Let’s face it. When you’re fresh out of college, long-term financial planning is not on the top of your mind. You’ve got far more interesting things to think about: your first real job, moving out of your parents into your own apartment, buying a new car or planning a fun vacation to celebrate that you’re now adulting.
But somewhere in the back of your mind you know that the sooner you start your long-term financial planning, the better off you’ll be.
If your future self could hop in a time machine and give your 20-year-old self some advice, here are five things they’d probably tell you to do in the next two decades.
1. Become financially independent and debt-free
Your parents may have helped you out financially through the school years, but now that you’re an adult, it’s time to stand on your own two feet. That means creating and managing a budget, making sure your spending is in line with your salary and making a plan to get out from underneath consumer debt like credit cards or student loans you took out.
2. Build an emergency fund
Life is unpredictable. Having a couple months’ worth of expenses in the bank will get you through hard times like a job lay-off, health problem, or the unexpected. Build an emergency fund in your 20s. In your 30s, build it more. As you get older and add kids and a mortgage to your financial responsibilities, your expenses multiply. In your 30s, aim to have six months’ worth of living expenses in your savings account, just in case.
3. Establish credit history and a good credit score
You might have missed a few payments on loans or bills along the way, and those mistakes ding your credit score. Now is the time to correct any missed or late payments and focus on improving your credit rating. When it come times to buying a house, a higher credit score will equate to a better rate.
4. Maximize employer benefits
It might have been perks like the Foosball table in the break room or free-pizza Fridays that first caught your attention when you started your new job, but financial benefits that many employers offer can really impact your monthly budget. Make sure you opt-in to programs like retirement accounts, flex spending accounts, benefits of your health plan like discounted gym memberships and opportunities for professional development.
5. Open a retirement account
You should start saving for retirement in your 20s when time and compound interest are on your side. Any money you save in your 20s will see four decades or more of market growth and compounding interest, which is when the interest you’ve earned starts earning interest, and that interest starts earning interest, and on and on. How much should go to retirement? As a rule of thumb, by age 30, you should have your annual income saved in a retirement account. By age 40, you should have between two-and-a-half and three times your annual income put away.
Hitting these milestones in your 20s and 30s will help insure financial health as you begin to plan for retirement in your 40s and 50s. Your future self will thank you.