Between finishing school, launching a career, and starting a family (or not) many young adults in their 20s and 30s let their savings fall by the wayside. But just because you are early in your career doesn’t mean you should put off improving your finances. Showing up late to the saving game can have detrimental effects on your financial wellbeing.
I can relate. When I was in my early 20s, I ignored some of these financial tips, and now I really regret neglecting them early on.
Don’t be like younger me! If you’re in your 20s or 30s, follow these financial tips and watch them save you thousands of dollars over your lifetime.
1. Make a Budget and Stick With It
You’ve heard this advice before, and it may seem like a no-brainer. Yet, many people in their 20s and 30s who know they should make a budget either never get around to it or don’t stick to it when they do.
Following a budget is all about making adjustments and planning ahead to give every dollar a job before you spend it. When you can spend your money on paper before you spend it in person, you have better control over where your money is going.
With a budget, you can approach your finances as if you’re going on the offense instead of constantly being on the defense, living paycheck-to-paycheck and fighting to cover all of your bills before the end of the month.
Everyone benefits from keeping a budget, whether you’re making $50,000/yr or $150,000/yr. Maybe you’re thinking, “Well, I track my spending in my head and I make a good amount of money so I don’t really need to budget.” Or maybe you feel a restrictive, formal budget just isn’t for you.
My challenge to you would be this: do a quick assessment of your spending over the last couple of months. Take a look at your bank account or your credit card statements and tally up the money that you spent in different categories like food, shopping, eating out, Amazon, etc.
Then track how much you are saving – how much you are “paying yourself.” If you’re not making a payment to yourself into savings, retirement, or other investment accounts, you’re losing out. A budget can help you reroute your money from other expenses that are eating away at your long-term financial goals.
Don’t overlook the importance of making a budget. And if you’re curious about a good budgeting tool I recommend, check out You Need A Budget.
2. Max out your Roth IRA
Everyone’s financial situation is different, so I’ll draw upon my career field as an example. Say you’re a typical physical therapist: you will start your career earning about $65k–$70k annually, with a 401k in your benefits package (or a 403b for nonprofit organizations like a hospital).
Side tip: If your employer offers to match your 401k or 403b contribution, definitely take them up on it, especially if the offer is dollar-for-dollar or $.50-to-the-dollar up to a certain percentage of pay.
But there’s another type of account that often goes ignored, though you’ve probably heard of it before: a Roth IRA. The reason you shouldn’t ignore a Roth IRA in your 20s or 30s is because the earlier you can contribute money into your Roth IRA, the longer it will grow and accumulate interest.
The money you put into the account has already been taxed, and the interest you earn on your Roth IRA grows tax-free. You can even withdraw it tax-free upon retirement. It’s one of the best retirement savings accounts out there, especially for younger investors who have time on their side.
3. Contribute to your HSA
Health savings accounts provide huge tax benefits and savings when you need it the most. An HSA is a type of savings account that lets you contribute pre-taxed money to later pay for qualified medical expenses.
As long as you are covered by a high-deductible health plan, you should open a health savings account. Not only does the money go in before taxes, it grows tax-free with investments in your account and is withdrawn tax-free to pay for things like your deductibles, co-payments, coinsurance and other health-related expenses you have.
A couple caveats: there are some rules for eligibility and a limit on contribution amounts. In 2020, the maximum dollar amount that you could contribute was $3,550 for an individual plan or $7,100 for a family plan.
One good thing about your HSA account is that it is your money; it stays with you and grows throughout the years. But unfortunately, it’s easy to overlook the importance of saving for things like medical expenses until it’s too late.
Spare yourself the financial stress by establishing a health savings account early on and contributing to it regularly. Even a small amount of money added each month will grow faster than you think. And when unexpected – or even expected – medical expenses pop up, you’ll be really glad you had had the foresight to open an HSA.
4. Cars Will Keep You Broke
It’s an easy trap to fall into. If you started a new job recently and need reliable transportation, you may be tempted to upgrade your car and take on a car loan.
This is a mistake I made early in my 20s; it’s so easy to try to justify the expense of a car payment! Of course, you’re better off buying a car with cash, but the majority of people in their 20s and 30s will opt for a used car with a $300–400/mo car payment.
The total expense doesn’t end with your car payment, however. Your new car will incur a ton of other expenses throughout the year, including taxes, registration, insurance, and maintenance – a fair estimate of an additional $200–300/mo.
Don’t just think, “Well, I can afford this $400 car payment because I make $5,000/mo.” After you’ve paid your income taxes and accounted for all the additional expenses surrounding the car, you may be spending 15–20% or more of your after-tax income on your car.
I’m not against you having a vehicle or reliable transportation, but you need to recognize the cost involved. Think about what you’re giving up because of that car payment and the additional expenses your car is costing you.
And how’s your savings? Are you struggling to put $200/mo into a Roth IRA but making a $300/mo car payment? This area of finance is very easy to ignore; it’s even easier to try to justify the cost of a new or used car payment. Don’t let your car keep you broke or prevent you from hitting the other financial goals you have.
From personal experience, these financial tips are vital for establishing savings early on and reaping the benefits later. Don’t coast through your 20s or 30s without sticking to a budget, maximizing your savings account options, and cutting out the expenses – like a car payment – that are keeping you broke.