This post is from our regular contributor, Erin.
It sounds funny to say, but I remember turning 21 like it was yesterday.
Graduating from college? Yep, seems like yesterday, too.
Your 20s are such a great time to treasure.
From graduating college, to getting your first job, to getting married, to starting a family, and to buying a house, tons of major life milestones can occur during this decade.
That’s why it’s so important to have a good handle on your finances earlier rather than later.
I may “only” be in my mid-20s, but I’ve learned a lot in a few years, especially when it comes to managing money.
I know, the subject can be boring, but if you want to fully experience your 20s (and with less stress), I recommend going through the following 10 steps to have financial success in your 20s!
1) Get a Handle on Your Student Loan Debt
If you don’t have to deal with student loans, feel free to skip this step. I’m putting this first on the list because far too many graduates don’t know how much they owe, who they owe, or when they owe. That’s not a good way to start your post-college life.
You’re responsible for paying back your student loans. There are no ifs, ands, or buts about it. You signed a master promissory note before taking out the money. That was a binding contract stating you’re legally obligated to make good on your promise to pay back the money loaned to you.
If you have federal loans (most graduates do), you can look up your loan information on the National Student Loan Data System. This will tell you who your loan servicer is, how much you owe, and what type of loans you have.
Set up online accounts with your servicers as soon as you can to see what your minimum monthly payments are. Set up automatic payments or set reminders for when your payment is due.
I highly recommend beginning to make payments before your grace period is over. You should develop the habit as early as possible, as long as you have the money for the payments.
2) Create a Small Emergency Fund
You likely won’t have a lot of liabilities if you’re in your early 20s. A car might be your biggest concern, aside from healthcare costs. For that reason, you don’t need to go crazy with an emergency fund, but a small one is still good to have.
Consider saving up at least $1,000 to cover you in case something happens. You don’t want to use your credit card in emergencies if you can help it, as the interest accrued on the balance will work against you.
Where should you save it? Hopefully you have a savings account opened, but if not, start there. Online savings accounts generally have better interest rates than local branches, and they also have less fees to worry about. (You should also have a checking account!)
As your responsibilities grow (like becoming a homeowner), make sure your emergency fund grows with them.
3) Learn How to Use Credit Responsibly
We’ve covered this before, so I’ll be brief, but if you haven’t learned how to use a credit card properly yet, now is the time to do so. Opening a credit card can be a good idea if you can trust yourself to be responsible with your spending. This will help you establish credit. Carrying a balance, however, will hurt your credit.
Treat your credit card like a debit card: don’t charge more than you have in your bank account. Credit cards are not a way to afford what you otherwise can’t. It’s not free money.
4) Start Contributing to Retirement Funds
I really wish someone had told me the importance of this when I had my first job. Sure, we might have a vague idea that saving for retirement is important, but it’s so far away, it can be hard to focus on.
There’s this thing called compound interest you don’t want to miss out on. In a nutshell, the earlier you save, the more time your money has to earn a return. Even if you can only save $20 per month, something is better than nothing. It will all add up in 40 years when you’re ready to retire.
Find out if your employer offers a 401(k), and if they offer matching contributions. If they do, great! Contribute enough to get that match, because it’s free money.
If they don’t, consider opening a Roth IRA or a Traditional IRA. Unfortunately, none of my employers offered a 401(k), so I opened a Roth IRA with a starting balance of $1,000. Depending on the broker, you may need even less to open one! There’s no reason not to.
5) Pay Off High Interest Debt
I know – your money is going every which way at this point. You’re saving for an emergency fund, you’re saving for retirement, and now I’m telling you to get rid of high interest debt.
This will likely be credit card debt, as APRs on credit cards average around 15%. In contrast, the highest interest rate on my student loan debt is 6.8%.
You can always choose the snowball method to paying off debt, but it’s worth prioritizing high interest debt as it will cost you more in the long run.
6) Track Your Spending
Being aware of how much you’re spending (and how much you’re earning) provides a foundation for taking the aforementioned actions. You need some sort of plan for your money to succeed with your financial goals!
The easiest way to start with this is to go back through your history of transactions. If you use cash, you might have to record your transactions going forward, but if you use a debit or credit card, then pull up past statements and go through them.
You can also use a service like Mint.com or You Need a Budget. Both require you to enter your various account information, and they’ll aggregate data from those accounts to give you a picture of what your financial situation looks like.
7) Set Financial Goals
We’re reviewing a few goals here, such as paying off debt and saving for emergencies and retirement, but you should also think about medium and long-term financial goals.
Of course, goals can change. I know what I wanted out of life when I was 22 is different from what I want now. That doesn’t mean you shouldn’t be working toward something. Even career-related goals count (wanting to make $X per year).
Do you eventually want children? A house? To travel? To retire early? All of these require further planning.
