t’s time to talk about money. Dropping allowance into your piggy bank hasn’t cut it financially for at least a few years now, but how are you supposed to know what to do with money in the adult world? This post will outline some essential financial goals for your 20s and explain how to accomplish them.
1. Make a Budget
Start a Budget in Your 20s
A budget is a great place to start with finance goals in your 20s. If you have money coming in and going out you should be keeping track of it. Paying attention to how you spend even the smallest paycheck will increase your savings now and prepare you for future saving with larger amounts of money.
You might not be in the saving mindset right now, but eventually you’ll want to rent a nicer apartment, buy a house, travel, buy a new car, redo a kitchen, or start an expensive shoe collection. Current saving makes future spending possible and a budget is the first step to saving.
How to Make a Budget in Your 20s
Your budget will probably be monthly--this makes it easy to pay attention to your money and make adjustments month to month based on income and expenses. There are lots of options of budget templates out there, including some online that will do the math for you. Here’s some steps that will get you started on a monthly budget:
1. Figure out your monthly income. Add up all the sources of income you have each month so you have an accurate total monthly income. If your income is different each month try to come up with a monthly average and use that number.
You should always underestimate income when you’re making a budget. If you’re coming up with an average monthly income, make sure your “average” is on the low side of the range so you don’t end up short.
If you get paid weekly you can find your monthly income by multiplying your weekly paycheck by 4.333. If you get paid every other week, multiply your paycheck by 2.166.
Once you know your monthly income you can figure out where you’ll be spending it each month. The 50-30-20 method suggests dividing your income into 50% for living expenses, 30% for lifestyle spending (the fun stuff) and 20% for savings.
2. Rent and utilities. Rent and utilities are guaranteed monthly expenses. You know what your rent will be and you can calculate an average of what you spend on utilities.
Estimating expenses is the opposite of estimating income--pick a number on the high end. You don’t want to plan based on September expenses and then not have enough to pay a January heating bill.
3. Stuff you have to pay for. Groceries, gas, phone bills, bus fare, etc. Pay attention to all of the things you need to buy for a month and add them into your budget.
It’d be surprising if you were able to accurately guess these costs off the top of your head, so you’ll need to examine your spending and be ready to make adjustments to your budget as you go. There are some questions you can ask yourself to help figure out these numbers.
- How much do you usually spend on groceries? How often do you go to the grocery store?
- How much do you spend on deodorant, shampoo, conditioner, lotion, hand soap, and everything else? No, you don’t buy a new body wash every month (or maybe you do) but you should have money allotted for these sorts of items each month.
- What about cleaning agents like dish soap, laundry detergent, and toilet cleaner? If you have to pay for laundry, factor all those quarters in as well.
- How often do you need a new pair of shoes or a new article of clothing?
- How much does it cost you to get around? Whether that involves the bus, gas, parking, or the subway, calculate your average monthly spending on transportation.
- What other guaranteed monthly bills do you have? This could be loan payments, phone data, insurance, Netflix, or any other bills that come every month.
4. Stuff you want to pay for. Shopping trips, iced caramel macchiatos, hockey games, Friday nights out, Sunday brunches--in short, the fun stuff! Just because making a budget sounds boring doesn’t mean you should exclude things you enjoy. If you don’t budget for fun you’ll either find yourself going over your budget or dealing with some serious fomo.
You won’t really know at the beginning of your budget how much you should allot for fun but that’s okay. Once you have your necessary expenses figured out, see how much is left from your income and set part of it aside for fun.
5. Savings. These savings could be intended for a house, a car, a trip, or retirement. Whatever your preferred saving motivation, you should devote part of every paycheck to savings. The recommendation is usually to put at least 20% of every paycheck into savings.
These savings can be invested, put into a savings account, or stashed in a box in your closet. Where you put this money will determine whether it grows or not, but the important thing is to stick to your savings and not touch the money for anything else.
