Financial Hindsight: 20 Tips I Wish I Had in my Early Twenties
Entering adulthood and managing finances can be a daunting task. It only gets more daunting if you’re like me, a first-generation American, first generation college and law school graduate, and the financial anchor of my immediate family. Today, on my 30th birthday, I look back on my early twenties and wish I had the financial literacy to avoid common pitfalls and expedite my journey towards financial freedom. In this article, I’ll share 20 essential financial tips that would have been incredibly helpful in those formative years. Whether you’re a recent graduate or a young professional, these insights can pave the way to a more secure financial future.
1. Forgive Yourself for your Financial Mistakes:
One of the most challenging parts of my financial journey was facing and accepting my money mistakes. Give yourself grace and take action. Understand why you made those mistakes: was it lack of financial literacy, an impulsive decision, or a situation outside of your control? Lean into your mistakes, learn from them, and remember that it is never as bad as it may feel at the current movement. Arm yourself with financial literacy and believe that you are worthy and deserving of money–the rest is easy!
2. Start Saving Early:
Compound interest is a powerful force in growing your money over time. By saving early, even small contributions can lead to significant growth due to the compounding effect. Whether it’s through a retirement account, a high-yield savings account, or investment vehicles, the earlier you start, the more time your money has to work for you. Don’t underestimate the impact of consistent, early savings on your financial well-being in the long run.
3. Build an Emergency Fund:
From medical emergencies to job loss, financial emergencies will strike unexpectedly. Building an emergency fund is crucial to protect yourself from these unforeseen events. Aim to set aside at least three to six months’ worth of living expenses in an easily accessible account, like a high yield savings account. High yield savings accounts, like Sofi savings accounts, are currently providing a 4.5% interest rate compared to the <1% most banks provide. This safety net provides peace of mind and prevents you from incurring high interest credit card debt.
4. Understand Your Financial Goals:
Setting clear financial goals is essential for making informed decisions and staying on track. Identify both short-term and long-term objectives, such as saving for a down payment on a house, paying off student loans, or planning for retirement. Having specific goals helps you prioritize your spending and allocate your resources effectively. Regularly revisit and adjust your goals as your circumstances change to ensure you stay motivated and focused on achieving them.
5. Live Below Your Means:
In a world of consumerism and constant temptations to spend, living below your means is a critical financial skill. Avoid the trap of lifestyle inflation, where increasing income leads to higher spending. Cultivate the habit of frugality by spending consciously and saving the difference. By living below your means, you create a financial buffer that allows you to save more, invest, and achieve your long-term goals.
6. Create a Budget:
Understanding your financial inflows and outflows is the foundation of sound financial management. Create a budget that tracks your income, expenses, and savings diligently. This budgeting exercise not only gives you a clear picture of your financial health, but also reveals areas where you can cut unnecessary expenses and save more. A budget empowers you to make informed decisions about spending and aligns your financial choices with your goals. Regularly review and adjust your budget to adapt to changing circumstances and ensure you’re staying on track with your financial objectives.
7. Avoid Credit Card Debt:
Credit cards can provide convenience and rewards, but they also come with the risk of high-interest debt if not managed wisely. Use credit cards responsibly by making purchases within your budget and paying off the balance in full each month. This way, you can enjoy the benefits of credit cards without accruing costly interest charges. If you already have credit card debt, prioritize paying it off as quickly as possible to avoid getting trapped in a cycle of debt.
8. Start Investing Early:
The key to maximizing the power of compounding is to start investing as early as possible. Whether it’s investing in ETFs (exchange-traded funds which are a collection of hundreds or thousands of stocks or bonds, managed by experts, in a single fund), mutual funds, or contributing to retirement accounts like IRAs or 401(k)s, the longer your investments have to grow, the greater the potential returns. Even small contributions made consistently over time can lead to substantial wealth accumulation. Embrace a long-term investment strategy that aligns with your risk tolerance and financial goals to build a robust investment portfolio.
9. Negotiate Salaries and Benefits:
When it comes to job offers or salary discussions, don’t be afraid to negotiate. Research industry standards and the value you bring to the table, then advocate for a fair and competitive salary. Negotiating can have a long-lasting impact on your financial well-being, as higher starting salaries often lead to higher earnings throughout your career. Additionally, consider the value of benefits like healthcare, 401k matches, and other perks, as they contribute to your overall compensation package.
10. Build a Good Credit Score:
Your credit score plays a vital role in your financial well-being, influencing your ability to secure loans, obtain favorable interest rates, and even rent an apartment. To build a good credit score, make timely payments on bills and credit cards, keep credit card balances low relative to your credit limit, and avoid opening multiple new lines of credit within a short period. A strong credit score demonstrates financial responsibility and can open doors to better financial opportunities.