If you’re awesome enough to land a well-paying job right out of college, you might also want to consider hiring a financial planner to help you reach your goals. “Outsourcing” money management might seem a little odd, but having another pair of eyes on your financial choices can help you avoid making any major mistakes.
8) Consider Your Insurance Needs
This is going to be different for everyone. I’m very lucky to be covered under my parents’ health insurance for the time being, but I don’t have optical or dental insurance (hello, emergency/healthcare fund!). Others aren’t so lucky. Review what your insurance needs are and plan appropriately.
This goes for life insurance as well. You might consider this later in your 20s, once you’re married or have kids, but it’s still important to think about! If you have people depending on your income, you need to protect it. The same goes for disability insurance.
As a side note, once you do get married (or maybe you are!), update the beneficiaries on your accounts. You should also look into estate planning and creating a will.
9) Keep an Eye on Your Credit
Maintaining a good credit score throughout your 20s will greatly help if you plan on applying for a mortgage or for a car loan at some point. Having a good credit score can also help when renting an apartment, getting a job, or getting a lower interest rate on a loan.
Monitor your credit score using a free site such as Credit Karma or Credit Sesame, and take advantage of getting three free credit reports throughout the year on annualcreditreport.com. Look out for any errors to ensure your score accurately reflects your credit activity.
10) Know When to Cut Back and Earn More
When I graduated college, I was focused on keeping my expenses as low as possible so I could keep more money in the bank. Within the past year or so, I recognized the limitations of cutting back, and started focusing on earning more instead.
There’s a balance to be achieved here, so figure out what works well for you. You can start a side hustle and develop more skills (which also helps when looking for a job), or you can be practical with your frugality and cut back on things that don’t matter to you as much. Always try and spend according to your values.
__________
When you’re in your 20s and just starting out on your financial journey, it’s okay to start small. The biggest hurdle is just starting. You don’t want your 20s to pass by in a blur, only to realize you have little to nothing saved for retirement by the time you’re 35. By following these steps, you’ll be well on your way to creating a good financial foundation for the rest of your life!
What do you wish you had done differently in your 20s? Did you struggle with anything listed? Which things did you succeed with?
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I like how you said you don’t want your 20s to pass in a blur! That is so true! You’ve got to start laying the foundation for the rest of your life! Financial or otherwise. You don’t want to wake up one morning with a lot of regrets about everything you didn’t do.
I didn’t even need to read past number 1!! :) I really think that minimizing and getting out of student loan debt is a true to key to setting yourself up for financial success. That’s why I’m trying so hard to pay off my law school debt. Everything else will be much easier.
A big problem is thinking you’ll have plenty of time later. Then you blink and your 20’s are gone. Getting started young with whatever financial plan you have means much less stress and work down the road.
All solid tips.. Oh how I wish I could go back and max out my retirement funds in my 20’s!
I like these tips! I definitely wish we had started investing earlier in our 20s, but there’s nothing I can do about that now.
All great tips Erin! I was so focused on killing my debt while in my 20s I completely ignored saving for retirement. It made sense, on one level, at the time but would change it if I could go back. Like Kim said, I was guilty of thinking I’d have plenty of time later in life – it’s crazy how fast those years can go.
Good tips. I’m pretty proud of myself 20s self for following most of these rules. I do wish that I tracked my spending…I probably would have realized that I could have saved and invested more than I did. I also wished that I was more motivated to start a side hustle. My friend and I tried to start a website years ago but gave up pretty quickly.
Great points. I’m still in my 20s and I think something I need to work on is my insurance needs. I have basic coverage, but I’m not fully convinced that I’m getting the best deals on home and car insurance. Another thing I need to work on is the legal side of things, like setting up a will. I’m not positive I need one, but I need to do research to determine what my needs really are.
Mark@BareBudgetGuy Yep, and there’s no time like now! I feel like my 20s have already been passing by in a blur, so I’m trying to make the most of the rest of my time here.
Financegirl I completely agree. They’re such a source of stress for many of us, and there’s no reason to carry that stress around if you can help it. Not having debt in the way means more of your money can go toward things you actually want.
Eyesonthedollar I think so, too. When you’re just starting out, it seems like you have years and years left to accomplish things. I’m not saying we should be in a rush, but we shouldn’t be taking time for granted, either!
Mrs Crackin the Whip Thanks! I know I wish I could go back just in the last 3 years and focus more on retirement!
holly3 Better late than never, and you guys have been making amazing progress! Consistency is always good to have regardless of age.
FrugalRules It really is crazy. I can’t believe I’ve been out of college for almost 4 years already, yikes! There’s so much that can happen in your 20s, it’s easy to lose track of time or lose focus, too. That’s why having a plan in place helps!
