20 Financial Habits to Form in Your 20’s
People say your 20’s are supposed to be magical. A time where exploring the world, starting your first job, getting married and starting a family all happen at once. The not so popularized version of your 20’s is the one where your car breaks down, your boyfriend dumps you and you are in a new city with no friends and no money. Funny how both scenarios could happen so easily in the same decade. Life is fluid, there is no pause button. You can’t rewind or fast forward. You only live through your 20’s once; that’s it. So let’s delve into the 20 financial habits you should form in your 20’s to set you up for the rest of your life.
I cannot stress this enough. If you are not budgeting on a monthly basis, you are doing yourself a disservice. Creating a budget and sticking to it is a sure fire way to keep your finances in order and put you on the path to success. A budget is your plan for exactly how much money is coming in compared to how much is going out. If you consistently spend more than you earn, you might get into trouble with debt.
2. Start Planning for Retirement
Your 20’s are the best time to start saving for retirement. I highly recommend contributing as much as you can afford to your 401(k). My company fully matches up to 8% of my salary, so I put 8% into a Roth 401(k). Investing just $200 per month starting at age 22 will grow into over $1 million by age 67. Source: How to Retire Rich
3. Pay Off Debt
Pay down any debt as quickly as possible. Try to avoid new debt, because debt generally breeds more debt. If you are holding onto a pile of cash while still in debt, decide whether the interest expense is worth it to put that money in your bank. Many student loan borrowers will actually end up paying double their original loan balance when you include the total interest paid. Don’t put it off. Pay your debt!
4. Avoid Lifestyle Inflation
You are probably thinking, why do I need to live like a student after I get my degree. The answer is “because you’re broke”. No one coming out of college with student loan debt and a starting salary is going to be able to afford the luxurious lifestyle depicted in the movies. Most of you are not Laguna Beach. You are a broke college grad. It’s okay to live on pasta salad and pb&j’s. I prefer it, actually, because I know the money I save by not spending on sushi and partying every night will add up quickly.
5. Have an Emergency Fund
Put most of your disposable income (after paying off all of your debt) into savings. As Dave Ramsey would advise, set up an emergency fund of at least $1,000. This is your rainy day money for when the car inevitably breaks down or your son breaks an arm playing soccer. Stuff happens and it is necessary for you to be prepared for it. Once you have an emergency fund, set up an additional savings account for your next investment. Source: Baby Step 1, Dave Ramsey
6. Set Aggressive Goals
Financial goals are a must in your 20’s. You goals should be based on when you want to retire, what you want to accomplish and what is important to you. Set aggressive yet realistic goals. Becoming a millionaire by 21 may be a bit of a stretch for the average Joe but becoming a millionaire by the age of 60? Totally do-able yet still aggressive. Once you have your goals figure out what that will actually look like and what you need to do in order to accomplish them.
7. Live With Less (Minimalism)
Minimalism is a buzz word right now for sure. But is it more than just a passing fad? Minimalism means living with less. It means not having the consumerist desires of today’s society. I’ve found that by having less clutter around our home, I am able to more easily focus on things that are important. A great resource for learning more about minimalism is The Minimalists podcast and documentary.
8. Track Expenses and Spending
Tracking your expenses and spending is going above and beyond just budgeting every month. We use platforms like Mint.com to track exactly where our money goes every month. This allows us to spot trends and areas where our spending habits could use some work. Noticing the extra $40 you’re spending at Starbucks every month and choosing to make your coffee at home could save you $500 a year!
9. Work Hard
Working hard in your 20’s might seem like a no-brainer; but in order to get ahead financially, average work isn’t going to be enough. Use your 20’s to climb the corporate ladder, get raises and promotions where possible, and always look for better opportunities. Know what your company’s progression plan is and don’t be afraid to ask to fast-track or move on. Get to a point where you are making as much money in your day job as you can!
10. Earn Side-hustle Income
Taking on a side-hustle is a fun and easy way to earn extra cash. Your 20’s is the best time to max out your ability to make money from side income. Rather than spending your down time shopping or watching mindless television, focus and earn some dough! Examples of side incomes are: blogging, freelance writing, virtual assistant, pet sitting, survey and questionnaires.
Investing can be an intimidating concept in your 20’s. You may not know how to invest or what to invest in. Investing can be as simple as buying your first property, expanding your 401(k) contributions, or buying stock. Put your savings into something that can add wealth to your life.
12. Automate Savings and Retirement
Set up recurring transfers with every paycheck, whether to savings or to an investment account, or to pay off debt. By automating your savings and retirement funds, you are able to create your budget around whatever is left over. You also help to avoid the biggest point of failure in any plan; you.
13. Build Credit
Your credit score is how you qualify for big purchases like a car or house. It is necessary to start building credit early since a factor of your credit score is the age of your accounts. Good credit is an asset that should not be abused. If you have tendencies to spend beyond your means, hold off on major credit card spending and build credit through repaying other loans.
Finding a financial mentor at a young age will help you to become wealthy. Become a financial professional by proxy; surround yourself with successful individuals and try to learn what they do with money. This crowd will be much more supportive of your long-term goals then your co-workers who only live for Friday night.
15. Learn to Love Cooking
Learning to love things that will save you money will be a life-long successful habit. Cooking your own food can save hundreds of dollars a month on pizza delivery and takeout. Additionally, it can help you to be healthier as well. A dinner party can also be a fun social activity to share with friends!
16. Find New Friends
Toxic friendships aren’t always just about the drama. Certain friendships can be bad for your happiness AND your wallet. Your 20’s can be an opportunity to say goodbye to the friends that use you for your money and don’t respect your goals, financial or otherwise.
17. Never Stop Learning
Continuing your education is imperative. Try to find a lesson in everything you do in your 20’s. Every mistake is a learning opportunity! Read a nonfiction book every month to constantly expand your knowledge base.
18. Find Your Happiness
Have you ever noticed some of the happiness people are also sometimes the poorest? It doesn’t take money to make you happy, and sometimes more money can even lead to unhappiness. Learn to be happy with less. Try to find happiness in the people and experiences in your life, not the things.
19. Do Your Research
Before making any major financial decision, do your research. Know what you want and find the best deal for it. This can be applied to something as big as a house or as small as a pair of shoes. There is no limit to the amount of research that can be done before making a financial decision.
20. Negotiate everything
If you didn’t know already, EVERYTHING is negotiable. Do not be afraid to ask. That extra$500 you spent on your car when you were 23 could have grown to $25,000 in your retirement account instead!
What is the best financial habit you developed in your 20’s? What advice do you have for anyone working on their financial habits?