When you are young, it’s easy to feel overwhelmed by money decisions. On one hand, you might be out on your own for the first time and have a lot of expenses (maybe more than you anticipated). But on the other hand, you know that how you handle your money now can have big implications for your future.
While it may seem like a lot to think about, it’s true that the decisions you make now will affect every aspect of your financial future. Do you hope to have a family? Do you want to retire early? Do you dream of a vacation home? Getting into good financial habits early will help you plan to live the life you want.
So today, we are talking about the 6 best money moves you should make before the age of 25.
Make a budget
Making a budget is a simple task that can have long lasting effects. All it takes is some time and discipline, and you can set yourself up for a good financial future. Here’s what to do:
Determine your income
Your first step is to determine how much money you are bringing in every month. Calculate your actual take home pay, which is your pay minus any taxes. This is your net income. If you have any deductions for a 401K or similar accounts, make sure you account for them as well.
Determine if you have any other income coming in every month. This could be from a side business, from rent you receive – anything that gives you some extra spending money.
Determine your expenses
Organize all of your monthly expenses into a spreadsheet. You will need two categories each month, fixed costs and variable costs.
Fixed costs are your monthly expenses that do not change and are the same amount every month. Fixed expenses can include rent/mortgage, your car payment, cable bills, internet, etc.
Variable expenses are expenses that change from month to month. Variable expenses can include groceries, your electric bill, dining out, etc. To determine average variable expenses, go through your credit card and bank statements from the past six to eight months and come up with averages for each category.
Budget your needs
Divide your expenses, both variable and fixed, into needs and wants. What do you need to survive and what is a luxury? Divide them up and take a look at each category.
Determine where there is wiggle room. For example, rent and groceries are both necessities. You can’t change your rent payments, but you can adjust your grocery bill. Decide on a fair budget for your needs.
Budget your wants
Look at your spending in your “wants” category. This is where you have the most room to adjust. See what you can get rid of to free up extra room in your budget. Little changes here and there will add up to big savings over time.
Make a plan
Now you need to determine how you want your finances to be allocated. Many advisors recommend a 50/30/20 model for personal budgets. This means that 50% of your income is allocated for needs, 30% is allocated for wants, and 20% is put into savings. You can adjust these numbers based on your situation, but aim to always have some money allocated into savings.
See how your current expense allocation looks. From there, determine where you can make adjustments. Canceling some streaming services or refinancing your car loan can free up a good amount of money every month. Decide on a budgeting plan that your plan is realistic and easy to track. The more complicated your budgeting system is, the more likely you will lose steam and your budget will go off the rails.
Check your credit score and credit report
Get in the habit of checking your credit score regularly. Having a good credit score will make everything in your financial life easier. The top benefits include:
- Lower interest rates on credit cards and loans
- Better chance for credit card and loan approval
- Higher credit limits
- Better insurance rates
- Easier approval for rentals
- More negotiating power for loans and accounts
You can check your credit report for free up to three times per year, once from each of the big three credit bureaus. Be sure to take advantage of this to monitor for any inaccuracies. Here’s what you should keep an eye on:
- Identifying Information. Your name, address, social security number, date of birth, and phone number. Make sure everything is accurate.
- Credit History. Look at all open and paid credit accounts, like credit cards, mortgages and loans. Check on any accounts that are shared with someone else. Look at total loan amounts, remaining loan balances, late payments, and check to see if any accounts have been sent to collections.
- Public Records. Ideally this section will be blank. This is where bankruptcies and judgments would be listed.
- Inquiries. Check to see what companies have requested your credit report.
If anything looks incorrect or amiss, contact the credit bureau to report it. It may take up to 30 days to receive a response, but you want to ensure any mistakes are corrected. In addition to ensuring that your credit score and personal information is accurate, checking your credit report will also alert you if anyone has been opening accounts or conducting business in your name.
Increase your credit score
Commit early in your financial life to increasing your credit score. The most important factors to your credit score are payment history and credit utilization. So be sure to prioritize making full, on time payments and keep your credit utilization ratio below 30% – this means that your total debt is less than 30% of the total credit you have available to you.
Start an emergency fund
Emergencies are by nature unpredictable. You never want to be caught off guard without a financial safety net. The earlier you start this, the better off you will be.
Depending on your situation, your emergency fund goal may vary. But no matter what your goal is, you want to use the budget you created before to allocate money to your emergency fund.
If you never touch this money – great! Then it’s tuckered away safe and sound, possibly earning a little interest along the way. But if you do need it for an unforeseen medical emergency or damage to your house, you have the resources to help yourself.
Refinance your loans
Like a lot of young adults, you may have gotten roped into a few less-than-ideal financing situations. If you bought a car when you were younger, you probably didn’t have a stellar credit score. And it’s hard to get a good interest rate when you have virtually no credit to your name.
As time has gone on and you have built more and more credit, you have probably qualified for a better interest rate than you did when you initially applied for financing. That’s why you should look into refinancing your loans, especially your car loan.
Refinancing your car loan can help you in a lot of ways:
- You can secure a lower APR
- You can change your repayment period
- You can add or remove a cosigner
The earlier you refinance in the life of your loan, the more money you will save. Check out Auto Approve today to see how much money you could be saving!
Start saving for retirement
The earlier you start saving for retirement, the more comfortable your retirement will be. Even making small contributions to a tax-favored retirement account in your early 20s can add up to big money.
Open an account that is geared towards retirement, such as an individual retirement account (IRA) or a 401(k). This way you can defer paying taxes on this money – this means there is more money in the account to earn interest on.
If your employer offers to match any contributions to your retirement, be sure to take advantage of this. This is essentially free money.
To emphasize how beneficial it is to start saving for retirement early, let’s look at an example. If you were to save $4,500 per year over 45 years of working, you would have over one million dollars by the time you retired. If your money was matched dollar for dollar by your employer, you would only need to contribute $2,250 per year. That’s less than $200 per month that would enable you to comfortably retire. Isn’t that worth it? So get started while you are young enough to have that money work for you.
And those are our top 6 money moves to make before you are 25.
Commit early to prioritizing healthy financial moves. The earlier you start a responsible budget and savings plan, the earlier you will reap the rewards. And if refinancing your car loan can help you reach your goals, be sure to contact Auto Approve today. We can help you save money every month so that you can make your money work for you!
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