Being in your 20’s is hard. The expectations we put on ourselves are just INSANE. We expect to find the time to work, have a side hustle, make money, have a rich social life, workout, eat healthy, and try not to go broke. It’s overwhelming!
In trying to “have it all”, it’s so easy to make a ton of money mistakes early on in our lives.
Since so many twenty-somethings start their careers out with a bunch of student debt, making money mistakes early in your career can really hurt you and affect the rest of your life.
For me, when I graduated college, for the first time in my life I could afford to eat out, go to happy hour, and spend money on unnecessary stuff.
My future seemed so far off that I wasn’t even thinking about saving or much less understanding my money. But guess what? Getting a handle on your money in your 20’s is probably the most important thing you can do for your current and future self.
There are five basic money moves that everyone in their twenties should make, because while we may not be making the big bucks (yet), we do have more career time than a lot of other people and THAT is huge.
The Power of Compound Interest
The reason making sense of your money in your twenties (or as early as possible) matters is because of compound interest.
Compound interest is the accrual of interest to an original sum of money, which then accumulates more interest and so on and so on. This can be a double edged sword.
If you have a ton of debt (like credit card debt), interest compounds – which means you end up paying interest on interest. Yikes!
This is why it can be so hard to make a significant dent in your debt if you’re only making the minimum payment, or only paying a small amount.
However, compound interest can totally work in your favor. For example, if you invest $10,000 at age 25, add nothing to it, and it grows at an annual rate of 7%, that money will be worth $149,744.58 in 40 years.
If you put that same amount of money away at age 40, you’ll only have $54,274.33 by age 65. That’s a huge difference (and that’s assuming you just let that money sit and never add anything to it, if you start adding money every year, it’ll grow exponentially).
Don’t believe me? Check out one of the many free online compound interest calculators and play with the numbers.
Without further ado, below are five money moves to make in your twenties.
1. Budgeting
Think about your current money situation. Are you on top of your bills? Do you know where your money is going every month? How much are you spending on eating out? What percentage of your income are you saving every month?
If you can’t answer any of those questions, you need a budget. Even if you can answer these questions, you should still revisit your budget every now and then to make sure it still works for you.
The point of creating a budget is to enable you to take control of your money and decide where YOU want to allocate your money, instead of blindly spending your money every month.
There’s many different ways to budget. Below are some common tools that you can use to start a budget that works for YOU:
- Allocate your expenses using the 50/30/20 “rule” where 50% of your income is for essentials, 30% is for “fun” or nonessentials, and 20% is for savings;
- Start using the envelope system: where you allocate cash to different envelopes for the month and only spend what’s there
- Sign up for Mint or another app to track your finances/budget straight from your phone.
Make sure you create a separate category in your budget for savings, which leads us to money move #2.
2. Start an Emergency Fund
If you car breaks down today, are you prepared? What if you lose your job?Having some money stashed away in case of an emergency is important because life just happens.
When life throws something unexpected at you, you don’t want to have to get into debt to get by. Getting into a car accident or losing your job can be devastating when you’re in your twenties and you’re living paycheck to paycheck.
Finding a way to put some cash away when life is going well is key to being secure when life throws you lemons.
How Big Should Your Emergency Fund Be?
Ideally, your emergency fund should cover 3-6 months of living expenses. This isn’t 3-6 months of your current salary, but what it would take for you to get by in case you lose your job or something else goes wrong.
A good number to try to reach if you’re staring from scratch is $1,000. That comes out to less than $100/month, then increase your savings as you can, eventually building to 3 months, and then 6.
You should lean towards a higher emergency fund if you work freelance or have high deductibles in your insurances. If you’re more stable 3 months may be enough for you. It’s important to tailor this to your particular situation.
Where to Keep Your Emergency Fund
The best place to keep your emergency fund is a high yield savings account, ideally an account in a separate bank than where you keep your checking account. That’s important so you’re not tempted to dip into your emergency fund next time you see a cute pair of shoes.
