Your 20s are full of new experiences, opportunities, and life lessons between graduating, beginning a career, possibly moving to a new city or home, getting married, and numerous other life-defining events.
Among the most important, and confusing: Figuring out your finances. Additionally, experts advise developing certain general financial habits and skills in your 20s, even though every person’s circumstances are unique. They say that now is the right time to lay a solid financial foundation that you can build upon for the rest of your life.
“Younger consumers tend to put off making better financial decisions because they believe they have a lifetime to live,” says Rod Griffin, senior director of consumer education and advocacy at Experian, a credit reporting agency. However, “the decisions and routines they establish in their early years will stick with them into adulthood.” ”.
In light of this, here are some pointers and advice that financial experts believe twentysomethings and recent graduates should be aware of.
Your 20s are a pivotal time in your life, filled with new experiences, opportunities, and life-defining moments It’s also a crucial time to build a solid financial foundation for the future. While everyone’s situation is different, there are some general financial habits and skills that experts recommend honing in your 20s Now is the time, they say, to establish a sound financial foundation to build on for the rest of your life.
Why Your 20s Matter for Your Finances
“It’s easy for younger consumers to kick the financial can down the road when they feel like they have their entire life to make better choices” says Rod Griffin, senior director of consumer education and advocacy for credit reporting agency Experian. But “the choices they make and habits they form while they’re young will follow them throughout their adult life.”
According to financial experts, these are the best things you can do with your money when you’re in your 20s:
1. Understand Your Money Story and Rewrite It
One of the most important things to consider when you’re starting your financial journey is your money mindset says Nicole Wirick, a Michigan-based certified financial planner. What is your relationship to money—for example, are you a spender or a saver do you consider it scarce or abundant—and how does that shape how you treat it? What money scripts, or unconscious beliefs about money, do you follow?
“Money could be perceived by many as a tool of control, or as something that was handled carelessly, or as something that was extremely scarce,” the author adds. “Knowing what money means as an adult can be greatly aided by those early recollections of money.” “.
Once you have that knowledge, you can use it to form better habits.
“We have the power to rewrite our money script, but we have to be aware of it first,” she says. “Otherwise the patterns can repeat themselves.”
2. Track Your Inflows and Outflows
Building a strong financial foundation for the future is possible once you are aware of your feelings about money and how they might affect or improve your financial situation, according to Wirick. The most crucial thing is to know how much money you make and make sure it exceeds how much you spend.
It may seem straightforward, but it’s simple to start overspending and challenging to stop once you do. Just look at total credit card debt in the U. S. , which topped $1 trillion last year and keeps growing. Of course there are nuances, but Conners Wealth Management’s president and founder, Steven Conners, is based in Arizona, and he advises staying away from that kind of debt at all costs.
To do so, you need to know what you’re earning. According to Conners, you should base how much you can spend each month and what you can afford on your net income, or income after taxes.
Having that understanding early on will help you start saving early. According to Wirick, saving money requires patience and practice at first but gets easier with time. This is similar to any other habit.
“Carve out a portion of the inflows for savings and investing. Treat it like any other bill and automate,” suggests Wirick. “We’re forcing ourselves to create good habits and treating saving as any other bill because it’s just an important.”
Ideally, you want to start building toward having a few months’ worth of expenses stashed away in a high-yield savings account. Financial planners differ on exactly how much to put away, but most commonly will suggest enough to cover three to six months of essential expenses, including any debt or loan payments. The more nervous you are about a potential layoff or loss of income, the more you’ll want saved, simply for the peace of mind.
This stash of money is typically known as an emergency fund. But Wirick says another way to think about it is as an opportunity fund.
“Opportunities are the good things, like a destination wedding. There’s a lot of that in your 20s,” she says. Try to have some money set aside to pay for the unplanned expenses that crop up.
And though you might feel like it’s too difficult to save money when you’re just starting out, all of the financial experts interviewed for this article stressed its importance, with many saying their biggest personal regret was not starting to save sooner.
“One important thing I always tell younger clients is that there’s never a good time to save money,” says Ron Tallou, founder and owner of Michigan-based Tallou Financial Services. “I try to get them on some kind of a saving plan, and they want to put it on hold. If that’s your mindset, you’re never going to get into it. There’s always going to be a new bill, so you just have to do it.”
3. Start Investing Early and Consistently
It’s hard to overstate how important it is to start investing early. Though that might seem like a scary prospect, it’s easy enough to get started. The entry point for many is a 401(k) or other retirement account, like an IRA. Buy low-cost, diversified index funds within these accounts and consistently contribute a portion of your paycheck (10% is great, but at least up to the employer matching contribution percentage, if you get one; 1% is a fine start, too, if that’s what you can afford), and you’re off to a roaring start, financial advisors say.
