If you're the type of 20-something who wants to take a deep dive into personal finance, God bless. There are plenty of great websites and books to immerse yourself in. But if that is so not you, no worries. You can build a fantastic foundation for financial success by focusing on just three key goals.
-- Pay your bills on time. Sounds obvious, but perhaps you're familiar with the saying that the road to hell is paved with good intentions? If you intend to pay bills at the end of the month, you can run into the "Whoops, I'm a little short" scenario: You spent a tad more during the month than you anticipated. So you let a bill or two slide.
The trick is to put bill paying ahead of spending. Set up automated bill pay. It's super easy and free. Just link your checking account with any monthly bill -- student loan payment, credit card, etc. That ensures bills get paid. Then, if you haven't already, set up banking alerts to send you updates on your balance. If you see it's getting low, you know to scale back spending.
A bonus: Your track record for on-time bill payments is the single biggest factor in computing your FICO credit score. You definitely want to sweat your credit score. Any time in the coming years when you want a loan, it will play a big role in approval, amount and rate.
The FICO scoring algorithm only cares that you pay the minimum balance due each month with credit card bills. That's a costly trap. Given the high interest rate charged on credit card debt -- the average is more than 16% recently -- paying the minimum basically means you will be paying that high interest for years.
-- Shovel 20% of after-tax pay into savings. The focus here should be on two types of savings: building an emergency fund and saving for retirement.
Emergency fund is cash you can tap at a moment's notice to cover an unexpected expense: car repair, health insurance deductible, staying afloat when a pandemic causes massive unemployment.
Your emergency fund needs to be a separate savings account. That's how you nudge yourself to only use the money in an emergency. Use an online bank that has a high-yield savings account (a quick online search will land you at great candidates) and have a monthly automatic deposit sent from your checking account to the online savings account. This is free. Regular banks tend to pay lousy interest rates on savings accounts.
Three months of living costs is your first goal. Stretching it to six months can be some valuable peace of mind. The key is to just get started, whether it's $100 a month or $200 a month. Every month you're making progress.
Retirement: As ridiculous as it sounds to be saving for something four or five decades off, this is the perfect time to start. The earlier you start, the less of your own money you will need to set aside.