Andrew LivingRichCheaply I had a few joint ideas with friends back in the day as well, but none that ever made money. Would have been nice! I think there’s always going to be some room for improvement at some point. It’s important to evaluate and make changes going forward, but we shouldn’t beat ourselves up over what we could have done earlier as we can’t go back!
Ali_AnythingYouWant Doing the research is half the battle. I think it’s great to make informed decisions on these things, even early on. Shopping around for the best deals and understanding what coverage you need will help down the road when things change!
I’m in my 20s, so this pretty much sums up my life right now :) I love how you mentioned paying something on your loans before the grace period is over. Halfway through my grace period I found out that interest was being accrued and it would capitalize and be added to my total loan amount after the 6 months were up. I immediately started paying extra and after I get rid of my high interest debt this year, I’m hoping I can knock out my student loans and move on to other things.
Ah, your 20’s. Such a great time. :) It’s been more years than I’d like to admit since I was in my 20’s but I remember them pretty well too. One of the things I hear repeatedly from clients is that they wish they would have started investing in their 20s (makes such a difference) and had more concrete goals. Goals, to me, make a huge difference because people who know what they want, typically find it much easier to not only save money but also make decisions that support their goals. People without goals just tend to spend mindlessly, even if they are smart enough to not create debt. They also don’t spend in a way that builds to something either.
Chonce That’s awesome! It’s seriously something I regret not doing. I wasn’t aware (like most, sadly) how interest was going to work on my loans. When I logged in to see a couple extra thousand tacked onto my loans, it was such a blow. It’s great to get ahead when you can.
ShannonRyan I can’t agree more – goals are so important to have! I know they can change, but having something to focus on helps so much. It’s better to have money saved even if you end up not needing it for the specific purpose you were saving for. You can’t really go wrong with having good financial goals to work toward!
I’m still in my 20s and glad I figured out most of this already. It’s just going to make my life so much easier down the road. On the flip side though, I hear a lot of people say they wish they started saving or investing in their 20s and now it’s too late – it’s never too late! I think it’s about taking baby steps to get where you want to be.
SavvyWithSaving Same here, I’m very grateful I’ve always been money conscious! Also, I agree, it’s definitely never too late to start retiring. Anything is much better than nothing.
These are all solid pieces of advice. I am a few (just a few!) years past my 20s now, and many of these items keep on applying once you graduate into the next decade!
Insurance is a huge deal! I would recommend that anyone who has student loan debt or other unsecured debt with a co-signer should have a life insurance premium that at least covers the amount of the debt.
Setting financial goals is another great one!
The last thing I would add is take your income seriously. Very seriously. In general, people top out their incomes around age 35-40 (women earlier, men later). It is not easy to focus on your career once you have a family or if you end up caring for your parents in old age, so take advantage of the primary income years of your life.
Insurance is what will keep your head above water for sure. Too many youngins’ — I’m turning 37 tomorrow so I can officially say stuff like that — underestimate how easy it is to suddenly not be healthy. Whether that’s an accident or a seriously illness… You need to make sure you can handle those costs if they come up. At the very least, make sure you know your yearly maximum out of pocket. Then you can make more strategic decisions.
PFUtopia They definitely do. That’s why it’s key to get started as early as possible!
Hannah UnplannedFinance Very true, Hannah. You don’t want to leave anyone in a bind should something happen. That’s something a lot of graduates don’t think about. I like the point about taking your income seriously, too. These are the years to get ahead as much as possible!
AbigailP Happy early Birthday! It’s extremely easy to take your health for granted when you’re younger. I’ve had a few issues that resulted in surgery in the past few years, and I’ve always been incredibly grateful for the coverage of my parent’s insurance. I don’t even want to think about how much that would have cost otherwise. Staying on top of your insurance is a must.
I wish I had followed these steps to a “T”. Now that I have 2 years left in my 20’s I can look back and say I spent a majority of telling myself I didn’t need to save for retirement, I never learned how my credit score affected me and a budget? Didn’t come into question until I was about 25. My parents only graduated high school and made similar financial mistakes that would have been avoided by a little bit of financial education. If it weren’t for blogs like these I might still be in the dark and ignorant about how important my own fiances are.
ShannonRyan I can agree with this as I am exiting my 20’s, my husband and I always had money to cover anything we wanted. So we didn’t make saving/investing a priority. It wasn’t until we lunged into law school and went down to one income that we saw our folly and how we could improve our lot in life moving forward. Now that we know how to live off one income, there is no reason why we can’t purge ourselves of debt and build financial security over the years.
Chonce Don’t give up, like Mr Money Mustache says, your debt is an emergency. At 28, I wish I could be free of my debt and it could have been possible If I had been more mindful and paid more attention. Props to you for being on top of it.
Financegirl Law school loans haunt my days and dreams! Luckily I can imagine a day when they’re all gone and can put all my energy towards getting rid of them.