In the early years of your adult life, debt can add up quickly. From paying back student loans to buying a car to purchasing a home, expenses may add up to more than you have in your checking or savings account. For this reason, some people turn to credit cards.
Credit card debt is a common and often harsh reality for people in their 20s. No one wants to be in the hole, but does that mean you should put most of your money toward paying off debt or should you try to save some for your future?
While each of these expenses is important properly prioritizing debt and managing money may improve your situation long-term. To get started, consider the tips below.
Pay Off Debt
While credit cards can help you cover some expenses, if you don’t pay off your balance each month, you’ll likely owe interest that will cost you even more over time. This should be a factor in prioritizing debt. David Jones, former president of the Financial Counseling Association of America, told Fox Business that young people who have credit card debt should put an extra focus on paying that down first, even if they have student loans.
But, if you have more than one credit card, how do you know which debt to pay off first? Forbes suggests first paying off all debt with an interest rate of 7 percent or higher. By reducing that debt, you may save more by avoiding interest costs than you would earn if you invested that money instead.
If you have multiple cards or debt accounts with more than a 7 percent interest rate, U.S. News and World Report recommends paying off the smallest balance first while continuing to make minimum payments on the larger balances. Once that first card is paid off, take the money you were using to pay that and put it toward the next smallest balance until that debt is gone. By continuing in this way, you may be able to reduce the number of cards you have to pay off more quickly.
Save for Retirement
Perhaps as important as prioritizing debt is saving for retirement. In fact, personal finance expert Suze Orman says it may be even more important. She recommends contributing to your retirement account even before paying bills, and says you should contribute enough to get the maximum match from your employer (if it is offered).
The National Association of Personal Financial Advisors (NAPFA) suggests something slightly different. The association says to pay off consumer debt and create an emergency fund before worrying about long-term savings. But, if you can start saving for retirement in your 20s, says NAPFA, you can benefit from compound interest for longer. According to U.S. News and World Report, compound interest allows you to earn interest on interest. For example, if you had $1,000 in the bank and earned 2 percent in compound interest each year, at the end of the first year you would have $1,020. The next year, if you didn’t add any money, interest would be earned for the whole amount instead of just the $1,000. After 40 years, you would have an additional $400.
Start an Emergency Fund
NAPFA advises that all young adults should have an emergency fund. When unexpected expenses come up, it’s best if you don’t have to put them on a credit card. Personal finance writer Kristin Wong suggests says experts recommend setting enough emergency money aside to cover three to six months of living expenses.
Even though you may have a number of new expenses when you’re in your 20s, it’s important to prioritize spending. Both debt elimination and saving should be near the top of your list, as they might help you take better control of your financial situation – from now until retirement.
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