Youth is a wonderful thing. It’s a time of fun, exploration, and wonder. At the same time, it’s when you can lay the foundations for an amazing future. It can be easy to get caught up in the fun and ignore your responsibilities, but your future self will thank you for having some forethought. Without further ado, let’s dive into 10 financial tips for your 20s that can have a major impact on your future!
1. Make A Budget And Stick To It
First off, I’ve talked about budgeting before, especially for beginners. I’ve also written a complete guide that can help you from start to finish. I understand that it can seem like a daunting task at first, but budgeting isn’t that hard – especially if you keep it simple. The main thing you need to focus on is spending less than you make. Once you have that down, everything else will become much easier! So, if you don’t already have a budget, get to it.
Naturally, the point of the budget is to stick to it. So make a budget that helps you reach your financial goals, but one that is also realistic for you to stick to. A budget is pointless if there is no way for you to adhere to it!
When Your Budget Should Change
A lot of people like to increase their spending whenever they get pay raises. Don’t fall for it! It’s a trap, and one that will set you back. Once you have made your initial budget – and tweaked it until it’s perfect for you – you shouldn’t change it unless there are major life events. Life obviously happens, so the budget will have to change, but don’t spend more just because you can.
2. Develop Valuable Skills
There are tons of great careers out there – with or without a degree – but they all require advanced skills. It’s your job to take the time to learn new skills and hone them so that you can become a valuable asset. This can help you in your career, but it can also help you if you decide to start a business. You’d be surprised at how much you can accomplish when you take the time to develop a valuable skillset.
3. Start Tackling Your Debt
Eliminating high-interest debt is one of the best uses of your money. Think of it this way, eliminating debt is a guaranteed return. As a general rule of thumb, I consider anything with an interest rate over 5% too high and an absolute emergency to take care of. Some people may disagree with that, but that’s my personal line. Avoid taking on new debt (that is part of what emergency funds are for) and tackle your existing debt with the best method that works for you.
The biggest caveat here is that you need to stay disciplined and be consistent to eliminate all of your debt. It probably will take a good deal of time, so don’t expect overnight success. Take your small victories and eagerly wait for the day when all of your major debt is gone!
4. Save Up For An Emergency Fund
Emergency funds are a must. They protect you from disaster and can help you avoid taking on more unnecessary debt. Your best bet is to build up a strong emergency fund, probably using a savings account with a high interest rate like the one Axos offers.
If you don’t know where to start with an emergency fund, begin by saving the equivalent of one month worth of expenses. Once you do that, you can start saving more and more for your emergency fund. Based on your specific case, you may want to save up to 6 months worth of expenses or more, but that is a good starting point for most people. If you can’t even save one month of expenses, you need to go back and redraft your budget. The inability to save that much usually shows some sort of overspending issue.
5. Take Advantage Of Retirement Accounts
Taking advantage of your tax-advantaged retirement accounts is a must in any plan for your future retirement. If you’re reading this blog, I’m sure you’re aware of how much I stress the value of investing. Retirement accounts take this up a notch – because they help alleviate some of your tax burden. As we all know, taxes can be one of your biggest expenses, so it’s worthwhile to mitigate their effect on your finances.
401(k)
A 401(k) is a type of tax-advantaged investment account. There is a cap on how much you can contribute annually, but usually your focus is simply on reaching the amount your employer will match.
In a traditional 401k, your contributions are deducted from your taxable income. This means that your contributions are made tax-free, but you will have to pay tax on them when you withdraw them in retirement. This can be a good thing since a lot of people will be in a lower bracket when they retire. However, it is always unknown how policies and taxes will change in the future, so you can never be completely sure what will end up being the better option in the long run.
In a Roth 401(k), you make contributions that have already been taxed. That means you won’t have to pay taxes on them later, when you withdraw.
Often, you may only have a traditional 401k available to you. However, if you have the ability to do both, you could always split your contributions between them to hedge your bets to a certain extent.
You can read more about them in my article here.
IRA
An IRA is another type of tax-advantaged investment account. There is a cap on how much you can contribute annually, which you’ll ideally reach.
In a traditional IRA, your contributions are deducted from your taxable income. Like the traditional 401k, this means your contributions are made essentially tax-free, however you will have to pay tax when you withdraw them during retirement.
Roth IRAs use contributions that have already been taxed. While that seems unfortunate now, it does mean you won’t have to pay taxes on them later on, which could turn out in your favor (but it could also work against you too). The main issue for Roth IRAs is that they have an income cap, so once you make over a certain amount you can’t contribute to it anymore.
Some people like to do a combination of Roth and traditional IRAs, but it is more common to just focus on maxing out a Roth IRA.
6. Develop Your Credit Score
Good credit scores can help you get bigger loans with lower interest rates. It is nothing but a boon for your finances, and it isn’t particularly hard to maintain a good credit score. As long as you practice normal, healthy financial habits, then you should be set. If you want more information on how to start building credit, or just need a breakdown of how it’s calculated, check out my guide on credit scores.
7. Listen To Advice – But Recognize The Difference Between The Good And The Bad
It’s important to listen to the advice of other people. Never assume someone doesn’t have anything to teach you or wisdom to share. However, it’s equally important to realize that a lot of people have bad advice. Unfortunately, that makes it harder for you to decide what you should or shouldn’t listen to.
My tip is simple. Listen to everyone’s advice, take it for what it is, but pay attention to their reasoning behind it. Usually the reasoning can be far more illuminating than the advice at face value – and that can help you separate the good from the bad.
8. Make Your Health A Priority
In your 20s, your health is likely fine. It won’t stay that way. Do your best to lay the groundwork now, so that you can stay healthy in the future. Exercise, build a home gym, eat healthy with budget-friendly meals, and so on. By starting to pay attention to your health now, you can mitigate a lot of the pain and headache later, and potentially increase your lifespan. Almost everyone I know regrets not putting more effort into their health when they were younger – don’t make that mistake.
9. Leverage Every Advantage You Have
A lot of people are too prideful to take an advantage when it’s handed to them. Don’t be that way. Whatever advantage you get, take it. Get over the idea of being a completely self-made success. That’s silly. The main difference between successful and unsuccessful people is usually plain – the successful people worked harder, for a longer time, and took every advantage they were ever given. Don’t let pride get in the way of your success!
10. Start Building Your Network
I want to stress the sheer value of networking. You’ll hear about and have opportunities that you wouldn’t get otherwise. Let’s take a common example. A job needs to be filled, and the hiring manager has narrowed it down to two candidates. We’ll say Joe is an okay candidate, but not spectacular. Meanwhile, Bob seems to be much more experienced and knows everything the role requires. Frequently, if the manager (or someone on his team) knows Joe and his personality, Joe will get the job even if Bob is more qualified.
People tend to err on giving breaks to people they know. More than that, if they know you’ll be pleasant to work with that is a huge boon. Many candidates who are good on paper are not hired because they seem like they’ll be a problem to work alongside. Fortunately, building your network isn’t hard, but you should get ahead of the curve and start now.
Your 20s Are All About Laying The Foundation
Your 20s are a great time to have fun and enjoy life. At the same time, it should also be when you’re laying the foundation for your future. Some extra work, and some extra investing, can save you a lot in the future. Things that seem small now have a way of spiraling into something much bigger in the coming decades – and that has perks as well as negatives.
Conclusion
Hopefully this gave you some ideas about how you need to get yourself on the right track. If you have any thoughts, or tips of your own, be sure to let us know in the comments. For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter!
