The money decisions you make in your 20s can affect your finances for years to come. That's why it's important to work on building healthy financial habits now so that you'll benefit later. Developing good spending and saving habits, learning to budget, and investing in your 20s can help you prevent needless debt, put away money for the things that are important to you, and take advantage of compounding to amass a fortune in the future.
It may be easier than you think to build a sound foundation for your later years. Master these 20 money skills in your 20s, and you'll be thanking yourself in your 30s, 40s, 50s, and beyond.
Learn How to Create Your Budget
Your first step is to take a look at your income and create a budget. A budget will help you decide when and how to spend your money, giving you the power to decide where your money goes. It also gives you permission to relax, since you know your priorities are accounted for.
Start by creating and following a budget now to help you manage your money without stress.
You may want to consider using a budgeting app. Many applications are designed for general personal budgeting, while others have more advanced options, such as sending a warning when you're close to overspending.
Have Regular Budget Meetings With Yourself
Each night, take five minutes to go over your budget and see whether you've stayed in line with your spending. Doing this regularly will give you a clear picture of whether or not you are meeting your spending goals for the month. A daily review may seem like a lot, but this schedule keeps the check-ins brief, since you only have to review one day's worth of transactions.
If you are married, be sure to have a discussion with your partner so you can each stay on track with your spending goals. If both partners are monitoring the credit card accounts frequently, you won't be caught off-guard by large purchases or bills.
Balance Your Accounts Each Month
It may seem like a lot of work for very little payoff, but balancing your accounts, or keeping track of the balance in your checking account, is a necessity. It can keep you from overdrawing your account and paying unnecessary late fees or overdraft fees. It can also help you to catch identify theft or see if someone has stolen your account information.
Balancing your checking account is not too difficult. Begin by gathering your most recent bank statement, a calculator, and a worksheet if you need help with the calculations. Then compare your transactions to the bank's list and spot any differences.
If you find an error, contact your bank right away. They will work with you in the event of unauthorized transactions, but you may still be responsible for some or all of the loss, depending on the circumstances.
Set Financial Goals
To reach your lifelong dreams, you need to set financial goals. By setting long-term, mid-term, and short-term financial goals, you'll be one step closer to being financially secure. Plus, if you aren’t working toward anything specific, you’re likely to spend more money than you should. A long-term goal, for example, might be saving for retirement, while a short-term goal could be building up your emergency fund.
Estimate how much money you'll need to meet each of your goals. A key to achieving these goals is to assign them specific dollar amounts. Don't just say you want to save "a lot" or "enough." Say "$20,000," or whatever amount is right for your situation. Specific, actionable goals are much more likely to net results.
There are various online savings calculators you can use to determine how much you need to save each month to reach that goal within your set time frame.
Plan for Your Financial Future
Take the time to visualize and plan for your financial future. This plan should take you through all of your major financial milestones, from buying a home to paying for your kids' college, if you decide to have kids.
It can feel overwhelming to sit down and plan it all out, but doing so can help you prioritize your goals and allow you to know when and how to spend your time.
If you need a little extra help with this task, consider meeting with a financial advisor. They can help you figure out the financial side effects of your major life decisions.
Start Contributing to Your Retirement Account
You've probably heard this before, and that's because it's pretty sound advice: You should start contributing to a 401(k) or other retirement plan starting with your first job. Your contributions will be made with pre-tax dollars, and taxes on earnings will be deferred until you withdraw them during retirement. Even better, many employers will match all or part of your contribution, which results in huge gains for you.
Contributing early gives you time to let compound interest work in your favor. For example, say you're a 25-year-old who invests $2,000 a year for eight years and never invests an additional dollar after the age of 33. You will earn more by the age of 65 than a 35-year-old who invests $2000 a year for 32 years, even though the 35-year-old invests four times as much.
If your company doesn't offer a 401(k) or you're self-employed, there are other retirement accounts you can consider. A good goal to work toward is to earmark 15% of your income to saving for retirement. If you can't contribute this much right away, it's OK. Work up to it as you increase your income and pay off debt.
Get Good at Finding Deals
There are a lot of ways you can save money on things you normally buy, such as clothing or groceries. This may mean learning the best time of year to buy linens or finding a deal on a new car.
You can find ways to save on everything from your groceries to your furniture. If you make looking for a deal a habit, you will be able to save significantly over the course of your life.
Learn How to Avoid Impulse Shopping
A smart shopper is a bit different from a deal hunter. Once you have perfected the art of finding a good deal, you need to become a smart shopper and determine whether you need the item at all before you buy it.
