One of the most exciting parts of looking towards future is planning and achieving the dreams you have – be it travelling, running your own business, buying your dream home, pursuing any hobby. You might be able to accomplish some of these goals with time but to achieve it all and live life to the fullest, you need to establish financial freedom.
What is financial freedom?
You may say, financial freedom is having the monetary stability to live the life of your dreams, to do whatever you want without having to worry about finances. Financial freedom means connecting to your deepest values and having enough money in the bank to support those values without having to worry about paying the bills.
Knowing how you want your future to look is important, it gives you a direction and a purpose to move ahead. Keeping realistic and conservative assumptions before you venture out to carve your road to financial freedom, is an essential key. Starting early can help position you for long-term success. The earlier you start planning your retirement, the greater will be your return on investment. This also entails coming up with a strategy to pay off student debts, stay out of debt, accumulate an emergency fund, and work towards achieving broader objectives like saving enough money for a down payment on a home.
Even if you feel financially stressed at an entry-level position, taking charge of your finances in an early stage will make it simple for you to reach your goals in your 30s and beyond.
You should make these wise financial decisions in your twenties to position yourself for future financial success.
1. Establish and adhere to a budget
Making a budget and sticking to it is a crucial step that can help you in organizing your finances and keeping a track of the money that enters and leaves your bank account each month. There are many internet tools and apps that may assist you in this exercise. Having a budget handy will help you keep a track of your savings and expenses.
Keep track of your financial objectives so you don't spend more than you can afford to pay back. In case you have to split spending with someone else, ensure that you both have easy access to the budget and hold each other accountability.
2. Establish an emergency fund.
Establishing an emergency fund to cover any unforeseen costs, such as medical bills or auto repairs, is one of the smartest things you can do in your 20s. To do this, allocate a percentage of your paycheck and have it sent automatically to an emergency savings account at the start of each month.
Ideally, you should have three to six months of expenses in this account, but, in light of the coronavirus pandemic and rising unemployment rates, some financial experts are recommending more conservative savings goals. Instead, after paying for essential expenses, you should concentrate on saving as much as you can.
3. Begin your retirement savings
There is never a bad time to start saving for your retirement, and the earlier you start, the more your money will have time to grow. The first step to early planning is to calculate the corpus you would need to live a stress-free retired life. Your corpus should be large enough to absorb costs that you know you may have to incur.
4. Pay off debt
In your 20s, you should prioritize paying off any debts you have, including credit cards and student loans. There are two main methods of paying off debt: snowball and avalanche. Snowball is when you pay off the smallest debt first. Avalanche is when you pay off the debt with the highest interest rate. Owing money to a lender may lower your credit score by raising your utilization rate, which is the proportion of available credit that you are actually using.
5. Set savings objectives
Start setting savings objectives in your 20s that are separate from your emergency and retirement funds.
For instance, you might save money to cover a down payment on a home, get ready for a family, further education, take your ideal trip, or finance a wedding. You can opt to invest the funds to meet your needs, thereby allowing the power of compounding to assist you. To create wealth in the long-term, regular investing is the key.
The Bottom Line
In the race to have money to be financially free, do not forget that financial freedom is much more than just having money. These steps alone won’t solve all your money problems, but they’ll help you develop habits and give a start to your journey of financial freedom. Create those financial goals, actively manage your finances, develop the right habits, and you’ll inch closer to your goals.
