Your twenties are a time in life when you are building your career, establishing your financial independence, and creating the habits for long-term financial stability.
Let’s start by addressing the foundational elements of finances that you’re building in your twenties. Here are the top three priorities for this decade:
Create a Budget
Budgeting is one of the most important aspects of personal financial planning. A budget is a plan for how you’ll allocate your income to cover your expenses, save for the future, and pay off any debts you may have. Creating a budget helps you keep track of your spending and ensures that you’re living within your means.
It’s important to be honest with yourself about your income and expenses and to adjust your spending as needed. Overall, budgeting is a critical component of financial wellness and can help you achieve your short and long-term financial goals.
Set Key Financial Goals
However, in the absence of a full-blown budget at this stage it is important to concentrate on two fundamental areas: pay down debt as quickly as possible (not to mention avoid unnecessary debt) and save 5-10% of each of your pay chequesbefore it becomes part of your general cash flow.
These savings serve two purposes: they can start your nest egg for retirement and act as your emergency fund if something unexpected arises.
It may seem far away; however, it is never too early to start saving for retirement. In fact, the earlier savings begin, the more time your money will grow through compound interest. Be sure to take advantage of the tax savings associated with your TFSA (Tax Free Savings Account) and RRSP (Registered Retirement Savings Plan).
Understand Your Risk
The last point I will mention for your twenties is relevant if you have started a family. If this is the case, you must ensure that your family will be well taken care of if you or your spouse are unable to work for any reason. You should undertake an insurance/risk assessment.
This assessment will take a close look at your current and long term cash flow needs in the event of a life changing event. It should provide a framework for you to ensure you and your family will have the funds necessary to see you through your down time. Most likely it will include a combination of Life Insurance, Disability Insurance and perhaps Critical Illness Insurance.
In conclusion, for individuals in their twenties, it is important to prioritize debt repayment, establish an emergency fund, start a savings plan for retirement, and consider conducting a risk assessment, if needed.
Next in this Series – Building Wealth Across the Decades: Key Financial Priorities for your Thirties