That does not mean you should not buy things you want. It means you have the ability to classify wants as such and to make sure that you have the money available to cover a purchase without dipping into savings. A good idea is to wait at least 24 hours before making a major purchase.
Shop With a List and Plan Before You Buy
One of the easiest ways you can save money while shopping is to shop with a list and stick to it. This is a simple habit to start and only takes a few minutes before each trip.
Having a clear list in front of you can help you rein in your impulse spending, which can save you time and money. Plus, having a list can help eliminate the need to take a second trip to the store because you forgot something, which saves you money on gas and additional impulse purchases. Take the time to organize before each of your shopping trips and the savings will start adding up.
Account for Irregular Expenses
Irregular expenses may be things such as holiday shopping, vacation spending, taxes, or home repairs. Taking the time to identify these costs and plan for them will help you build more net worth on your way to a solid financial future.
If you know that certain expenses come once a year, set aside some money each month to cover them. By the time they come around again, you'll have saved enough to pay for these major expenses without having to dip into your savings or use a credit card.
Save Up for an Emergency Fund
One of the most detrimental financial habits you can develop is to rely on credit cards to cover daily expenses when you go over budget.
Instead, it's important to have a good emergency fund in place so you don't need to use credit. Aim to save up three to six months' worth of expenses. That will cover you in the event of an emergency, such as losing your job or dealing with an unexpected loss in the family.
Focus on Networking and Career Growth
Part of your financial picture is making sure to earn an adequate income. Concentrating on job performance and career growth will help. That's why it's important to keep your resume updated so that when you hear of a good job opportunity, you can take it.
It is also important to continue to build your professional network, even if you like your job. A strong professional network will make it much easier to find a new job when you are ready, or may even present you with a great professional opportunity when you're not looking.
Take Advantage of Your Employee Benefits
Remember to take advantage of your employee benefits. They are part of your compensation package and they can offer tax benefits, too.
For example, health insurance or health savings accounts may be paid with pre-tax dollars. When it comes to retirement savings, be sure to take the employer matching contribution, if one is offered. It's basically free money for your retirement.
Other employee benefits such as stock options or different insurance plans can also help you financially, depending on your situation.
Pay Yourself First
When you have money coming in, don't forget to pay yourself first. That means making savings a priority—not something you tackle when everything else is taken care of.
You can have your savings automatically withdrawn from your checking account and put into your savings account via automatic transfer. This makes saving easy and automatic. Just make sure to keep enough in checking to pay your bills.
Set a goal to save 10% to 20% of your income each month to put toward your long-term priorities.
Track Your Progress
Part of setting and achieving your financial goals is tracking your progress.
If you've set aside some money for your dream vacation, a down payment on a home, or your child’s college fund, take a moment to see how far you've come. Compare that to where you want to be. Remember to celebrate your wins and your hard work.
Keep track of how much you've saved toward each of your goals as a reminder of your abilities and dedication. Even if those amounts are small, they'll start adding up.
Protect Your Savings
If you find it too easy to dip into your savings account when you find yourself running short on cash, it's time to take action.
Your emergency fund should be liquid and easily accessible so that you can cover unexpected expenses right away, but you can move the rest of your savings to accounts that are more difficult to access.
For instance, putting your money in an online bank can add a few extra days to the time it takes to transfer your money, which may give you the cooling-off period you need before you make an impulse purchase. Certificates of deposit (CDs) are another option if you can find any with competitive interest rates—they'll impose a penalty if you try to withdraw before the time period is up.
Lean on Your Support Network
It helps to have friends that can support your financial choices. Although you probably won't spend a lot of time talking about your bank accounts, it's still good to have friends who understand what you're trying to do.
Some friends may encourage you to spend money while others are more supportive of your goals. Building a good financial support system can help you reach those goals more effectively.
Check Your Credit Report Regularly
While you are focusing on building these skills, don't forget to check your credit reports regularly and be on the alert for identity theft. You can request one free credit report from each credit bureau per year. Space them four months apart to cover yourself for a full year. Doing this can help you catch identity theft much more quickly and protect your credit score, too.
Make Giving Back a Habit
Part of making sure you have enough is remembering those who don't. Be sure to remember to give back to your community in some way. You can do this by making donations or contributions to the causes and charities you support, or by offering your time and talents instead. Regularly giving back will remind you to have gratitude for all that you have, and also can give you a tax break.
Find Your Balance
Finally, it is important to find the right balance between working, saving, and enjoying your life. Take time to relax regularly. It's even OK to treat yourself—just make sure that you are saving enough of your income to be comfortable and properly plan ahead.
This is a difficult skill to develop, but essential if you want to be financially successful. It's OK to make mistakes. Just learn from them and keep going.