5 Smart Money Moves to Make in Your 20sJuly 21, 2021
If you’re like most young adults, the idea of moving out of your parents’ home and living on your own after graduating from college is exciting — and also a little overwhelming. Once you’re on your own, you’re responsible for paying bills, saving for the future, and making major financial decisions.
Don’t think you’re ready? You’re not alone. A study by EVERFI found that nearly half of college students said they don’t feel prepared to manage their money.
If you’re not sure what to do or how to save money in your 20s, there are simple things you can do now to set yourself up for a more secure future.
How to manage money in your 20s
As an adult, there are a lot of financial terms thrown at you. If you’re intimidated, keep in mind that you don’t have to do everything at once. Start with the basics and focus on things that manage your spending, reduce your expenses, and plan for long-term goals.
1. Create a budget
If your goal is to start saving money in your 20s, creating a budget is key. But most people skip this fundamental financial skill. In fact, 65% of Americans have no idea how much they spend in a month.
If you’ve been putting off creating a budget because it sounds too complicated, try to keep it simple. Budgets don’t have to be elaborate. You can create an effective budget with just a pen and paper.
To get started, list all of your monthly income. Then, list all of your fixed expenses, like your rent, utility bills, student loan payments, and cell phone bill. Finally, you can allocate the rest of the money for other essentials — like groceries or gas — and non-essentials, like dining out with friends or entertainment.
If your expenses are higher than your monthly income, you’ll have to look for areas to cut back. Perhaps you can reduce your housing expenses by getting a roommate or decrease how much you spend on food by meal planning on the weekends.
2. Contribute to a retirement fund
Retirement may be the last thing on your mind. But when you’re young, planning for your retirement is critical. The earlier you start saving, the better off you’ll be. Need some motivation? Consider this example:
Sharon and Julie are both 22, and they graduated in 2020. Sharon started saving for retirement as soon as she got a job and tucked away $100 per month into her retirement plan. If she keeps contributing $100 per month, she will contribute $54,000. Assuming she earns an 8% average return, Sharon will have $527,453 by the time she turns 67 — thanks to market returns, her money will grow by over $473,000.
Unlike Sharon, Julie doesn’t start saving for retirement right away. Because of her other priorities, she doesn’t begin contributing to her retirement plan until she turns 27 — five years later than Sharon. If she contributed $100 per month and earned the same rate of return as Sharon, Julie would have $349,100 by the time she turned 67 — nearly $200,000 less than Sharon.
To catch up with Sharon, Julie would have to contribute more to her retirement fund every month. To achieve a balance of $520,000 by the time she’s 67, Julie will have to contribute $150 per month.
3. Build an emergency fund
Emergencies pop up all the time. From a flat tire to an unexpected veterinary bill for a pet, there will be times when you have to fork over hundreds or thousands of dollars without any warning.
Unfortunately, most people are unprepared. According to a Bankrate survey, 21% of Americans said they have no emergency savings at all.
Ideally, you should save three to six months’ worth of expenses in a separate savings account. If that seems impossible, set a smaller goal. Aim to save $1,000 to give yourself some breathing room.
Set up automatic transfers so that some of your paycheck goes toward your emergency fund every time you’re paid. If you have any extra cash — such as money you get from selling old clothes or games — put that money into savings to build your emergency fund faster.
4. Review your credit report
Checking your credit report is one of the most important money basics for young adults.
You may not realize it yet, but your credit report plays a major role in your life. Whenever you apply for a loan, credit card, or even an apartment, creditors and management companies will review your credit report to decide whether to approve you.
You can view your credit reports from each of the three credit reporting agencies — Equifax, Experian, and TransUnion — for free at AnnualCreditReport.com. When reviewing your credit report, consider the following:
- Errors with your personal information: Sometimes, mix ups happen. The credit report may have the wrong name or Social Security number. If that’s the case, contact the credit bureaus to correct that information.
- Unauthorized or incorrect accounts: If you see unauthorized accounts on your credit report — such as a credit card you never opened or a loan you didn’t apply for — you may be the victim of identity theft. Contact the creditor that issued the card or loan and dispute the accounts with the credit bureaus.
- Credit Inquiries: The credit report will show any recent credit inquiries, such as a credit card company performing a credit check. If you see inquiries you don’t recognize, consider placing a credit freeze or fraud alert on your account to prevent criminals from using your information.
5. Research your student loan repayment options
- Explore alternative payment plans: If you have federal loans and can’t afford your payments, you may be eligible for an income-driven repayment (IDR) plan. If you qualify for an IDR plan, your payment will be recalculated based on your discretionary income, and you could get a much smaller payment.
- Make extra payments: If you can afford it, make extra payments toward your loans every month. Even an extra $10 or $20 can make a big difference. You’ll save money on interest charges and pay off your debt faster.
- Consider student loan refinancing: If you have loans with high interest rates, student loan refinancing can be an effective way to save money. You could qualify for a loan with a lower interest rate than you have now. With ELFI, you can even get a rate quote without affecting your credit score with the Find My Rate tool.*
Learning how to manage money in your 20s
Handling your finances on your own can be intimidating. However, it doesn’t have to be super complicated. By breaking it down and focusing on the most important segments, you can manage your money wisely and build good habits.