Five years back, when I turned 20, I felt like a grown up standing on a heap of thoughts about how I want my future to look like. I knew I wanted to travel, build myself a house and live a stress-free life. It took me a while to realize that any of this won’t be possible until I learn to get my finances in order.
Your 20s can be a concrete foundation to the rest of your life and this is the right time to develop effective money habits that can help you retire early or to live a financially healthier life. Establishing good financial habits can sometimes mean making small sacrifices but it can go a long way in helping you become financially independent at the earliest.
Here are some of the most effective money habits to start in your 20s to help you improve your finances and attain financial stability before retirement:
1. Stick to a budget – Budgeting is the first and foremost step to help you keep your finances in check. Always have a specific amount set aside for the expenses that you need to incur during the month and try to stick to those expenses. At the end of the month, revisit all your actual expenses and compare it to the budget. This will help you recognize the areas where you might be spending more than you need to and you can then take necessary measures to prevent the same from happening in future. It’s important to review your budget every now and then to make way for the changes in your financial habits.
2. Cooking at home rather than eating out – We sometimes don’t realize how expensive it is to eat out than opting for a home cooked meal. When hanging out with friends, we often don’t bother to keep a note of the money we are spending on food which sometimes ends up disturbing the entire budget for the month. Home cooked meal not only saves money but also helps reduce wastage by reusing the leftovers. Do an advanced meal planning every week to avoid last minute hustle of running to the store to buy groceries.
3. Retirement Planning and maximizing your savings for the life post retirement – If you want to retire early, you need to start saving now. As simple as that. You don’t want to live your life post retirement regretting that you didn’t save up anything in your 20s. A lot of people comfortably retire after 40 because they had a solid foundation built up during their 20s by adopting healthy financial habits.
4. Make debt repayment your priority – Debt repayment should always be your first priority in the journey towards financial success. Be it credit card debt, student loans, car loan or home loan, pay off your debts to ease off the financial stress even if it means making small financial sacrifices until you find yourself debt-free.
5. Ditch the harmful money habits – Stop spending money on things you don’t need and give up harmful money habits like impulse spending that might be killing your finances. Expenses can also get out of hand if you have a habit of using credit card without keeping a track of your expenses or if you are regularly being charged with late fees by not paying bills on time. Ditch the habits that are costing you unnecessarily an amount that you could have saved for your 40s.
6. Investing your money – Form a habit of putting your money in the long-term investment avenues to earn valuable returns on your savings. Long-term investments in real estate, stock market and other financial instruments can give you returns on the money that would otherwise be lying in a safe or a bank account. At the same time, it is important to fully understand the risk/reward ratio of the financial instruments you are investing in.
7. Review your monthly bills – A timely review of your monthly bills is important to keep a check on the expenses that might be ruining your budget. Look for the areas which are eating up your money and find ways to reduce those expenses. You can easily save a few hundred dollars every month on utilities and groceries by making small changes in your money habits.
8. Use coupons and avail cashbacks everytime you shop – Make use of discount coupons and cashbacks while shopping online or at supermarkets to save every penny possible. It might feel cumbersome to look for coupons or sign in through referral sites every time you make a purchase but cashbacks collected over time can easily pay a couple of your phone bills or to make another online purchase.
9. Plan your errands everyday – Calculate the expected amount of expenses before leaving your house. During the course of the day, keep note of the things you’re spending the extra amount on. Did you have an extra cup of coffee than usual? Or you simply had to take a cab instead of a metro because you were running late for work? Could these expenses have been avoided? Look for ways to avoid similar situations in future if it can save you some dollars.
10. Stop overspending on gifts – It’s obvious to take a gift along when going to weddings, birthday parties or dinners. But sometimes, we unknowingly tend to overspend on gifts and don’t realize it until we actually pay a look at our budget. While it’s always a good gesture to come with gifts when invited to a party, make it a point not to exceed the set budget. Look for some affordable gift ideas and try opting for recycled packing.
11. Keep minimum possible cash in your wallet – The amount of cash in your wallet should be as less as possible as more cash encourages unnecessary spending. The amount of cash that you carry should be enough to pay for your daily errands besides a few extra dollars for any emergency.
12. Save first, spend later – Always direct a specified amount of your pay check to your savings account first and then go on to spend the remaining amount to pay your bills. Always remember the rule – “Don’t save what’s left after spending, spend what’s left after saving.”
13. Setting, reviewing and updating your financial goals from time to time – Always think of your financial goals for a proper financial planning. Where do you want to see yourself 10 years from now? How much do you want to save for your kid’s college? Is buying a car or a home a part of your financial plan? Besides having financial goals in place, you should always review and update them from time to time to make way for changes in financial and personal situations.
14. Maintaining an emergency fund – Have an emergency fund to pay for at least 3 months of your expenses to avoid any unforeseen circumstances. Your emergency fund can act as your financial cover if required and it should be enough to pay for your basic needs for at least 3 months or more if need be.
It’s never too late to start implementing effective money habits to be able to live a financially comfortable life during the later stages of your life. Money management isn’t difficult if carried out smartly keeping your financial goals in mind.