Developing good money habits in your early adult years can help you position yourself for financial stability and better grow your wealth over time. The sad truth is that many young adults in their 20's are unaware of how to best manage their money and will often regret the monetary decisions they made in their 20's well into their 30's and 40's. For 20-year-olds looking to get into good money habits early, below are four things you should know.
1. Money and Material Goods Do Not Create Happiness
This is an old saying that is true TO A POINT. It's often used as a replacement for "be happy with that you have" which is a bunch of bull****. What this saying REALLY means is that after you get to a comfortable level of food, clothing, entertainment, living arrangement, and other necessities, you get far less happiness per additional dollar earned. The original study out of Princeton University came out in 2010 stating that once you make $75K, you don't get much happier making more. That number adjusted for today is pretty close to $100K.
The point in saying all this is that if you are looking to be happy with your money, you don't need to break your back and work overtime in order to make $120K next year. You'll feel like you wasted time more than your happiness increased.
2. Exercise Caution When Borrowing
Borrowing money is, unfortunately, a necessary thing that most adults will experience throughout their life. While it is easy to tell you to simply not borrow any money in your 20's, the truth is borrowing, and repaying the money is an important part of establishing a strong credit history. Since borrowing is an essential part of adult life, it is important to exercise caution when borrowing money to make sure you don't become saddled with a mountain of debt that is hard to get out from under.
The major difference is between good and bad debt. Good debt has low interest rates and can help you buy things like homes or vehicles. Bad debt is very high interest and is used for things like going shopping (credit cards!!!). Focus on borrowing low-interest debt to get things that will provide you a financial benefit in the long run. Sorry, those Louboutin's definitely aren't worth getting into debt for.
3. Pay Yourself First
Many experts will tell you to budget and meticulously count where every dollar is spent. I strongly disagree. Budgeting is financial dieting and though you may stick with it, most people don't. There is a simple hack to not have to worry about budgeting while still being financial responsible. First thing when you get a paycheck, take 15% of it and put it into savings of some kind (savings account, investment account, etc.). Whatever is left is what you can spend on rent, utilities, cell phones, concerts, or whatever else you prefer to indulge in.
4. Know the Importance of Having Cash on Hand
Your first instinct when you get an influx of money is to either pay off debt or maybe even invest it (but let's be honest, it's probably to spend it). While it is vital to put money away for retirement early and also keep your debt under control, it is always important to have cash on hand. Emergency situations can arise such as major car or house repairs or even losing a job. There are many bills that still do not allow credit cards for payments such as rent and mortgage, so not having cash on hand when life throws you a curveball can have devastating consequences.
The rule of thumb for emergency cash reserves is 3-6 months of your income. This is a very simplified explanation of what you should keep based on a multitude of factors including how you make money (commission or salary), if you own a business, own real estate, have kids, and many other things. Talk to an advisor to get some help honing your cash reserves if you want to stray from the 3-month rule.
Prepare yourself for your future and help increase your chances of being financially secure by taking money matters seriously in your 20's. By following the tips above, you will be taking the first steps to taking control of your money for the rest of your adult life.