Your 20’s are an incredible season of life. An exploratory time where you become more aware of who you are, what you want vs what you need and start making significant decisions that will impact the rest of your life.
Responsibilities start shifting your way both professionally and personally. You begin to get paid for your expertise and start learning how to succeed in the career or the job you find yourself in. You may meet your partner for life and make friends that equal family. You’ll take it all in, learn from whoever you can, whenever you can and start mapping out the path you want for yourself.
One of the major factors in determining the success of that path, will be your ability to manage your money.
And no, I don’t mean becoming a stock picker and spending hours in front of a computer screen trading stocks. I mean, creating smart money habits and making smart money choices in your 20’s that will benefit you for years and years to come.
But unless your parents spent a lot of time teaching you smart money habits or you majored in accounting or finance, you may likely start your first job and find yourself feeling a bit lost. A stack of HR paperwork will find its way to your desk discussing all of the different benefits offered to you and you’ll hear people talking about investing but you aren’t sure where to start.
So if I were to talk to a 20 year old today, these would be my top 5 suggestions for prioritizing their money in their 20’s!
Here Are The Top 5 Money Moves to Make In Your 20’s
Spend Less Than You Earn
One of the best things about starting your first job is that you will be getting paid! Money will start flowing to your bank account on a regular basis and for a time, you may feel like you’ve hit the lotto! It’s a great feeling. But it also comes with responsibility and a need for awareness.
As money starts to flow freely into your bank account, it will be imperative that you ensure it does not flow freely right back out of the account. How do you build awareness?
- Put eyes on your spending and your income on a weekly basis, at a minimum. Understand how much is coming in and have a good handle on what is going out. This will make it easier for you to prioritize and manage the goal of spending less than you earn.
- Create a budget – once you realize what is coming in, I would create a budget that provides you with guardrails on how you delegate your income. The 50/30/20 Budget is a great place to start. 50% on necessities, 30% on wants and 20% on investing, saving and/or paying down debt.
Two Investment Accounts You Need to Have
There are two ways that I want to see 20 year old’s starting to invest. It is through their employer provided 401K or 403b account and in a Roth IRA, if they are income eligible.
When you begin working you will likely receive a bunch of paperwork, one of which will be focused on how to open up your 401K account. Read through the welcome kit, get an understanding of your options and ensure that you are contributing up to the employer match.
For example: If your employer will match up to 4%, this means that if you contribute 4% of your salary so too will your employer. That is “free” money being added to your retirement. Take advantage of the employer match, at a minimum. Start this from the beginning. Learn to live on a little less.
Second, The Roth IRA. The Roth IRA is an incredible tax free investment account geared towards individuals with more modest income. But once your income gets too high, you no longer can contribute, which is why it is imperative to start investing here early and often. Tax free growth and withdrawals will have a meaningful impact on the value of your account over time. Learn all about the Roth IRA here.
Use Your Credit Card As If It Were Cash
I love credit cards and the points/rewards system that they have in place and believe they are a much better form of payment than cash or debit card. But they should not be a means to pay for things you can’t afford.
When using a credit card, build the mindset that any time you swipe your card, you could afford to pay it in full today if you wanted to. You’re not going into debt for a purchase, you are simply using a credit card to take advantage of points and you will subsequently pay it off in full next week or whenever the balance is due.
I cannot urge the importance of this comment. Credit card interest is wildly high and getting into significant credit card debt is a very slippery slope that will be difficult (not impossible) to get yourself out of.
With that said, use it responsibly. Anything you put on your credit card, you can afford to pay off today.
Build Up Your Peace of Mind Account
Your peace of mind account (emergency fund) is a way for you to be at peace with the cash you have available knowing that you have enough to support an emergency should it pop up in your life without having to go into debt for it.
For those 20 something year olds without a home or children, I would advise having around 3 months worth of monthly spending in a peace of mind account. A separate account or dedicated funds to be used specifically for emergencies should they come up.
For those 20 something’s that do have a home or children, I would boost that suggestion up towards 4-6 months worth of monthly spending saved in a peace of mind account as the need for your emergency account will likely be more frequent.
Side note: If you are saving for something specific, like a down payment on a home, a vacation, a home repair, etc. that should be a separate savings goal.
Automation will do two things for you: create simplicity and also a forced savings to learn to live on a little less.
I don’t even want you to think about the following things because I want it to be so automatic that it has been engrained in your mind, you don’t know any different anymore.
Automate the following:
- Your investing into your 401K through contributions out of your paycheck
- Paying off your credit card in full each month
- Paying off bills each month
- Paying off any additional debt each month
- Building up your emergency fund until it’s fully funded
- Investing in your Roth IRA
Like I said, I want these things a part of your lifestyle so much so, that you forget they are a task. Automate your savings, automate your investments each month, automate debt repayment. Do not give yourself the opportunity to think otherwise. Every little bit counts – so start off small with what you can and over time increase it as appropriate. But create the habit NOW!
My boys are little now and I’m sure will not have an appreciation for our money conversations until they are much older. But understanding and executing these 5 money moves in your 20’s will be a (dare I say….) guaranteed way for you to secure your financial independence, security and success throughout your life.
Please pass this along to your friends and family who may benefit from the guidance!
Read this blog post to learn more about the Roth IRA
Read this blog post to learn why I prefer credit cards to debit cards
Read this blog post on building smart money habits.
Follow @finpoweredfemale for more personal finance, tax, investing and business ownership tips on building wealth with confidence!
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