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Ah, that first paycheck. It smells of freedom, new outfits, lattes, and dream vacations!

At least, that’s what most of our Instagram feeds would have us believe. But the reality for most of us is that as soon as we get paid, we’re already handing off our hard-earned dough to someone else: lenders, utility companies, Whole Foods, our landlord, the IRS (and on and on).

We may need these things to survive, but how do we know what’s essential? And what should we do with whatever pittance (if any) is left over?

Christopher P. McGill, president and CEO of East River Bank, says, “When you’re in your twenties, it’s hard to find the balance between living in the moment and planning for the future.” Ain’t it the truth. But many financial experts will tell you the best time to start saving is now.

McGill, a third generation banker, has strategically developed his bank’s outreach with millennials in mind. He advises, “Use the same rule that you were taught when you were 5 years old: save, save, and save—even if it’s just a few dollars at a time. Saving can be especially difficult when you’re getting established in your career, paying down debt, and planning for major purchases such as a home or car. Make it a priority this year to set aside that savings into your budget before you get accustomed to spending it every month.”

Not only will budgeting in your twenties help you enjoy your money, but it also sets you up to practice healthy financial habits you’ll use for the rest of your life. We asked financial experts which essential buckets we should be allocating our money to in our twenties to best set ourselves up for security and success. Here’s what they had to say.

01. A Sufficient Cash Reserve

Perhaps you've heard this called an emergency fund. Some people consider cash reserves and emergency money to be a little different, but either way, you need to have it. Stephen Rischall, CRPC, cofounder of 1080 Financial Group, is a certified financial adviser for millennials who was recently recognized by InvestmentNews as a “40 under 40” honoree. "Young people should have at least three months’ worth of living expenses saved up in their bank account or otherwise readily available," he advises. "It can help you avoid getting into debt in the event of an emergency or loss of income."

Holly Perez of popular money management software Mint tells us, "It’s so important to be able to cover costs for the unexpected like loss of job, medical emergency, home repair. It is recommended to have enough money to cover 3-6 months of expenses. If you can’t swing this much, put a few dollars away every month if possible."

02. True Expenses

Lindsay Burgess of You Need a Budget—a budgeting method and software that has helped hundreds of thousands of people get out of debt, break the paycheck to paycheck cycle, and save more money—says, "It's easy to think of your monthly expenses as rent + cell phone + gas + food + Netflix and call it good. But your true expenses are so much more than your fixed monthly bills."

For example? "Christmas comes every year. It is a true expense," Burgess notes. "If you take what you think you'll spend and divide it by twelve, and save that amount every month, you are accounting for your true expenses. And when Christmas comes you won't have to rely on credit cards." This goes for everything from charitable donations and a yearly vacation to being in your best friend's wedding. Burgess explains, "Your discretionary income isn't what you have left after rent and bills. It's what you have left after rent and bills and saving for your true expenses. If you can master this discipline, you will not be stressed about money."

This list includes just some of these larger, less-frequent costs you'll need to break down and treat like monthly expenses.

03. Ditching the Debt

Burgess adds, "When we carry debt, we are paying for mistakes and/or priorities of the past. So Past You is stealing from Current You and Future You. It also strips us of options. If that money didn't have to go toward your debt every month, just think of all the things you could do with it! Get out of debt. It will eliminate some stress and multiply your options."

Many of us graduate with debt from student loans and credit cards. McGill of East River Bank tells us, "While it’s advantageous to pay off all forms of debt, credit cards should be at the top of the list this year so you can avoid high-interest debt. Millennials should focus on clearing their credit cards first, and then use all the money they’ve freed up to ditch student loans and car payments. It’s best to avoid credit card debt altogether, but do keep the plastic in your wallet for the times you might really need it like an emergency."

04. Retirement

When you're young, one of your greatest assets is time. Rischall of 1080 Financial Group says, "Millennials don’t like the word ‘retirement,’ but the power of compounding interest and a longer time horizon help tremendously if they begin investing sooner for retirement. A good goal to begin with is saving at least 10 percent of everything you earn for retirement. Consider using a Roth IRA, a group retirement plan through work, or a mix of different account types. What’s most important is that you actually start investing for the long term, even if you can’t yet afford to save 10 percent of your income."

