Financial Planning in Your 20s: 10 Money Tips for Young Adults

While financial planning in your 20s might not seem as exciting as spending your cash on concerts, vacations, and tech, it can definitely set you up for a secure future. But you know this, or else you wouldn’t be here, fully ready to get serious about managing and growing your money.

In this article, we’ll share practical tips to help you manage your finances and build solid money habits that future you is really going to appreciate.

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10 financial tips for young adults

Some might think financial planning is only for those in their 30s or later, but starting early can greatly benefit you. Here are essential tips to master financial planning in your 20s:

1. Start building an emergency fund

An emergency fund serves as your financial safety net, covering unexpected costs without stressing your regular budget. “Life in your 20s is full of unexpected changes—job transitions, relocations, or even a sudden health issue,” says Dennis Shirshikov, a finance professor at the City University of New York, and Head of Growth at Gosummer. “Having a cushion can prevent these from derailing your long-term financial goals.”

Aim to save at least three to six months’ worth of living expenses. Start small if you need to, and gradually build up. Setting aside a little from each paycheck into a separate savings account—and increasing it whenever you get a raise—can make this process easier and more automatic.

2. Be mindful of credit card usage

Credit cards can be a useful tool for building credit and managing expenses but they can also lead to debt if not used responsibly. Be mindful of how much you’re charging on your credit cards and pay off the balance in full each month to avoid accruing interest charges. If you struggle with overspending on credit cards, consider switching to a cash-only or debit card system for a period of time.

Read this next: 8 Dangers of Credit Cards: What to Watch Out For and How to Avoid

3. Handle high-interest debt

High-interest debts can spiral out of control if not managed properly. “Prioritizing debt repayment, especially high-interest debts like credit cards, is crucial to avoid financial pitfalls early on,” Shirshikov says.

Consider the avalanche method to focus on eliminating debts with the highest interest rates first while maintaining minimum payments on others. This approach can help you save money in the long term.

Once you’ve cleared the highest interest debt, proceed to the next one, continuing this cycle until all debts are settled. Manage your credit card use by spending only what you can pay off each month, avoiding unnecessary interest charges.

4. Automate your savings

Set up automatic transfers to your savings or retirement accounts. This way, you’re saving consistently without having to think about it. Automation helps make saving a seamless part of your routine, ensuring that you consistently put money aside even if you forget or get busy. Over time, even small, regular contributions can accumulate to a substantial amount, aiding in your financial planning in your 20s.

5. Track your spending and budget accordingly

It’s crucial to know where your money is going each month. Create a budget and track your expenses to see where you can cut back if needed. There are many free tools available, such as budgeting apps or spreadsheets, that can help you keep track of your spending and stay on top of your finances. By being aware of your spending habits, you can make smarter financial decisions and avoid overspending.

6. Reduce unnecessary expenses

Cutting back on unnecessary expenses can free up more money for savings and investments. Look for ways to save on everyday items such as groceries, transportation, and entertainment. For example, consider meal planning and cooking at home instead of eating out frequently. Assess entertainment subscriptions periodically and cancel what you’re not using. Small changes can add up over time and have a significant impact on your overall financial health.

7. Start investing

Starting your investment journey in your 20s allows your money more time to grow. “The earlier you start investing, the more you can take advantage of compound interest, which is often called the eighth wonder of the world,” Shirshikov says.

Compound interest refers to the process where the earnings on your investments are reinvested to generate their own earnings. Over time, this can really boost your investment’s growth.

Explore different investment options like stocks, bonds, certificates of deposit (CD), or mutual funds. Diversifying your investments can help manage risk while potentially increasing returns—if some investments lose money, others may earn money.

This might also interest you: 7 Best Investment Apps for Beginners

8. Save for retirement

The earlier you start saving for retirement, the better. Compounding interest works in your favor the longer you save, allowing your money to grow significantly over time. Even if retirement seems far away, contributing to a retirement account now can lead to a comfortable future.

To figure out how much to save, try using a retirement calculator. For example, if you’re a 25-year-old planning to retire at 65 with no savings yet, you should aim to have about $3,118,756 by the time you retire.

Contribute to a 401(k) or an Individual Retirement Account (IRA), even if it’s a small amount to start with. If you’ve got a 401(k) account with your employer, make sure to at least contribute whatever they’re matching—it’s like getting free money. As your income grows, you can increase your contributions.

9. Consider multiple streams of income

In today’s uncertain job market, having multiple streams of income can provide stability and security. Start a side hustle or freelancing in your field of expertise. This can provide an additional source of income and help you achieve financial independence. Plus, diversifying your income can also lead to new opportunities and expand your skill set.

10. Improve your skills

As a young adult, it’s important to invest in yourself by continuously learning new skills and improving existing ones. This investment can lead to better job prospects and higher income potential.

Consider enrolling in online courses, attending workshops, or gaining certifications in areas that interest you. These pursuits cannot only enhance your career but also contribute to personal growth and satisfaction.

FAQs

Should I get a financial advisor in my 20s?

“While it’s not essential for everyone, getting a financial advisor in your 20s can be beneficial, particularly if you have a more complex financial situation or if you simply want guidance in setting up a strong foundation,” Shirshikov says.

Financial advisors can help clarify your financial goals and help you choose the right investment vehicles to reach them. If you’re unsure about managing investments or budgeting, consulting a professional might be a wise choice. Alternatively, robo-advisors provide a cost-effective solution, offering tailored advice without the higher fees of traditional advisors.

Is investing in your 20s a good idea?

Yes, investing in your 20s is a smart move, as it gives you a significant advantage through compound growth. The earlier you start, the more time your money has to grow. Even small contributions to retirement accounts or diversified portfolios can make a big difference down the road.

How much should I be saving in my 20s?

Aim to save at least 20% of your income, balanced between saving for immediate goals, like an emergency fund, and long-term objectives, such as retirement. As your income grows, increase your savings rate to build a solid financial cushion.

“Building wealth in your 20s is all about developing good financial habits,” Shirshikov says. “Live below your means, save and invest regularly, and avoid lifestyle inflation as your income increases.”