Life as a young 20-something-year-old is an exciting time. Youâve likely graduated from college, started your first real-world job, and are making decisions on your own. While your adult life has just begun and retirement seems years away, itâs important to start discussing your financial options, managing your money responsibly, and planning for your future now.
This article will walk you through six suggestions on how to manage money in your 20s.
Budgeting is the process of tracking your income, bills and expenses in order to assess how much you can spend and what you can afford each month. Creating a budget and sticking to it is the foundation for financial success as it helps you to live within your means and avoid debt.
âThe first thing I recommend to most young people starting out is to understand a budget,â said Corbin Green, a growth and development director and financial advisor based in Salt Lake City. âPeople need to understand what money is coming in and what money is going out each month, and have it laid out in an organized fashion.â
When creating a budget, youâll want to write down:
Once youâve assessed your income and expenses, you can make your budget.
Once youâve outlined your initial expenses, such as your mortgage, car payment and utilities, itâs crucial to add an âexpenseâ of paying yourself first to start building up a short-term and long-term savings account. Treat your savings and retirement account like a utility bill â it must be paid monthly and on time.
âMy recommendation is to pay yourself first. The first bill paid each month should be money to your savings account, then your essential bills and anything left over at the end of the month is fun money,â Green said. âThe biggest mistake I see is the younger generations make is not saving early enough. They tend to have a âkick the can down the roadâ attitude and put off savings until their 30s.â
Letâs look at an example: Assuming you want to have $1 million in savings by the time you retire at age 65, this is how much youâll need to invest each month:
|Monthly savings to reach $1 million by age 65|
Monthly savings required
âThis generation lives lavishly, so the number we coach people to save is around 20% of their income. That should help them maintain their current lifestyle in retirement,â Green said. âIf you want more travel and more fun stuff during retirement, saving 30% of your income will help you live a lifestyle above what youâre currently living.â
Time is on your side when youâre young. A little bit of money saved now is going to make a big difference later. Make your savings payments consistent, sustainable and automatic.
In addition to your retirement account, youâll want to start an emergency fund. An emergency account is money set aside specifically to cover the cost of an unexpected expense. This account usually consists of three to nine monthsâ worth of money that is easily accessible in case of an emergency.
If something unexpected were to happen (i.e., inability to work, illness, loss of income), youâd have quick access to cash that would sustain you long enough to pay your bills and allow you to find a qualified job.
The average millennial has an average of $23,064 in debt, according to a recent study by LendingTree, the parent company of MagnifyMoney. Debt â or money owed to a lender â can be crippling to your financial, and even your physical and mental health.
Large amounts of debt can seem daunting to pay off, but itâs important to make a plan, start paying it off quickly and include it in your budget as a monthly payment. If you have more than one debt, how do you know which to pay off first?
Green suggests consolidating debt to one payment with a lower interest rate when possible. You may find and compare personal loans you can use to consolidate debt using this tool from LendingTree. Youâll input some personal information before getting to review loan offers.
Minimum Credit Score
LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.
But you may be more driven to try the debt avalanche or debt snowball methods of repayment.
âThe financial professional in me says to put more money toward the debt with a higher interest rate and some money at the debt with lower interests rates; but never focus on just one expense at a time,â Green said. âBut as a human, you may ask yourself âwhich of these debts is a moral victory to pay off?ââ
If you owe money to a friend or family member and paying that debt off is a mental relief, Green suggests paying that off first and then moving on to other debts.
As a young adult, itâs important to make a plan to pay off and manage your debt to avoid heavy interest fees.
A credit report is a report that shows your credit history and is used to determine your creditworthiness. Building a strong credit history and maintaining a high credit score are essential for your financial health. In your early 20s, itâs important to build your credit by paying your credit cards and utilities on time but avoiding debt in the process.
âNever live above your means and use credit for money that you donât have,â Green said. âI never recommend buying anything on credit unless you have the means to pay it off in full at the end of every month.â
Using a credit card to build credit is a smart use case, but if you canât afford to pay it off by the end of the billing statement, you probably canât afford it in the first place.
As you enter adulthood, youâll want to make sure that you are protecting yourself and your finances with adequate insurance. Take advantage of the benefits offered at work â health insurance, life insurance, short and long-term disability insurance and 401(k) match, if offered. You may consider additional benefit packages outside of what your work offers.
âI always recommend you have something outside of work so you have control and coverage should you leave your employer,â Green said.
Managing your money and knowing where to get started with financial planning can be overwhelming and confusing â especially when youâre in your 20s. Finances can be complex, but itâs essential to educate yourself, find out what resources are available to you and start having financial conversations earlier rather than later in life.
5.99% To 35.99% APR
6.99% To 15.49% APR
6.99% To 24.99% APR
3.34% To 16.99% APR
By clicking âSee Offersâ youâll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.
This Cash Back Number May Surprise You
Best Travel Credit Cards With No Annual Fee
Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit
2 Credit Cards Charging 0% Interest until 2019