Wondering what you should know about personal finance in your 20s? Here are some key concepts and practices you should be familiar with.
Managing personal finances is a crucial aspect of adult life, and it’s never too early to start. In your 20s, you have a unique opportunity to set yourself up for financial success in the future.
By learning and practicing some basic financial management skills now, you can avoid common money mistakes and build a solid foundation for your financial future.
As a 20-something myself, I’m sharing the best personal finance information and tips from my perspective. While none of the content in this blog post is financial advice, here are some key concepts and practices to be familiar with when it comes to managing money.
This post is all about personal finance tips to know in your 20s.
Quick Guide: Personal Finance In Your 20s
Budgeting
- Budgeting
Create a monthly budget to track your income and expenses. This helps you understand where your money is going and enables you to make informed financial decisions.
Creating a budget is one of the most important things you can do for your finances. A budget is simply a plan for how you will spend your money each month. Start by tracking your income and expenses for a few months to get a sense of where your money is going. Then, create a budget that allocates portions of your income to different categories, such as housing, transportation, food, and entertainment. Stick to your budget as closely as possible, and adjust as needed.
To start, following the 50/30/20 rule for budgeting can be helpful. The rule suggests that you allocate 50% of your after-tax income, sometimes referred to as take-home pay, to needs, 30% to wants, and 20% to savings. While the 50/30/20 rule sets guidelines for how you spend, a more customized budgeting method can help you reach financial goals faster. You can try zero-based budgeting if you want to save more than 20% toward your savings, investment, or debt payback goals. Zero-based budgeting gives every dollar a job so that your monthly income minus expenses equals zero. Budgeting apps such as YNAB, Mint, or Every Dollar can help you keep up with your everyday spending. Or, if you’re a spreadsheet person, create your own or use a budgeting template in excel or google sheets. Set aside time to review your budget and progress on any financial goals periodically.
Emergency Fund
- Emergency Fund
Start building an emergency fund that covers three to six months of living expenses. This fund acts as a safety net in case of unexpected events, such as medical emergencies or job loss.
You can prepare your pockets for the worst by saving for emergencies. Having an emergency fund prevents unexpected expenses from throwing off your budget and can keep you from going into debt to cover an unplanned expense. After establishing how much money you generally need to live monthly, set aside at least three times that amount as a three-month emergency fund. If you can’t do that just yet, start with a thousand dollars and work up to six months of living expenses.
Be sure to clearly define an emergency circumstance that would necessitate pulling from your savings. You might take money from your emergency fund for an unexpected hospital bill, urgent new car purchase, or last-minute flight. To make it harder to dip into your savings any other time, try keeping your emergency fund in a separate savings account at another bank. A high-yield savings account can be a good place to store your emergency fund because it earns a higher-than-average interest rate on the balance. You can open an FDIC-insured account from online banks such as Capital One, Ally, or Sofi.
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Debt
- Avoid Debt: Be cautious about accumulating high-interest debt, such as credit card debt. If you have debts, focus on paying them off as quickly as possible to avoid paying unnecessary interest.
Debt can be a significant financial burden, but it’s a reality for many people in their 20s. Whether you have student loan debt, credit card debt, or auto loan debt, it’s important to manage it carefully. Start by planning to pay off your debts as quickly as possible. Consider using the debt snowball or debt avalanche method to prioritize your debts and pay them off strategically. The debt snowball method prioritizes paying off debt from the smallest to largest balance, while the debt avalanche method prioritizes paying off the highest interest rate debt first. While both methods will put your extra dollars to good use, the quick success of the snowball method could motivate you to repay your debt faster.
Paying off your debt faster could mean paying less interest in the long run. Interest, or the cost of borrowing money, is an important aspect of debt to understand. A high interest rate would mean a higher overall cost to borrow. The higher the interest rate on your debt, the more you’ll pay for future home mortgage, car loan, and to carry a balance on a credit card in general. It’s a good habit to pay more than your minimum balance due each month to cover some of the interest charged. Some would even say not to rush to pay off debt, especially in your 20s, as your income will likely increase over time, and you’ll be able to use the extra funds toward debt. In this way, another option is to pay off low-interest debt slowly and focus on investing in the stock market or other financial goals instead. However you choose to go about it, ensuring you maintain a high overall quality of life despite being debt can be most beneficial.
