There are different ways people spend their 20s — sometimes frivolously, and other times with a hyper sense of clairvoyance. Those interested in the FIRE movement (Financial Independence, Retire Early) manage their finances as best and as early as possible to avoid crippling debt or being an employee forever. The goal is to save money and live off the investments made early on. Eventually, before they turn 40, their investments usually become enough for them to live off of, without having to be stuck in an 8-5 job until they retire.
Even though it is common for millennials to spend money on travel to have an Instagrammable post, it would still be better if young people have funds that can be dipped into to steer clear of instances that can hurt you financially. For instance, if you lose your job, what happens? You could move into your parents’ home, but that can cause a strain on your independence later on. You would also have to talk about rent or allowances while you are still looking for a job.
Another instance of why it is crucial to have a fund ready on hand is if someone gets into a medical emergency and the bill is larger than your savings. It is difficult to resist loans and credit cards in instances such as these. That is why you should have the following funds set aside to deal with less stress later on.
Emergency Fund
An emergency fund prepares you in cases where there are unforeseen circumstances that you need financing for. For example, you are not a big fan of insurance policies, but you or someone you know got into an accident. Having cash stacked away to help pay for bills can keep you from going into long-term debt because you will not be limited to swiping a credit card to pay them off.
However, it is important to note that not having money for your rent does not count as an emergency. Likewise, it is not an emergency if you or the person you are with is about to go into labor. These are events that can be planned for. Emergency funds should only be used when you were blindsided by fate, like a car accident or one of your electronics broke down unexpectedly.
Buffer Fund
A buffer fund is used to finance you when you are in between jobs. A steady job may not always be a sure thing, so you need to prepare money just in case things go south at work. It can be 6 to 12 months of your living expenses, so you have ample time to recuperate from your previous employer, and you will still be able to provide for yourself and your family (if you have one). Furthermore, the reasons why you might lose a job may be due to circumstances that will not change for a long time, just like the pandemic last year. It is important to be prepared to have resiliency in similarly difficult times.
Savings Fund
By now, you would have heard that it is important to have savings. It should be different from your emergency and buffer fund. Having savings can help you work towards things you really want to have, like your forever home. You will need to have enough to pay off the deposit and the monthly amortization. A savings fund, along with a mortgage lender, can pave the way to homeownership. It is all about making the right decisions and taking proper professional advice to get there.
The amount your savings fund should have is up to you and the goals you set. Your desires can get pricey, even if it is a cabin in the woods to visit for the summer. Only you can work to finance your dreams in the future; without putting any risk on your finances. Separating your daily expenses and wants can help you get to where you want to be financially a lot quicker.
Even though people spend their 20s differently, the key takeaways are that there will always be unexpected expenditures before you hit your 30s and that it is important to prepare for them. That might mean starving your wants and practicing delayed gratification more often than others. But in doing so, you should be able to achieve financial resiliency. You will be able to sleep better at night because you would have saved up for a nice bedroom in your very own home compared to someone at your age who is still renting.
