cost at which you borrow money as well as your ability to access credit in order to make a big investment move.
Make your credit card repayments in good time and develop a plan to clear your outstanding loans as soon as possible. This also saves you money on fines accrued from late payments.