7 Rules for Budgeting in Your Twenties
A wise man once said, “With great power comes great responsibilities.” As you start out on your own in your twenties, you will likely be earning actual money for the first time in your life; that’s the power. You will also be forced to pay your bills and manage a budget while trying to have a life and start investing simultaneously; that’s the responsibility. By following these seven simple rules, you can trim the fat and enjoy yourself while still saving for your future. Below are 7 rules for budgeting in your twenties.
Avoid high-interest credit card debt like it’s the Plague
Let’s say you’re stuck with $1,500 in credit card debt at an insanely high rate of 29.99%. If you paid $40 per month, it would take you 113 months to repay the debt, and that $1,500 would have tripled due to the $2,984 in accumulated interest. By upping your payment by $10 to $50 per month, you cut the payoff time in half to 57 months, but you still pay an additional $1,306 in interest. If you can take your payment up to $60 per month, you shave the payoff time down to 40 months and only $882 in total interest. By sacrificing that extra $20 per month, you’ll save thousands of dollars in interest.
Except for underwear, don’t buy anything new
Between Facebook Marketplace, Craigslist, LetGo, OfferUp, not to mention brick and mortar thrift stores, there isn’t much you can’t buy secondhand these days. Yes, you need stuff like clothes, furniture, and a car, but your twenties is not the time to invest in high-end items to suit your tastes. You don’t have to resort to dumpster diving, but be frugal and save your money to get debt free and build up savings.
Always pay more than the minimum amount due on credit card debt
You may think you’re seeing real progress in paying down your credit cards because you’ve been making the minimum payments for as long as you can remember, but all you’re doing is kicking the can down the road. Your credit card statement will show you not only how long it will take to repay by paying the minimum balance, but how much it will cost you in interest. Make at least one extra payment per year to take a bite out of the principle.
Max out your 401k
If your employer offers a match on your 401k, make sure you max out your contributions to get that match. By failing to do so, you’re leaving valuable income on the table because your annual match funds will grow substantially over time. There are also significant tax benefits to maxing out your 401k. Participants who make tax-deferred contributions to their 401(k) are allowed to write them off of their income come tax time. You will eventually pay taxes once you withdraw funds in retirement, but it may be advantageous to make tax-deferred contributions, especially if you expect to find yourself in a lower tax bracket in retirement. You may not think about 401k when budgeting in your twenties, but it is the best time to start.
Stop eating (and drinking) out too much
This one can be tough, because so much socialization and networking take place in bars and restaurants, but it’s likely the easiest way to shave some serious money off of your budget. When you do go out, pay attention to what you’re ordering, especially if you’re drinking. Those $15 Manhattans are fancy, but are they really worth the price? A little moderation here goes a long way, plus it will help prepare you for when you have children and going out becomes the stuff of myth and legend. This is a very important point in budgeting in your twenties, as many young adults eat out much more often than older adults.
Regularly review your subscriptions
One of the most significant problems with automated payments is that they can chip away at your bank account without you seeing the cumulative impact on your finances. How many free trials have you signed up for online with the intention of canceling before the trial period ended and then just forgot to cancel? The answer may surprise you. Go through your bank statement, as well as any other online payment source like PayPal, to make sure you aren’t wasting money on something you don’t even know you’re paying for every month. This is a major part of budgeting in your twenties, as letting go of subscriptions happens way too often.
Take advantage of cash back deals
You would be surprised at how much money you can earn back from credit cards with cash back benefits, but do your homework first. You want to get not only the highest percentage back but also on the most extensive variety of purchases. When you get your cash back reward, invest it using a platform like Stockpile where you can buy fractional shares of stocks that will continue to grow over time.
These rules may not be very flashy, and it may take a little time to see the results. But remember, financial independence is a marathon, not a sprint. Save where you can, and invest your savings using a platform like Stockpile, where you can buy fractional shares of stock and grow your portfolio for only 99 cents per trade and no monthly fees. You may be skeptical now, but your future self will thank you immensely. Also, sites like Ebates offer cash-back for shopping at your favorite stores online.