Most of us have either heard about or lived through the war stories of the struggling 20-something. The crammed apartments, the diet that should have been ditched after college and worse, the savings account you expected would explode after snagging your first real job has remained sadly modest.
While the struggle may be real, it’s also an opportunity. The low-expense lifestyle of a 20-something is the perfect opportunity to slowly build credit and savings a solid financial future.
Here are five ways to build credit and savings in your 20s.
1. Don’t spend too fast
Landing your first salaried job is exciting, but go slow spending the new paycheck — moving too fast can set you back.
‘Live like a broke college student for a little while,’ says Liz Weston, author of ‘Deal with Your Debt: Free Yourself from What You Owe.’
It can take half a year (or even longer) to build up cash reserves, and that’s if you’re living very lean. Give yourself time to adjust to the influx of pay, and determine exactly how far your new income can go.
‘It kind of takes that long to figure out what your expenses are, once you’re out of college or away from home,’ Weston says.
2. Don’t rush to pay off student loans
Student loans typically have low interest rates, so paying them off quickly won’t save you a mountain of money. Stay current on your student loan payments but focus on putting your money aside for more strategic purposes like an emergency fund or retirement.
‘There’s no need to rush with student loans. Save for retirement,’ Weston recommends. ‘Hands down, there’s no better way to spend your money than putting it in a 401(k) or IRA.’
If you need more breathing room with your student loan payments, there are options. Check out the income-based repayment programs from the U.S. Department of Education.
‘It can really get your payment down to an affordable level,’ Weston says.
Read more: Clark’s student loan guide
3. Get serious about the future
Saving — even a little — for retirement in your 20s will make a big difference later.
‘There’s no better time to save than in your 20s, particularly saving for retirement because you have all those decades ahead for compounding interest,’ Weston advises. ‘The best time to save is right now.’
Participate in your company’s 401(k) plan and shoot for placing 10 percent or more of your pre-tax salary in this account, Weston recommends.
Don’t lose heart if your 401(k) balance seems miniscule for a while — use time to your advantage, as compound interest will eventually work its magic.
‘Think of every dollar in that account growing to $20 over time,’ Weston says.
4. Build a healthy credit score
Having a strong credit score will help you to save money more diligently. Once you’ve proven yourself as a low-risk borrower, lenders will start to reward you with lower interest rates and insurance rates.
‘Get a small starter credit card account. Establish some on-time payment history,’ says Bruce McClary, vice president of public relations for the National Foundation for Credit Counseling. ‘On-time payments are the single most important factor in a credit score, so you want to make sure you are making payments on time [and] don’t miss one.’
Do your homework to determine the best credit cards for your spending habits and be sure to keep an eye on the fine print so you don’t end up paying unexpected fees.
Set up email and text reminders when credit card payments are due rather than relying on memory. You can automate your payments as well. Consider scheduling your monthly payments a couple of days after payday, so there is plenty of money in your account.
Remember you’re building credit, not debt, so go easy on the credit card spending. Weston recommends using less than 30 percent of a credit card’s limit at any time. Spend a little each month and pay your balance in full. Access your free credit score each month to see the effects of your on-time payments on your financial health.
The first thing McClary ever charged with a credit card was a shirt and a pair of socks, spending maybe $40.
‘It was very manageable,’ McClary says. ‘That got me on the map.’
Read more: Get your free credit score
5. Stay on track
Nothing derails your finances faster than an emergency. Tucking away some money into an emergency savings account can help you stay on track with your savings goals when unexpected bills come your way.
‘You want to have an emergency fund,’ says Beverly Harzog, author of ‘The Debt Escape Plan.’ ‘I don’t care if you can only put $40 a month in an emergency fund. Get started. Lack of an emergency fund is why so many people end up in debt.’
An emergency cushion of six months of living expenses is ideal, but maybe that’s not attainable immediately.
‘Start out small. Don’t freak out,’ Harzog says. ‘Make your goal to be one month worth of expenses and then try to get to three months and then try to get to six months.’
Whether your savings priorities are long- or short-term, visualizing your goals can help you stay on track. Harzog uses Pinterest as her motivation: Saving for a house or a car, or want to build a travel fund? Pin it to remind yourself where your money is headed.