The following online banks have high-yield savings account that pay you a higher interest than traditional banks.
- Marcus by Goldman Sachs – 2.15% APY
- Ally Bank – 2.10% APY
- Wealthfront* – 2.57% APY
- Betterment** – 2.69% APY
- Discover Bank – 2.02% APY
- American Express – 2.10% APY
*The Wealthfront account technically isn’t a high-yield savings account but functions similarly to one.
**The Betterment account has a 2.69% APY when you sign up for their checking waitlist, and technically isn’t a high-yield savings account but functions similarly to one.
3. Make a Plan to Pay Down Your Debt
Having debt sucks. Large amount of debts can keep you chained down to a life where you make payments only to see your balance rise, or decrease minimally. Compound interest makes this worse. Because your debt earns interest on top of interest, these balances can really skyrocket.
In order to see the light at the end of the tunnel, it’s helpful to make a plan as to how exactly you’re going to pay this debt off.
You should start off by making a list of all the debts you have – name, amount, interest rate, minimum payment, etc. If you use a spreadsheet for your budgeting, you should keep this list in the same place.
Pay Your Debt Off Quickly
If it’s possible for you to consolidate your loans into a lower interest rate, do so, but make sure you understand all the terms attached to this.
Make sure you’re also slashing your budget as much as possible so you can maximize the amount of money you’re putting towards your debt. You don’t want to only be making the minimum payment.
You want to create an aggressive plan to get rid of your debt as quickly as possible and save on interest.
Something I definitely don’t recommend is to dip into your retirement fund to pay off your debt.
Don’t Dip Into Your Retirement Accounts
Don’t go raiding your 401(k) (if you have one) to pay off your debt. It’s not worth it. There’s hefty penalties levied for early withdrawals, and you’re really robbing future you of the ability for this money to grow.
4. Get Your 401(k) Match
One of the biggest mistakes I made when I got my first job was to delay signing up for my company’s 401(k) plan.
I needed to “think” about it, even though my company matched all my contributions up to 3% of my salary. When I finally saw the light a couple of months later, I had a further delay because I could only sign up for my plan quarterly.
My choice to “think about it” cost me 6 months of my employer matching contributions. While it might not seem like much, that money really adds up over time.
So learn from my mistake, and always always always contribute enough to your 401(k) to get your company match. You should do this even if you’re working on paying down your debt. I
f you don’t take advantage of your employer match, you’re leaving free money on the table. Don’t do that!
5. Open Up a Roth IRA
If you’re debt-free and are contributing enough to your 401(k), you should consider opening a Roth IRA account.
A Roth IRA is a retirement account that you contribute to with your after-tax money.
Because presumably your salary will continue to grow as you progress in your career, you may end up in a higher tax bracket when you get close to retirement than when you start working.
Because Roth contributions are made with post-tax money, you don’t have to pay taxes on your contributions when you retire. You only pay taxes on your earnings.
This is useful in lowering your tax bill while increasing your income in retirement.
For 2019 there’s a maximum Roth contribution of $6,000 per person (assuming you make at least $6,000). Something to keep in mind is that once you hit a certain income level, you’re no longer allowed to make Roth contributions.
These income limits are over $100k, so they may not seem like you’ll ever reach them. BUT! If you get a promotion or earn a lot from your side hustle and regular day job, you could approach those limits. Invest in yourself NOW and see your money grow.
Ready to Take Charge of Your Money?
Taking the time in your 20’s to learn about your finances is one of the most important things you can do. You should check in with yourself financially every month to see where you’re at in relation to your goals. Keep at it and you’ll be crushing it sooner than you realize!
Brilliant advice!
I honestly think we should be talking to teenagers about money in high school/college.
I knew nothing about this sort of thing as a teenager and I was probably late 20’s when I took action, almost too late really x
I love all these clever money tips, especially the tip about using the 50/30/20 rule. I will definitely try to incorporate these budgeting tips. Thanks for sharing.
This is exactly the type of stuff we need to get taught!