In my early 20s, I made a ton of financial mistakes.
From maxing out credit cards, taking unnecessary student loans, to delaying my savings, I got off to a rocky start.
I sometimes wonder how I even have anything to my name.
Now into my 30’s, what I wouldn’t give to go back to my 20-year-old self and try to talk to sense into him.
But since I know myself rather well, I’m pretty sure I wouldn’t have listened. Ha!
You don’t have to get off to a rocky start, though.
“When you’re in your twenties you’re really forging for your future. Things take shape later on.”
These 20 rules for finances in your 20s should help you get things in order before you head into your 30s:
1. Avoid Credit Card Debt
One of the best things you can do for your finances in the long term is to avoid credit card debt. Make it a point to have the money in your account before you charge something. High-interest credit card debt can ruin your finances over time, leeching away your wealth.
I, unfortunately, learned this lesson the hard way. My dad, who struggled with credit card debt for most of his life, actually encouraged me to open a credit card when I was still in college.
Before I knew it, I had maxed out one credit card and was opening several more. It was a vicious cycle that could have ruined me had I not figured out when I did. Even still, I had over $20,000 of debt before I did and it took me several years before I became debt free.
2. Only Borrow What You Need for an Education
I had a full-tuition scholarship (because I joined the National Guard) and a cushy job in the mall at GNC. With all of my resources, there was no reason for me to take out the maximum in student loans. But I did anyway.
While you might need to borrow to fund your education, don’t take more than you need to make it work. The smaller your debts, the better.
Then, when you’re done with school and looking to repay your loans, make sure you understand what you’re getting into. Too many people are getting caught up in student loan consolidation scams, and just wasting money that could have been spent on their student loan debt. Remember, once you graduate you have to pay back the loans.
3. Be Careful about Borrowing for Anything Else
Whether it’s a house or a car, be careful about borrowing. The rule about only getting what you need applies for all your loans. Yes, you will probably need to borrow if you want to pay for a house. But you don’t need to go overboard; modest homes and modest cars paid for with solid down payments, are your best choice.
4. Pay Attention to Your Credit
Just because you shouldn’t rack up credit card debt doesn’t mean that you should ignore credit cards and other forms of credit. Building a good credit history can help you in a number of ways.
Good credit is about more than getting the best interest rate on a loan (something that can save you thousands of dollars over your lifetime). Your credit is used to determine insurance rates and security deposits. A version of your credit report might also be used as part of your background check for a job.
A previous 20-year-old intern of mine thought his credit was good but found out the hard way that since he didn’t have any credit history, his credit score was actually a 621. Ouch!
After realizing this he was able to implement a few strategies and raise his credit score dramatically to the tune of 110 points in a short amount of time.
If you want to make the most of your finances, you need to establish good credit habits. The fastest way to do this is to get a credit card and use it once or twice a month for items you can pay off in full, immediately after you use it. Try to never carry a balance over to the next month.
5. Pay All Your Bills On Time
As a fledgling adult, you are now responsible for many of your own costs. It’s vital that you pay all your bills on time. You don’t want to miss payments for utilities, your phone plan, or other items.
Missed payments can have a number of consequences that can be far-reaching, including messing up your credit score for years. That’s right, I said YEARS.
6. Open a Checking Account on Your Own
At some point in your 20s, you should open a checking account on your own. This means that you ditch the old joint account with your parents, and start managing your own finances. Look for a free checking account (many banks and credit unions offer student accounts that come with benefits), so you don’t have to worry about fees.
7. Open a Savings Account
While you’re at it, open a savings account. Look for a high-yield account that offers you the chance to earn a return. Then, set up a regular schedule for adding money to your checking account. Even if it’s only a few dollars a week, the important thing is to get in the habit of saving.
8. Open a Retirement Account
The sooner you start saving for retirement, the better off you’ll be. Why? Because you don’t want to still be eating ramen noodles in retirement. That’s why.
You can end up with thousands more in your nest egg if you start investing in your 20s, rather than waiting until you are in your 30s.
As soon as you start earning income, open a retirement account. If you can’t get a retirement account through your job (perhaps it’s part-time), open an IRA. Anyone with earned income can contribute to an IRA.