2. Start Repaying Debt
Paying off Student Loans in Your 20s
Student loans are intimidating and can feel impossible to pay off, but working on paying them should definitely be a finance goal for your 20s. Odds are you’re not going to write one big check and be done with student loans forever, but you can start paying them off so they’re not looming over you forever.
You should check in with wherever your loans are from so you can start to figure out a repayment plan. Beware of really small monthly payments even though they seem easier at the moment because your remaining balance is collecting interest every month as well.
It’s a good idea to keep tabs on your total student loan balance as well as what you owe each month. You can also work on paying interest as you go along to avoid larger and larger totals.
If you have federal student loans and work in public service or as a teacher, you are eligible for student loan forgiveness. There are requirements for qualifying for federal student loan forgiveness and it takes time to meet them, so look into these options now so you know what to expect.
Paying off Other Debts in Your 20s
Anything with a high rate of interest needs to be taken care of sooner rather than later. If you owe for credit card debt, car payments, or loans other than student loans, make a plan to start (and hopefully finish) repaying them now.
Debts, especially long lasting ones, can be easy to forget. Even large debts sometimes get pushed to the back of your mind simply because they feel too big to handle right now. The best thing you can do for your present and future financial security is face your debts and start repaying them before interest gets the better of you.
3. Start Checking Your Credit Score
Why Your Credit Score Matters in Your 20s
You need a good credit score to make the large purchases that are probably in your future, which means building that credit score should be one of your finance goals in your 20s. It’s pretty easy to maintain a good credit score if you pay attention and stay on top of it.
Build Your Credit in Your 20s
The key to building credit is to use a credit card responsibly. Having a credit card or two that you always pay off on time gives you an on time payment history that translates to a good credit score.
Having a bunch of credit cards you don’t need is not the way to build a good credit score. Having a credit card open at all your favorite stores can mean you lose track and forget to pay one or more of them on time. Applying for several credit cards can also reflect poorly on your credit, especially if you get rejected.
Use the credit cards you have but keep them at a low balance and always pay your credit card bills on time.
4. Start Saving for Retirement
Aren’t My 20s a Little Early for Retirement Saving?
No, it is not too soon to start saving for retirement. As crazy as it might sound, saving for retirement should be one of your finance goals in your 20s. If you feel like you have no idea where to start with retirement saving, you’re not alone.
How Much to Save
As explained above, you should try to devote 10-15% of your paycheck to long term savings. Separate from your retirement savings, you should have an emergency fund that could cover at least 3 months of your living expenses if you were to lose your job.
If your employer has a retirement plan that matches your savings, only 5% of that saving percentage has to come from you because your employer will add the other 5%.
Don’t panic if you don’t have a retirement plan available to you now. Even if your current retirement savings plan is putting a dollar a day into a jar it’s smart to start saving now.
Where to Put Retirement Savings
Putting retirement savings somewhere they will grow is ideal. One option is a savings account. The details of a savings account, including minimum balance and growth rate, depend on your bank. Odds are your money won’t grow very much in a savings account but there will be some growth.
The benefit of a savings account is that you can usually withdraw money or move it into another account without penalty. Retirement accounts limit access because the money is designed to be in there growing for a long time. You can easily dip into your savings account if you need money for an emergency.
You can also invest your savings. Higher risk investments tend to be higher reward, but the risk shouldn’t be ignored.
Money you invest in an individual retirement account (IRA) is not taxed which is an added perk especially with larger amounts of money. However, you will have to pay taxes on whatever you withdraw from it. That means if you end up needing to use your savings for something like an expensive car repair, you’ll pay taxes on the money you take out to pay your bills.
There are lots of investment options for your money but unless you’re a money expert it’s a good idea to talk to a financial advisor about what to do with your savings so you can get the most out of them without losing money.
These four main finance goals will set you up to be in command of your finances in your 20s. Budgeting, paying debts, building credit, and saving in your 20s will make your financial life easier now and in the future.