The good news is that many members of Gen Z are already investing for retirement. In fact, reports find that they are doing it earlier than previous generations did at the same age, including a February survey from the Investment Company Institute.
“Our research found that younger households are more likely to prioritize saving for retirement, have retirement accounts, and have more in those accounts, compared with similar-age households in 1989,” Sarah Holden, senior director of retirement and investor research at ICI, said in a statement about the survey.
That pays off in the long run. Time in the market is one of the most important factors in investing. The money you invest early in life has the longest opportunity to grow and compound, meaning “the dollars you save today are likely the most valuable dollars for your future,” says Wirick.
Here’s an example: Let’s say you save $7,000, the max amount you’re allowed, in a Roth IRA each year for the next 25 (that limit is increased, but for simplicity’s sake, we’ll use the same figure each year). With a 7% annual return, you’ll have around $450,000 by the end, while only contributing $175,000 of that.
That said, even if you can only afford to invest $50 per paycheck when you get your first job, it’s better than nothing, says Wirick. As you age and earn more, you’ll be able to invest more.
“It can be really exciting to get the larger paycheck after school, but make sure you don’t become accustomed to spending all of it,” says Wirick.
Avoid investing in the latest craze, like crypto, meme stocks, etc., until you have a solid foundation built around low-cost index funds, says Justin Stivers, a financial advisor and founding attorney at Florida-based Stivers Law. Be boring.
“I don’t think it’s a great idea for young people or any people to jump onto the latest craze,” says Stivers. “A lot of young people are more susceptible to that, and that’s part of the marketing strategy: ‘This isn’t your parents’ investing.’ But there is something to said about traditional investments and traditional models.”
Twenty-five or 30 years can seem like a long time to keep your money invested, especially when there are so many needs in the present. But Conners says if you can make some sacrifices now, you’ll be better off.
“Look in the mirror and say, ‘I am patient when it comes to my investments,'” he says. “If you’re baking a cake and you looked at it 50% of the way through, it might have looked like mush. But when it’s done, you pull it out and it looks wonderful.”
4. Consider the Roth IRA
Okay, so you’re set on investing—how to actually do it? Again, your first step should be starting to contribute to your workplace 401(k) if possible. The benefits there are plenty: It lowers your taxable income, and often your employer will match your contributions dollar-for-dollar up to a certain percentage. That’s a 100% return on your investment.
But if you don’t have a 401(k) or you want to invest outside of it, financial planners love IRAs (individual retirement accounts), and especially for young people, the Roth IRA.
A Roth IRA isn’t tied to a specific workplace; you can open one on your own whenever you want at a bank or financial institution like Fidelity. It has some different benefits compared with a 401(k), the biggest being when you are taxed on your contributions: With a Roth, you are investing money you’ve already paid taxes on. That means your money will grow and compound, and when you take the money out in retirement, you won’t be taxed on it (assuming you follow the withdrawal rules).
With a traditional 401(k), you get the tax
Consider the Roth IRA
Alright, so you’re determined to invest; how do you actually go about doing it? Ideally, you should begin by making contributions to your employer’s 401(k) as soon as you can. There are many advantages: Your taxable income is reduced, and your employer will frequently match your contributions dollar for dollar up to a predetermined percentage. That’s a 100% return on your investment.
Financial planners, however, adore individual retirement accounts, or IRAs, particularly the Roth IRA for young people, if you don’t have a 401(k) or want to invest outside of it.
You can open a Roth IRA at any bank or financial institution, such as Fidelity, on your own, at any time. It is not restricted to any particular place of employment. When compared to a 401(k), it offers a few distinct advantages, the most significant of which is that contributions to a Roth are tax-deductible because you are investing money that has already been taxed. This implies that your money will increase and compound, and that you won’t pay taxes on it when you withdraw it in retirement (as long as you abide by the withdrawal guidelines).
With a traditional 401(k), you get the tax savings now but pay taxes later. There is such a thing as a Roth 401(k), but it’s less common. Both pre-tax and post-tax accounts, as they are often described, have a place in your retirement planning.
Since employees typically make less money when they are younger than when they are older, why is the Roth such a good deal for young people? That means you’re essentially pre-paying your taxes in a lower bracket. (This isn’t true for everyone, of course. You need to consider your specific salary and tax situation. ) Roth IRAs are an especially good deal now, given how low federal income taxes are. That may change slightly in just a few years.
