5 Financial Terms Anyone in their 20s Should Be Aware Of
Navigating finance is hard at any age, but your 20s come with fear of the unknown. We’ve summarized these essential terms to help you know which way to go.
This is an employer-offered retirement savings plan that lets you set aside part of your income each month before taxes are taken out. You won’t have to pay those taxes until years down the road, when you’ve retired and are ready to access the money. Many companies offer contribution matches, meaning they will meet what you save up to a certain amount. Thinking about retirement may be a drag, but it is vital that you start ASAP. If your workplace offers a 401(k), take advantage of it for big savings.
Credit is your ability to make payments and be a responsible financial actor. This is summarized by your credit score, a number drawn from an evaluation of your monetary behavior. If you pay your bills on time and don’t max out your credit card, you are likely to have a good score. This matters because lenders look at that number and your credit history to determine if they should approve you for loans.
You already know what this is, but do you have one? The consensus is you should have six months’ worth of living expenses stashed away in a short-term fund. Young people need to be especially cognizant of emergency expenses as they are less likely to have a sizeable amount in savings at any given time. Make sure you are allocating part of your budget, however small, to cover incidentals like repairs and injuries.
Another way to save for retirement is through investing. It is no secret that the world of investment is complicated, fraught with bad decision-making by overeager, under-informed stockholders. Luckily you won’t need to delve that deep if you stick with a low-cost index fund. This is a set of low-risk investments good for long-term savings plans. No need to play the stock market; just consult with your financial advisor regularly.
Wants Vs. Needs
Responsible budgeting depends on knowing what’s necessary and what’s indulgent. In your early 20s, you have few monthly payments. Your student loans may not have even kicked in yet. You might only be spending money on gas, food and fun. Once those bills start piling up though, you will need to cut back in some areas. There are fortunately many apps (e.g. Mint or You Need a Budget) that help break down spending to ensure your money is focused where you need it most.