You can make financial mistakes at any age but it’s especially easy to make the wrong financial decisions when you’re in your twenties. Perhaps you’ve just landed your first full-time job role and you’re not used to having disposable income or maybe you’ve graduated from college and are eager to pay off your student loans as quickly as possible.
Whatever your situation, it’s important to know how to manage your finances effectively. With this in mind, take a look at these four financial lessons you need to learn in your twenties…
Paying off the Right Debt First
All debts are not equal, which means you shouldn’t necessarily aim to pay them off at the same speed. A fixed, low-interest rate means that your debt will only increase at a specific rate, for example, whereas a variable high-interest rate could mean that that amount you owe increases at an alarming speed, even if you’re making regular payments. In these situations, it can be advisable to pay off higher interest rate debts more quickly than low-interest ones.
If you’re unsure how to manage your debts or which ones you should be paying off first, it’s well worth getting expert advice. Talking to a financial advisor or a debt counselor will help you to figure out the long-term impact of your debts and create a workable plan that helps you to avoid unmanageable debt in the future.
Declaring Your Income to the IRS
If you’re earning money, you’re liable to pay tax and missing payments can have disastrous consequences. If you don’t declare your income or you avoid paying tax, for example, the worst-case scenario is you could end up in prison for tax evasion. In addition to this, you could be given large fines and sanctions, as well as being required to pay back the tax you owe.
When you’re employed by a company, they will typically deduct your tax payments from your wages on your behalf. However, it’s vital to ensure that you’re being taxed the right amount as an administrative error could mean that you’re inadvertently avoiding paying tax.
In addition to this, you’ll need to consider whether you’re generating income from any other sources. If you’re working as a freelancer or you have a side hustle, for example, you’ll either need to register a company or as self-employed so that your income can be taxed appropriately.
It’s Never Too Early to Save for Your Retirement
When you’re in your twenties, retirement seems like a long time away, but it will come around more quickly than you expect! If you don’t start saving now, you could face financial problems in the future, so it’s important to think about how you’re going to fund your lifestyle as you get older.
Paying into a 401(k) or IRA are popular options but there are other types of investments to consider. You may decide to build up a property portfolio or play the stock market in the hope of generating high returns, for example.
With help from an investment manager or retirement advisor, you can find out what your options are and determine what level of risk you’re willing to take with your funds. Furthermore, a finance professional will be able to help you save for your retirement in the most tax-efficient way.
An Emergency Can Strike at Any Time
If you don’t already have an emergency fund in place, it’s time to start one. You never know when an emergency will occur, but most people are faced with unexpected bills at some point. When you don’t have the funds to pay for sudden expenditure, it can have a major impact on your lifestyle and your well-being, which is why it’s so important to set money aside for emergencies.
Making monthly contributions to an emergency fund ensures you have funds available whenever they’re needed. What’s more – keeping your money for emergencies separate from your disposable income or savings means you won’t be tempted to use the funds for anything other than genuine emergencies.
Optimizing Your Financial Management Skills
Everyone makes silly financial mistakes at one time or another and they can sometimes be hard to recover from. By taking a proactive approach to financial matters and enhancing your money management skills, however, you can ensure that you know how to protect your funds and maximize their value. When you do this in your twenties, you can mitigate the impact of financial mistakes and make your money work for you as you move on the next stage in your life.