Marissa Mullins, a millennial who got a financial planner at the age of 25, laid this out for Verily:

Let’s say at 25, you invest $100 in a retirement fund at an interest rate of 5 percent. You plan on retiring at age 65. So that $100 has forty years to collect compounded interest each year. At age 65, that $100 will have become $729.80.

Now let’s say at 35, you invest that same $100 in a retirement fund with the same interest rate of 5 percent. You still plan on retiring at age 65, so that $100 has thirty years to collect compounded interest each year. At age 65, you’ll have $444.02.

Just by putting $100 away ten years earlier, I'd gain an additional $285.78. That number got my attention. What would happen if I added just $100 more each year?

The earlier you start to save, the more time your investment has to grow. Even if it’s $100 a year (less than $8.50 a month), that money grows exponentially higher now than it would years down the road.

05. Health Insurance

Insurance means planning for the worst case scenario. How each individual plan functions is different, but in exchange for your monthly premium, most plans share medical costs with you and limit your out-of-pocket expenses for the year.

Sean Clark, a millennial, financial advisor, and CEO of York Independent Financial, told us: "Look into health insurance. Yes, I know that it looks expensive, but there are tax subsidies to offset the costs of coverage. You can check out the details at, and there are other plans called Short Term Medical Plans that, while they do not cover pre-existing conditions, are very affordable.​"​

So yes, if you don't have to go to the doctor one year, that insurance premium was pricey. But the time that stomach ache turned into a two-day hospital stay for appendicitis? You'll be grateful for an insurance plan that helps lessen the blow.

06. Life Insurance

According to Clark, "there are primarily two types of life insurance, term life and whole life." Term life insurance provides protection in case you die prematurely, and provides coverage only for a certain period of time—like ten, twenty, or thirty years. Whole life coverage covers you, as you may have guessed, until your death, no matter how long. Which one is right for you depends largely on your age.

Clark advises: "For somebody just starting out in life, the only real choice is term insurance. It provides the maximum amount of coverage for the lowest possible premium because it is simply just Insurance, similar to property insurance. Whole life insurance, also called permanent insurance, is appropriate for older individuals seeking to do legacy planning."

Clark adds, "​A critical mistake of younger families is neglecting life insurance.​ ​I have seen this mistake more often than any other.​ ​For some reason, people think protecting their family is expensive, but it really is not.​ ​My firm runs term life quotes constantly, and for a healthy 25-year old to get $250,000 of protection for his family comes down to pennies per day.​ ​There are a lot of services that offer free quotes, York Independents included.​"​

"It is important to keep in mind that not all term insurance companies charge the same amount for the same coverage and it is very important to either use a comparison shopping service or do extensive research on your own prior to making a purchasing decision," he adds.​

Secure life insurance if you can now because it's cheaper when you're younger. The older you get, the more expensive it becomes because your health risks become more apparent.

07. One Credit Card

"It might sound crazy to recommend a credit card as part of a budgeting plan, but if you use it wisely you can reap some serious rewards," says Craig Sebastiano of RateHub, a financial comparison site that connects its users to the best credit cards, bank accounts, and mortgage rates. "The best rewards credit cards out there today can earn you free flights, up to 6 percent cash back in certain categories, and great sign-up bonuses. Plus, using a credit card smartly—i.e. not carrying more than a 30 percent balance each month, or even better, carrying no balance at all—will allow you to build good credit in your twenties without taking on more debt. When you're ready to make some big purchases, like a home or car, having a great credit score will be of utmost importance."

McGill recommends getting one credit card and using it wisely. "The best way to start using a credit card is for small, regular bills that you can pay off each month, such as linking your cell phone bill to your credit card." If you use it for more than everyday expenses, you risk wading into dangerous waters. "If you find yourself charging up high balances or using your credit card for regular expenses because you do not have the cash, you may need to reevaluate your spending and living situation."

Creating a budgeting system that works for you is the best way to tell your money where to go versus coming to the end of the year asking yourself where it went. Put in the effort now, and you’ll reap the benefits for years to come.

Photo Credit: Brittni Willie