11. Prioritize Student Loan Repayment:
If you have student loans, make repaying them a priority. While it may be tempting to delay payments, doing so can result in accumulating interest and prolonged debt. Allocate a portion of your budget to student loan repayment and consider making extra payments whenever possible to reduce interest costs and expedite the payoff process. Once you’ve cleared your student loan debt, you’ll have more financial flexibility to pursue other goals.
12. Avoid Impulse Purchases:
Impulse purchases can derail your budget and lead to regret. Implement a 24-hour rule for significant purchases: wait a day before deciding. This gives you time to consider whether the purchase aligns with your needs and financial goals. You’ll find that many impulsive desires fade after this cooling-off period, allowing you to make more rational and mindful spending choices. By curbing impulse purchases, you’ll free up funds to allocate towards your savings and investment goals.
13. Set Financial Boundaries:
Resist the pressure to conform to others’ spending habits, societal expectations, or others’ never-ending needs. Establish clear financial boundaries that align with your unique goals and values. Many women of color face familial pressure to provide financial support to family members, but it is vital to set financial limits. Take inventory of your financial needs before helping others and set aside money for your family if this is important to you. By setting boundaries, you’ll prioritize what truly matters to you and avoid unnecessary expenses that can hinder your financial progress.
14. Invest in Your Knowledge and Skills:
One of the most valuable investments you can make is in yourself. Continuously seek opportunities to expand your knowledge and acquire new skills. This ongoing personal and professional development can increase your earning potential and open doors to new career opportunities. Consider workshops, courses, certifications, or higher education that align with your interests and career aspirations. The investment you make in yourself will pay dividends throughout your life.
15. Understand How Taxes Work:
The U.S. federal income tax brackets are currently as followed for individuals:
- 10% on income up to $9,950
- 12% on income between $9,951 and $40,525
- 22% on income between $40,526 and $86,375
- 24% on income between $86,376 and $164,925
- 32% on income between $164,926 and $209,425
- 35% on income between $209,426 and $523,600
- 37% on income over $523,600
These brackets represent the income ranges at which taxpayers are subject to the respective tax rates. It’s important to note that these tax rates are incremental, meaning that if you make $40,000 a year, $9,950 is taxed at 10% ($9,950 x 0.10 = $995); the remainder ($40,000 – $9,950 = $30,050) is then taxed at 12% ($30,050 x 0.12 = $3,606). Without any consideration for deductions, credits, or special circumstances, a person with this income would owe ($995 + $3,606 = $4,601) in federal income tax.
16. Save for Retirement:
Early and consistent retirement savings are essential for securing a comfortable future. Start contributing to retirement accounts, such as 401(k)s or IRAs as soon as you enter the workforce. The power of compounding allows your investments to grow exponentially over time, maximizing your retirement savings. Make it a priority to contribute regularly to your retirement accounts and take advantage of any employer matching contributions to accelerate your retirement nest egg.
17. Insure Yourself:
Protecting yourself and your loved ones from unexpected financial burdens is crucial. Invest in health insurance to safeguard against costly medical expenses. Life insurance provides financial security for your family in case of your untimely passing. And disability insurance ensures you have income replacement if you become unable to work due to a disability. Having the right insurance coverage provides peace of mind and prevents potential financial hardships.
18. Maximize Employee Benefits:
Make the most of the benefits offered by your employer. Contribute to retirement plans, explore company discounts, and learn about the PTO/leave policies. Additionally, consider enrolling in health savings accounts (HSAs) or flexible spending accounts (FSAs) to save on taxes and cover medical expenses more efficiently.
19. Diversify Your Investments:
Diversification is a fundamental principle of investment strategy. Instead of putting all your eggs in one basket, spread your investments across various asset classes, such as stocks, bonds, real estate, and commodities. This diversification helps minimize the impact of market fluctuations on your portfolio and can lead to more stable and potentially higher returns over time. Review and rebalance your investment portfolio periodically to ensure it aligns with your risk tolerance and financial goals.
20. Seek Professional Financial Advice:
If you find yourself unsure about complex financial decisions or need guidance on achieving specific goals, consider consulting with a financial advisor. A professional advisor can assess your financial situation, provide personalized recommendations, and help you create a comprehensive financial plan. Financial advisors can help you optimize your investment strategies, manage risk, and plan for major life events like buying a home or funding your children’s education. Never pay a financial advisor a percentage fee of your portfolio–this will cost you tons of money and it is unnecessary. Make sure to hire financial advisors on an hourly basis to address your specific questions and needs.
Hindsight is 20/20, but these financial tips can help you make better choices in your early twenties and beyond. By prioritizing saving, budgeting, investing, and making informed financial decisions, you’ll be better equipped to secure a stable and prosperous financial future.
Remember, it’s never too late to start implementing these tips, so even if your early 20s are far behind you, take charge of your finances and set yourself up for success.
