Your 20s are an exciting time of life. You may be finishing school, starting your career, or even launching a business. Along with these new beginnings comes a level of financial freedom that can feel liberating. However, this stage also presents an excellent opportunity to build a strong financial foundation. According to top financial planners, here are some key pieces of advice that every person in their 20s should know to secure long-term financial success.
1. Start Budgeting Early
One of the most fundamental yet overlooked financial habits is creating and maintaining a budget. Budgeting is more than just tracking expenses; it’s about understanding where your money goes and ensuring you’re not living beyond your means. In your 20s, it’s crucial to adopt a budgeting system that allows you to allocate funds to essentials like rent, groceries, and bills, while also leaving room for discretionary spending and savings.
Tips for Effective Budgeting:
- 50/30/20 Rule: Financial planners often recommend the 50/30/20 budgeting rule. This guideline suggests allocating 50% of your income to needs (rent, utilities, groceries), 30% to wants (entertainment, dining out), and 20% to savings and debt repayment.
- Use Budgeting Tools: Utilize digital budgeting tools or apps like Mint, YNAB (You Need a Budget), or even basic spreadsheets to keep track of your expenses and manage your finances efficiently.
- Adjust for Life Changes: Your income and expenses will likely change over time. Whether it’s a raise or an increase in rent, periodically review and adjust your budget to reflect these shifts.
2. Build an Emergency Fund
Life is unpredictable, and having a financial safety net can help you weather unexpected expenses, like medical bills or car repairs, without going into debt. Financial planners recommend building an emergency fund as soon as you start earning an income.
How Much Should You Save?
- Three to Six Months of Living Expenses: A general rule of thumb is to have three to six months’ worth of living expenses saved in an easily accessible account, such as a high-yield savings account. This amount should cover essentials like rent, groceries, and transportation if you lose your job or face a financial emergency.
- Automate Your Savings: Set up an automatic transfer from your checking to your savings account every month to make consistent progress toward your emergency fund goal.
3. Start Saving for Retirement Now
One of the most powerful pieces of advice financial planners offer is to start saving for retirement as early as possible. In your 20s, time is on your side, and compound interest can significantly increase your savings over time.
Take Advantage of Retirement Accounts:
- 401(k) or RRSP Plans: If your employer offers a retirement plan like a 401(k) or RRSP for Canadian employers, enroll as soon as you are eligible, especially if they match contributions. Employer matching is essentially free money toward your retirement.
- Roth IRA o TFSA: If you don’t have access to an employer-sponsored plan, or even if you do, consider opening a Roth IRA or TFSA if you live in Canada. Contributions to a Roth IRA are made with after-tax dollars, but your withdrawals in retirement will be tax-free.
- Maximize Contributions: While contributing as much as possible to your retirement accounts is ideal, even small contributions in your 20s can grow substantially thanks to compound interest.
4. Avoid Lifestyle Inflation
Lifestyle inflation refers to the tendency to increase your spending as your income grows. While it can be tempting to upgrade your apartment, buy a new car, or go on lavish vacations once you start earning more, financial planners advise resisting this urge.
Stay Disciplined with Spending:
- Live Below Your Means: Instead of spending your raises or bonuses, consider putting that extra income toward savings, investments, or debt repayment. Living below your means allows you to build wealth while avoiding the trap of unnecessary debt.
- Set Financial Goals: Whether it’s buying a house, starting a business, or traveling the world, having clear financial goals can help you stay focused and avoid overspending.
5. Invest in Your Financial Literacy
The more you understand about personal finance, the better equipped you’ll be to make smart financial decisions. Your 20s are a great time to build your financial knowledge and take charge of your financial future.
Ways to Build Financial Literacy:
- Read Books: Books like “The Total Money Makeover” by Dave Ramsey and “Rich Dad Poor Dad” by Robert Kiyosaki are excellent resources for learning about personal finance, investing, and wealth-building strategies.
- Follow Trusted Blogs and Podcasts: There are plenty of reputable financial blogs and podcasts that offer advice and insights on budgeting, investing, and saving.
- Attend Workshops or Seminars: Many financial institutions and nonprofit organizations offer free or low-cost workshops on topics like retirement planning, investing, and debt management.
6. Be Mindful of Debt
Debt can be a major financial burden if not managed properly. While some debt, like student loans or a mortgage, can be seen as an investment in your future, other types, such as credit card debt, can derail your financial progress.
How to Manage Debt in Your 20s:
- Prioritize High-Interest Debt: Pay off high-interest debt, like credit cards, as quickly as possible to avoid accumulating unnecessary interest charges.
- Use Debt Strategically: When taking on debt, like for education or starting a business, carefully evaluate the long-term financial benefits and your ability to repay it. Avoid borrowing for things like luxury items or vacations.
- Avoid Excessive Credit Card Use: While building credit is important, it’s essential to use credit cards responsibly. Pay off your balance in full each month to avoid interest charges and keep your credit score in good standing.
7. Invest Wisely
Investing can seem daunting, but it’s one of the most effective ways to build long-term wealth. Financial planners recommend starting to invest in your 20s, as the earlier you start, the more time your money has to grow.
Tips for New Investors:
- Start with Low-Risk Investments: If you’re new to investing, consider low-risk options like index funds or exchange-traded funds (ETFs) that offer diversification and lower risk compared to individual stocks.
- Focus on the Long Term: Don’t get caught up in short-term market fluctuations. Investing is a long-term strategy, and trying to time the market can be risky.
- Consider Dollar-Cost Averaging: This strategy involves investing a fixed amount of money at regular intervals, regardless of the market’s performance. It helps reduce the impact of market volatility and ensures you’re consistently investing.
8. Build and Maintain Good Credit
Having a good credit score can save you money on interest rates and help you qualify for loans or mortgages when you need them. Building good credit in your 20s can set you up for financial success in the future.
Tips for Building Good Credit:
- Pay Bills on Time: Late payments can have a negative impact on your credit score. Make sure to pay all your bills, including credit cards, utilities, and student loans, on time.
- Keep Credit Utilization Low: Financial planners recommend keeping your credit card balance below 30% of your credit limit to maintain a healthy credit score.
- Monitor Your Credit: Regularly check your credit report for any errors or fraudulent activity. You’re entitled to a free credit report annually from each of the three major credit bureaus.
9. Establish Multiple Income Streams
Relying solely on your 9-to-5 income can be limiting, especially if you’re looking to build wealth. Financial planners often recommend creating multiple income streams to provide financial security and growth potential.
Ideas for Diversifying Income:
- Side Hustles: Consider starting a side business or freelance work in your spare time to bring in extra income.
- Investments: Dividends, interest from savings accounts, and rental income from real estate can also be valuable sources of passive income.
10. Seek Professional Advice
Even with access to a wealth of financial resources, there’s no substitute for personalized advice from a certified financial planner (CFP). In your 20s, a CFP can help you develop a comprehensive financial plan tailored to your goals, whether it’s saving for a home, paying off student loans, or building an investment portfolio.