3 Smart Financial Moves To Make In Your 20s
There’s no better time to get your financial house in order than in your 20s. It’s the perfect time to develop good financial habits that will serve you well in the future, as you prepare to be financially independent and secure. Financial decisions you make early on can affect your financial life in a permanent way.
But what steps can you take now that will result in the most payoff later in life? Follow these 3 smart financial moves to make in your 20s, so that your future self (and your bank accounts) will thank you.
Smart Move #1: Balance debt payments and savings
A lot of people just starting out in their financial lives wonder, “Should I pay all my debts first, or should I start saving first?” From a purely math perspective, paying off your debt with 14% interest is more financially sound than putting money in a 1% interest earning savings account.
But personal finance is never that clear cut. What if you’re so busy paying down your debt that you don’t save any money, and all of a sudden, your car breaks down and you have no money to pay for it? You just end up in more debt.
The way to break the cycle is to balance your debt payments and savings. Let’s say you can devote ₱5,000 of your paycheck to debt payments and savings. Use ₱3,000 to pay your debts, and ₱2,000 to put in your emergency fund to cover any unpleasant financial surprises life might throw at you.
Once you’ve built up a healthy emergency fund, you can then concentrate on paying off your debts, or perhaps look to saving for retirement (that’s coming up next). This way, if there’s an unexpected expense, you don’t have to add to your debt and start the debt cycle all over again. You can just dip into your savings.
Having a system for paying your debts, while also saving enough to build a buffer for emergencies, will help you develop good saving habits that can serve you well in the future. Start off by comparing savings accounts with our tool.
Smart Move #2: Start saving for retirement right now
You might be thinking, “retirement is so far away!” Or you might be more concentrated on getting a job and building a career now, than preparing for your future later.
You might change your mind when you realize how much money you’re wasting by not starting to save right now — because of the magic of compound interest, it might be in the millions!
Check out compound interest in action. Let’s say you start saving for retirement at 25, putting away ₱2,000 a month in an investment product that earns 8% interest every year (which is typical for moderate risk funds), compounded annually. By the time you’re 65, you’ll have over ₱6.2 million to enjoy for your retirement.
But if you started saving the same amount at 35, you’ll only have around ₱2.7 million when you’re 65. Waiting 10 years to save would cost you around ₱3.5 million! So if you don’t start saving as early as you can, that’s millions you’re wasting. Even if it’s just a little bit, as long as you save regularly and in the right products, you can be well on your way to a happy retirement.
Smart Move #3: Invest
The younger you are, the better time it is to start investing. Look into medium- to long-term investments such as UITFs or equity value funds to help secure your financial future. If you’re more interested in gains for now, look into short-term funds with no minimum holding periods that can grow your money faster than regular savings accounts, while also giving you easy access to your returns.
But once you’ve amassed a good amount of money, consider diversifying into longer-term investments, and becoming more aggressive with your investing.
Some investment options you should take a look at:
- Short term: BPI Short Term Fund. For a minimum initial investment of P10,000 and additional transactions of at least P1,000, you can get started in the world of investment. If you need liquidity and stable income, this is a good first fund to try.
- Medium term: Metrobank Max-3 Bond Fund. Do you already have an investment horizon of at least 1 year? Look into this fund, which is for young professionals who’ve already built up a savings fund and have a moderate risk tolerance. The initial participation is P50,000, with minimum additional participation of P25,000.
- Medium to long term: BDO Equity Fund. If you have an aggressive risk appetite and want potentially higher returns, and can afford to stay invested for more than three years to maximize your money’s earning potential, check this fund out. The minimum investment is P10,000, and the minimum additional is also P10,000.
Start investing while you have time on your side. The longer your investment horizon is, the better potential for gains — so one of the smartest financial moves you can make in your 20s is getting started now.
For more smart financial moves to make in your 20s, check out the 10 Financial Milestones To Hit By Your 30th Birthday.