Saving
- Save and Invest: Establish a habit of saving a portion of your income regularly. Consider contributing to retirement accounts like a 401(k) or IRA and explore low-cost investment options to grow your wealth over time.
It’s never too early to start saving for the future, and your 20s are a great time to begin. Start by building an emergency fund that can cover three to six months of your living expenses. If you want to save regularly for certain expenses including car repairs, birthday gifts, or vacations, create sinking funds or specialized saving accounts for your goals. Then, consider opening a retirement account, such as a 401(k) or Individual Retirement Account(IRA). These accounts offer tax advantages and compound interest, which means your money grows over time. Even if you can only contribute a small amount each month, starting early can make a big difference. With the power of compounding interest, the money you invest in your 20s could be worth a million or more once you reach retirement age.
Set a goal to invest between 15 and 25% of your income toward retirement. Contributing to an employer-sponsored retirement account is one way to get started. Depending on the industry you work in, this type of account can be known as a 401(k), 403b, or TSP. As an added incentive, many employers will match your contributions to these accounts up to a certain percentage. Retirement accounts, namely 401(k) and IRA, often have Traditional or Roth options. The type of account you choose to open might depend on your tax needs. Funding a Traditional 401(k) or Traditional IRA would mean you put pre-tax dollars into the account and wait to pay taxes until you begin making withdrawals. Funding a Roth 401k or Roth IRA would mean you contribute post-tax dollars, paying taxes on the money you invest up front, and the growth is tax free. You can do your own research and enlist the help of a financial advisor to make the best decision for you when the time comes.
Credit
- Understand Credit: Learn about credit scores, how they are calculated, and how they impact your financial life. Aim to maintain a good credit score by paying bills on time and using credit responsibly.
If you’re interested in taking advantage of credit and/or credit card rewards, first focus on understanding how your credit score works. Building good credit history and knowing how to maintain it is most important. Your credit score determines your creditworthiness, which is better understood as the likelihood that you will repay lenders any money borrowed. Get to know your score and what might affect it, including your payment history, utilization rate, length of credit history, credit mix, and recent credit inquiries. Paying bills on time and using credit cards sparingly can significantly impact your score. Always paying your balance in full is best practice when it comes to using credit cards. Setting up automatic bill payments can make this an easy task. Be sure to make your payments before your credit card’s statement closing date as it determines what will get reported to credit bureaus such as Experian, and thus impacts your score. As a general rule, keep your credit utilization under 30% across cards. This means if you have a $1000 credit limit, try to spend no more than $300 on your credit card each month. You can monitor your credit score using sites such as Credit Karma, Experian, or annualcreditreport.com for free and without penalty.
Once you understand the makeup of your score, you can find a credit card that will work for you. You can research credit cards offered by your local bank or others such as Discover and Capital One. Many will offer credit cards with rewards programs geared toward students. First, research the card’s annual percentage rate, which is the rate interest will be added to your balance if you don’t pay the entire balance when it is due each month. Regarding rewards, it’s best to think about your lifestyle and general needs when selecting a credit card. Ask yourself if you spend more money on gas, restaurants, or groceries, for example. Depending on the card you choose, you may be rewarded for anything you purchase using your card or only for items you buy that fall into rotating categories. Consider the opportunities to gain cash back, points for travel, and bonuses. Understanding how the rewards program is structured will help you strategically take advantage of the benefits your credit card offers in the future.
Managing your personal finances can seem overwhelming, but it doesn’t have to be. By building a budget, saving for the future, and managing debt, you can set yourself up for long-term financial success. It’s never too early to start planning for the future, and even small steps can make a big difference over time. It’s a good idea to pay yourself first and challenge yourself by setting financial goals you can work toward in your 20s, mid-30s, and beyond. Being intentional about how you spend money is the best way to mind your wallet and avoid living above your means.
This post covers just the basics of managing money after finishing school and as a young professional. Still, you can read books, listen to podcasts, watch Youtube videos, take courses, talk with friends or family, and enlist the help of seasoned financial professionals to learn even more personal finance tips and tricks.
More importantly, remember that money comes and goes but memories are forever. Don’t forget to have a lot of experiences in your 20s. Do your best to create a balanced life and prioritize play whenever possible.
This post was all about personal finance tips to know in your 20s.