9. Learn about Investing
Now is a great time to learn about investing. Find out how you can use money to improve your returns. Get the basics of how to invest in low-cost funds, as well as how you can use dividend stocks to your advantage.
When you understand the basics of investing, you are better able to build wealth over time. Learn how you can use a taxable investment account in addition to your tax-advantaged retirement account to boost your wealth.
10. Purchase Life Insurance
Probably the last thing on your mind in your 20s is life insurance. Ewwww! That’s something that only old people need to talk about.
But the truth is, you can get a much better rate on life insurance while you are young and (probably) healthy. If you plan to start a family sometime in the next decade or so, getting life insurance now can be a good way to lay the foundation for financial protection for your family. It’s possible to find inexpensive term life insurance that provides adequate coverage for 20 to 40 years, depending on the length of term you choose.
And just because you take out a 30-year term policy today doesn’t mean you have to continue to pay on it. Since life insurance is a unilateral contract, you can stop it at any time. But remember, since most policies are super cheap (around $15 per month for $250,000 of coverage), it would be silly to ever stop paying on the policy.
11. Develop a Marketable Skill
It’s not necessary to go to college if you want a good job. However, you do need a marketable skill. Consider which skills you can develop that might be in demand. There are plenty of certifications that can provide you with a good job — and you don’t have to go to school for four years.
Make yourself marketable, and you’ll be more likely to find a job, even in a down economy.
12. Consider a Side Hustle
Even the most marketable of us run the risk of being jobless if economic conditions are especially difficult. A side hustle can help you diversify your income. Consider starting up a small side business that can help you cultivate an alternative income stream so that you don’t have to rely too heavily on a single source of income.
A side hustle I failed at was real estate. I could have given up, but that led to me starting my blog, which has been a great side hustle. Don’t give up after one attempt.
13. Give to Others
Well-rounded finances include efforts to help others. Whether you give money to your church, donate to charity, or volunteer, you can give of your time, money, and effort. Efforts to give to others generally result in better financial management, and can even expose you to new opportunities.
14. Start Building a Network
Developing people skills is an important part of marketing yourself for future career and financial opportunities. Take advantage of internships, campus organizations, community organizations, and other opportunities to meet people. Build relationships now, and you might be surprised at how helpful they can be later.
15. Establish Your Priorities
Think about what you value, and what is important to you. Now is a great time to establish your spending priorities. Consider how you want to use your money, and what you want your money to accomplish on your behalf. Then, instead of wasting money on the things that don’t matter to you, you can use your money to purchase things and experiences that are important.
16. Create a Spending Plan or Budget
Put together a plan for your money. Base your spending plan or budget on your priorities. Understand your cash flow so that you know how much money you have coming in each month, and what expenses need to be paid as well. You don’t need to account for every dollar (although that can help), but you do need a plan that helps you stay on track, and that allows you to meet your goals.
17. Talk Finances with Your Significant Other
Chances are that you will meet your spouse while you are in your 20s. When things start getting serious, you need to talk finances. Whether you are planning to move in together, or whether you want to get married, you need to talk about your money habits, share the realities of your situation, and make plans for the future.
If you are sharing your life with someone, you also need to figure out how you will manage your finances together (even if you keep separate accounts).
18. Get Used to Saving Up for Big Purchases
Now is a great time to develop the habit of saving up for major purchases. Rather than buying things on credit, practice saving up for things like computers, vacations, and even your wedding. While you can benefit by buying things with an airline or airmiles rewards credit card, make sure that you have the money saved up in advance so that you can pay off your card and avoid carrying a balance.
19. Learn to Cook
I would never suggest that you eschew eating out altogether. After all, I enjoy eating out. However, eating out all the time can lead to health problems, and it can drain your finances. Learn how to plan meals, and how to cook.
You’ll be healthier, and you’ll save money over time. Good health is one of the best money-savers (plus, you get to enjoy your money!), and learning to plan and cook healthy meals can go a long way toward maintaining a good quality of life.
20. Learn to Say No
Know how to say no. This means that you might have to say no to a purchase you want (or at least put it off). Sometimes it means saying no to loved ones as you attempt to make time for yourself and your job. Sometimes, it even means saying no to a job that isn’t working for you. Learning how to say no — and knowing when to use this word — can help you use your financial resources more effectively.