Achieving financial success usually isn't easy, but there are steps you can take in the short-term to put yourself in a good position to meet your goals. Living a fulfilling life includes not only physical and mental health, but financial health as well. The following is a list of practical steps you can implement to ensure financial success in your 20s and to ultimately put yourself in a position to lead a long-term, "fiscally-fit" life.
1. Build a Balance Sheet and Cash Flow Statement
Getting your finances in order requires an understanding of your starting position. Two common financial statements for this purpose are the balance sheet and cash flow statement.
A balance sheet helps you identify your net worth, or the difference between your assets and liabilities. Over time, your net worth should grow. If you're not making progress towards paying off debt (liabilities) and building assets, you're likely not making any progress towards reaching your goals.
A cash flow statement will show your net income and where you're currently investing, spending or paying down debt. Having an understanding of your cash flow is important because it should align with your stated goals. If it doesn't, you should reevaluate where your money is going.
Tools that can help you develop a balance sheet and monitor your cash flow include Mint.com and YNAB (you need a budget). Mint.com will allow you to see your balance sheet and plug in all your various accounts in addition to seeing where you're currently spending money every month. YNAB allows you to plan your budget, and only spend what you actually have available. It's very useful for helping people stick to a budget.
2. Establish an Emergency Fund
Everyone should have an emergency fund in place. If you're faced with an unexpected expense, lose your job or experience any other unfortunate event that could derail your finances, having an emergency fund in place as a buffer will soften the blow.
An adequate emergency fund should contain roughly three to six months of living expenses. If you don't have an emergency fund and face unexpected expenses, it could cause you to incur a large amount of credit card debt, deplete your "fun" money or even force an early withdrawal from retirement accounts.
An efficient location to store emergency money is an online high-interest saving account. Name the account "first name" Emergency Fund and set up automatic contributions until you reach three to six months of expenses. Once complete, forget about it, but have the peace of mind knowing it's there. (For more from this author, see: Why You Should Have an Emergency Fund.)
3. Prioritize Your Goals
Do you have student loan debt? Does your employer offer employee benefits such as a retirement plan, health insurance and disability insurance? Do you want to buy a home in a certain number of years? These are all questions to ask yourself when prioritizing your goals. For the most part, goals should be worked towards congruently, not one at a time.
For example, just because you have student loan debt at a 5% interest rate doesn't mean you should be putting all your focus and funds towards paying that debt off faster. If you're not also making contributions to a retirement account, you're losing extremely valuable years of tax-advantaged compounding. Not to mention, the long-term growth of equity investments averages around 8-10% historically, far outpacing the interest rate on the 5% student loan.
You should also consider your short-term goals. These may include buying a home, taking vacations or getting married. Typically, once the former goals are taken care of (including health insurance and other necessary insurance policies), you can then prioritize the lifestyle goals.
4. Automate Your Finances
After prioritizing long and short-term goals, you can begin to allocate cash flow towards them. The key is to automate as much as possible, removing the work involved with having to move funds here or there. Your student loan payments should allow you to transfer funds automatically towards paying them off, as well as your 401(k).
Use the same process for paying off your credit card every month, making car payments, transferring cash to an account designated for a home purchase or preparing for honeymoon costs. The process of automating help you hold true to funding your goals. (For more from this author, see: The Best Way to Budget: Automate Your Finances.)
5. Monitor and Make Adjustments When Necessary
Life will always throw an occasional curveball your way, and things never truly work out the exact way we envision them. Be prepared to make adjustments when you need to and don't be afraid to take risks. Revisit your plan when you have a new goal or any major changes in your life. If you get married, have conversations with your spouse about building a joint financial plan if you haven't already. If you have kids, you may want to begin saving for their college costs. As life changes, so will your priorities.
6. Don't Be Afraid to Take Risks
Contrary to some advice you may read on personal finance or investment blogs regarding risk reduction, there really isn't a better time to take risks than when you're young. Maybe you want to build a side hustle and develop it into a full-fledged business one day. Allocating cash towards an investment that's focused, such as starting your own business or even investing in individual stocks, isn't a bad financial decision. Risk and reward are correlated, and taking risks can pay off. Not to mention the satisfaction in building a business or investing in successful stocks.
Not everyone has the same goals, aspirations or financial situations. Typically, as you grow older and you've made substantial progress towards your financial and life goals, it only makes your plan more complicated. If you follow these steps and start to make quantifiable progress towards your goals, you can reach financial success in your 20s. The habits formed early will go a long ways towards ensuring a financially independent future.
(For more from this author, see: Make Financial Wellness Part of Your Life Plan.)