Your 20s are a time of big changes and new responsibilities. It’s also when you start making important money choices that can affect your future. Learning good money habits now can set you up for success later on.
Developing strong financial habits in your 20s can help you build wealth and reach your goals faster. This article will cover four key money habits to start now. These tips can help you manage your cash, save more, and plan for what’s ahead. By starting early, you can make your money work harder for you in the long run.
1. Build and Stick to a Budget
Making a budget is key for good money habits in your 20s. Start by looking at how much you earn and spend each month. Write down all your costs, from rent to groceries.
Next, set rules for your spending. The 50/30/20 rule can help as a starting point but the more you put towards saving/investing the better. Put 50% of your money toward needs, 30% for wants, and 20% for savings or debt.
Try to improve your budget a little bit each month. Look for ways to cut costs or boost savings. Even small changes can and will add up over time.
Remember to be flexible. Life changes, and so should your budget. Review it often and adjust as needed. With practice, budgeting will become a habit that helps you reach your money goals.
2. Create an Emergency Fund
Starting an emergency fund is a smart move in your 20s. This money helps you handle unexpected costs without going into avoidable debt.
Aim to save 3-6 months of living expenses. This gives you a safety net if you lose your job or face a big expense. Start small if you need to. Even $500 can help with minor emergencies. Gradually increase your savings over time until sufficient.
Set up automatic transfers to your emergency fund each month. This makes saving easier and more consistent. Keep your emergency money in a high-yield savings account. This way, your money grows while staying liquid.
Review your fund regularly. As your income or expenses change, you may need to adjust how much you have in your emergency fund. Don’t touch this money unless it’s truly an emergency. It’s not for vacations or non-essential purchases.
Remember, having an emergency fund gives you peace of mind. It’s a key step in building a strong financial future and allows you to allocate your future earnings to investments.
3. Automate Investments for Retirement
Starting to save for retirement in your 20s is a smart move. It gives your money more time to grow. Automating your investments can make this process easier and more consistent.
One of the best ways to do this is through your workplace retirement plan. If your job offers a 401(k) or similar plan, sign up for it. Set a percentage of your paycheck to go directly into this account each month. Many employers offer matching contributions. This is free money for your retirement. Try to contribute enough to get the full match if you can.
If you don’t have a workplace plan, you can still automate your retirement savings. Open an Individual Retirement Account (IRA) and set up regular transfers from your bank account or through the brokerage that holds your IRA.
Remember to review your automated investments regularly. As your income grows, you might want to increase your contributions. This habit can help you build a solid financial foundation for your future.
4. Pay Off High-Interest Debt and Avoid Bad Debt
Paying off high-interest debt should be a top priority in your 20s. Credit card debt often has the highest interest rates, so focus on paying it off in full whenever you use it, automate full statement balances to be paid when due. If you can’t pay it in full, you should not be using it in the first place.
Make a list of all your debts and their interest rates. Target the ones with the highest rates first while making minimum payments on others. This strategy can save you money in the long run. If you want to understand why you should do this, check out our standard loan calculator to see the ultimate cost of your loan(s). Paying off the principal reduces the debt that will rack up and siphon all your income.
Avoid taking on new bad debt. Bad debt includes high-interest loans for non-essential items or credit card balances you can’t pay off quickly. Some people do not realize had bad debt is until way later in life, your 20s is the time to make sure you know that, so you don’t end up in your 50s still paying the minimum balance on a 22% APR credit card debt.
Good debt, like student loans or a mortgage, can be beneficial when managed responsibly. These debts are used to finance an activity or an asset that will increase your income or an asset that will appreciate over time. If you used student loans to go to college, that is more than fine but make sure you are paying it off timely. If you are working towards affording a home, it is okay to take on debt for it, however, be smart to know what you can and can’t afford when it comes to servicing the debt.
In your budget find areas where you can cut back to save and invest more. Put any extra money towards your debt payments. Small, consistent efforts can lead to big results over time.