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Personal Finance and Savings

5 Financial Moves to Make When You're Young

Maurie Backman Motley Fool Contributor Published On February 05, 2020

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The challenge of being young often boils down to having a limited income. After all, it stands to reason that the further along you progress in your career, the more money you stand to earn, and the newer you are to the workforce, the lower your paycheck reads. But in spite of this, it still pays to focus on certain financial goals when you're young. Here are a few key moves that could set the stage for a lifetime of success.

1. Build an emergency fund

Having emergency savings to tap in a pinch could be the one thing that keeps you out of debt when unplanned bills pop up. Ideally, you should aim to sock away three to six months' worth of essential living expenses so that you have money available if you get hurt, lose your job, or encounter a costly automobile or home repair. Furthermore, that money should be accessible to you at all times, which means you don't want to invest it. Rather, you should stick it in the bank -- preferably a high-yield savings account.

2. Start establishing your nest egg

The more time you give your retirement savings to grow, the more money you're apt to wind up with. If you begin funding an IRA or 401(k) in your 20s, you'll have four decades to benefit from investment gains. But the longer you wait to start building that nest egg, the less you'll get to take advantage of the power of compounding.

Contributing $300 a month to a retirement plan over 45 years gives you just over $1 million despite only putting in $162,000 of your own money. That's because with the right investments, you can use time to your advantage and capitalize on ongoing returns.

Speaking of the right investments, the 7% average annual return above is reasonable for a stock-heavy portfolio. Play it too safe by sticking to cash and bonds, and your results won't be nearly as impressive.

3. Pay off high-interest debt

The longer you hang on to costly debt, the more money you end up throwing away on interest -- money you could otherwise use to sock away for retirement or meet other important goals, like buying a home. If you're sitting on debt, paying it off quickly will allow you to approach your 30s, 40s, and beyond with a clean slate, so take a look at what you owe and devise a plan for knocking it out. If you're loaded with credit card debt, a good bet could be to transfer your various balances to a single card with a lower interest rate, and then pay that card off. And if you're grappling with private student loans, whose interest can be costly, you can try refinancing to a lower rate to make those loans easier to pay off.

4. Buy a home

Let's be clear: Buying a home is only a good idea if you have the finances to support it. That means coming up with a decent-sized down payment (ideally, at least 20% of what your home costs) and having enough money to keep up with the ongoing expenses of ownership, like property taxes, insurance, and maintenance. But if you do manage to purchase a home when you're young, there's a good chance you'll have your mortgage paid off well ahead of retirement. It also means you'll have a chance to build equity in a home from a young age, and then tap that equity as needed.

5. Purchase life insurance

Many young people assume they don't need life insurance, but if you have loved ones who depend on you financially, or who stand to suffer financially from your passing, then it pays to put a policy in place. The good news? The younger you are when you apply for life insurance, the more likely you are to not only qualify for it but snag a competitive rate on your premiums.

The money-related decisions you make when you're young could have a lasting impact as you get older. Make the above moves, and your future self will no doubt be grateful. 

About the Author

Jackson Hewitt is partnering with Motley Fool to offer content about taxes, saving, and other financial topics that could help clients get ahead and stay ahead."5 Financial Moves to Make When You're Young" by Maurie Backman was originally published October 19, 2019.

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