Important Financial Tips for People in Their 20s
Because of a myriad of factors, including inflation and race- and gender-based economic inequality, many Americans are behind on their retirement savings goals. In the 2023 CNBC Your Money survey, conducted by SurveyMonkey, 56 percent of respondents said they’re not on pace to “retire comfortably.” Not only is this a major issue for people and their plans for the future, but financial stress can also increase the risk for depression and anxiety, negatively impact sleep patterns and energy levels, and cause tension between loved ones.
While it’s never too late to start saving or planning for retirement, the best thing you can do to improve your chances of retiring comfortably is to learn how to budget and be smart with your money from an early age. Below are six valuable money management tips for people in their 20s.
Create a Personal Spending Plan
The key to prudent financial planning is to never spend more than you make. This might sound obvious, but it is easier said than done, especially with generally easy access to credit cards, and with rising costs on everything from housing to groceries. By creating a budget and personal spending plan, you can see exactly where your money goes and cut out wasteful spending to ensure your income is greater than your expenses.
To get your finances in order, first create a comprehensive monthly expenses list, including costs for rent/mortgage, insurance, utilities, food, transportation, etc. Add up your totals for each of these expenses, being realistic about non-recurring costs and expenses such as gifts for birthdays, holidays, weddings, etc. If the resulting figure is more than what you earn in a month, you’ll have to find a way to lower some of those expenses. For example, you could look for cheaper living accommodations, take public transit instead of making high monthly payments for a vehicle, or cut back on eating out at restaurants.
Avoid Impulse Purchases
When on a budget, it’s particularly important to make every dollar count. A lot of people who enjoy shopping often buy themselves things they don’t really need, but want at the moment. These impulse purchases make it more difficult to adhere to budget restrictions. Thus, you should exercise caution when shopping in stores or browsing online marketplaces. Before buying something, ask yourself if it’s something you really need or just “want”. If it’s a “want,” make sure you can afford it and that it is within your monthly budget.
Making a list when grocery shopping is an effective way to avoid impulse purchases and likely wasteful food purchases. Plan your meals for the week and only buy the items you need to avoid wasting food and your money.
Establish Good Credit
Building good credit from a young age is a great way to make borrowing from financial institutions easier and less expensive. For example, people with good credit scores will receive lower interest rates for major purchases, such as a home or automobile. You will need a credit card to start building your credit history.
To show prospective lenders that you can be trusted to pay off future loans, be sure to never miss a monthly credit card payment. Alternatively, you can apply for a secured credit card, which usually requires a deposit, or ask a friend or family member to put your name on their card as an authorized user. You can also improve your credit score through Experian Boost, a free feature that allows you to include utility and subscription payments toward your credit score.
Use Credit Cards Strictly for Emergencies
As important as credit cards are for improving your credit score, they can also significantly increase your debt if used for impulse or unnecessary purchases. Americans’ collective credit card debt increased by $50 billion in the fourth quarter of 2023 to a record $1.3 trillion. To avoid piling up unwanted credit card debt, make sure you have established an emergency buffer fund of 3–6 months of normal expenses. This way you can make sure you’re only rarely using the card for emergencies, i.e. car and house repairs or medical bills. You should also budget to pay off these expenses as soon as possible.
Protect Yourself Online
Protecting yourself online doesn’t just mean acting professionally on social media accounts to make yourself more attractive to prospective employers, although that is an important consideration for your future earnings potential. You should also be wary of what you share on social media to protect yourself against fraud and identity theft, both of which can result in severe financial losses. According to the AARP, Americans lost $43 billion in identity fraud in 2023.
To mitigate your risk of identity fraud, use different passwords for your social media accounts and two-factor authentication when available. You should also regularly check your bank accounts and credit reports for any suspicious activity. Putting in place an inexpensive identity theft protection and restoration plan is another basic step to take.
Contribute to a Retirement Account
Because of the power of compound interest over time, and complete tax deferral, the earlier you start contributing to a retirement account, the better off you’ll be financially when you stop working. Assuming a $1,000 initial investment and $500 in monthly contributions at a 5 percent rate of return, a person who starts investing at 25 would have $773,000 in savings by the time they’re 65. Investors who start saving at 35 and 45, under the same conditions, would only have $422,000 and $209,000, respectively, by the time they’re 65.