There are other benefits to Roths. One benefit, according to Wirick, is that it’s much simpler to take money out of your Roth IRA without paying penalties or fees because you’ve already paid taxes on the money you contribute. In fact, you can withdraw contributions at any time—not investment returns—which can be advantageous for younger people who haven’t yet established a sizable safety net. Ideally, you won’t touch your retirement contributions at all, but, hey, life happens. Better to have the option.
When investing, keep this in mind: “You actually have to make sure that the money you put into your account is invested,” advises Wirick. A lot of individuals create a Roth IRA but never choose the index funds or other investments. To become familiar with a fund’s holdings (the companies it invests in) and returns, spend some time researching the fund’s name on a website like Morningstar. Then, confirm that the contributions you make go toward purchasing shares of the fund.
Start investing as early as you can
It’s hard to overstate how important it is to start investing early. Though that might seem like a scary prospect, it’s easy enough to get started. The entry point for many is a 401(k) or other retirement account, like an IRA. Purchase inexpensive, diversified index funds within these accounts, and allocate a portion of your paycheck regularly (10% is great, but at least up to the employer’s matching contribution percentage, if you get one; 1% is a fine start, too, if that’s what you can afford), and you’re off to a roaring start, according to financial advisors.
The good news is that many members of Gen Z are already investing for retirement. According to reports, such as a survey conducted by the Investment Company Institute in February, they are actually doing it earlier than previous generations did at the same age.
Sarah Holden, senior director of retirement and investor research at ICI, stated in a statement regarding the survey that “our research found that younger households are more likely to prioritize saving for retirement, have retirement accounts, and have more in those accounts, compared with similar-age households in 1989.”
That pays off in the long run. Time in the market is one of the most important factors in investing. “The dollars you save today are probably the most valuable dollars for your future,” says Wirick, because the money you invest early in life has the longest chance to grow and compound.
As an illustration, let’s say you save the maximum $7,000 in a Roth IRA per year for the next 25 years (the annual contribution is actually higher, but we’ll use the same amount for simplicity’s sake). With a 7% annual return, you’ll have around $450,000 by the end, while only contributing $175,000 of that.
That said, Wirick says that even if your first job only allows you to invest $50 per paycheck, that’s still better than nothing. As you age and earn more, you’ll be able to invest more.
“Getting the bigger paycheck after school can be really exciting, but make sure you don’t become accustomed to spending all of it,” advises Wirick.
Avoid investing in the latest craze, like crypto, meme stocks, etc. according to Justin Stivers, a financial advisor and founding attorney of Florida-based Stivers Law, until you have a strong foundation built around inexpensive index funds. Be boring.
“I don’t believe it’s a good idea for anyone, especially young people, to get on the newest fad,” Stivers says. It’s part of the marketing strategy to target young people by saying, ‘This isn’t your parents’ investing.'” ’ But there is something to said about traditional investments and traditional models. ”.
Given the abundance of needs in the present, 25 or 30 years may seem like a long time to invest your money. But Conners says if you can make some sacrifices now, you’ll be better off.
“Look in the mirror and say, ‘I am patient when it comes to my investments,” he says. In the event that you were baking a cake and you glanced at it 20%50% of the way through, it might have appeared to be mush. But when it’s done, you pull it out and it looks wonderful. ”.
The 8 BEST Ways To Build Wealth In Your 20s
FAQ
How should I spend my money in my 20s?
Where should I be financially at 22?
Where should I be financially at 25?
What should a 21 year old invest in?
Should you invest in your 20s?
In your 20s (and especially in your early 20s), Truist head of financial wellness Brian Ford recommends investing in networking, knowledge, education, and skills to set you up for long-term success. “Put money into investing in yourself,” says Ford. “It’ll pay greater dividends early in your career to get you on the right trajectory.”
How to make money in your 20s?
9. Make quality purchases. Invest in things that have value. While it may be hard to part with your cash, some things are worth spending money on, such as a nice interview suit or new experiences. Check out more smart purchases to make in your 20s.
How can I save money in my 20s?
Set up an emergency fund One of the best steps you can take in your 20s is to establish an emergency fund to cover any unexpected expenses that may arise, such as medical bills or car repairs. The money in your emergency fund can help you avoid taking out a loan or carrying a balance on a credit card, which can save you money on interest charges.
How do you manage cash flow in your 20s?
Create a budget and monitor your cash flow. Cash flow is one of the most important things to be aware of, especially in your 20s, Meaney tells us: “You’ve got to know where your money is going and you’ve got to make sure that more money is not going out than is coming in.” This means sitting down to craft a budget.