Your 20s are a critical time to lay the foundation for a secure financial future. It’s not just about getting by—it’s about taking proactive steps now to avoid unnecessary stress later on. Financial habits, when adopted early, can set you up for long-term success. The habits you build in your 20s are often the ones that define how you approach money for the rest of your life. This blog will highlight 6 habits you need to adopt in your 20s for financial success.
1. Create a Budget
One of the best and most popular financial habits you can build is budgeting. Building a solid budget is a vital step toward taking control of your finances. It’s easy to get caught up in the excitement of newfound freedom in your 20s, but without a plan, your money can slip away quickly. Budgeting isn’t about depriving yourself; it’s about knowing where your money is going and making intentional decisions to reach your goals.
Without a budget, it’s all too easy to lose track of how much you’re spending, which can lead to financial stress. By budgeting, you’re essentially giving your money a job. It helps you prioritize spending, save consistently, and prepare for larger expenses ahead. It’s not just about restricting yourself; it’s about being in control of your money and ensuring you’re not spending more than you’re bringing in.
According to a National Endowment for Financial Education (NEFE) report, 60% of adults in the U.S. report feeling stressed about their finances, and a lack of budgeting is often a significant contributor to that stress. Budgeting provides clarity on how much you can afford to save, invest, and spend without guilt or panic.
Here are ways you can Budget Effectively:
– Track Your Expenses: Start by logging every expense, from rent to your daily coffee. Tools like Mint and YNAB can help make tracking easier.
– Use the 50/30/20 Rule: This is a straightforward approach that allocates 50% of your income to essentials (like housing and utilities), 30% to discretionary spending (like entertainment), and 20% to savings or debt repayment.
– Automate Your Savings: Automating your savings ensures that you pay yourself first, before you even have the chance to spend on other things.
2. Emergency Fund
Building an emergency fund is one of the most essential financial habits you can adopt in your 20s. It’s the safety net that protects you from life’s unexpected expenses, like medical bills, car repairs, or even a job loss. Starting early means you have time to build up the fund without feeling overwhelmed, and you’ll be better prepared for whatever comes your way.
Life can throw curveballs at any time, and having an emergency fund is your safe route. A Bankrate Survey shows that only 39% of Americans have enough to cover a $1,000 emergency. That’s a concerning statistic, especially when considering that unexpected expenses are inevitable. Not having an emergency fund can lead to accumulating debt or other financial strain when something unexpected arises.
Steps to Build Your Emergency Fund:
– Set a Goal: Aim to save three to six months’ worth of expenses. Start small—perhaps $500—and increase it over time as your financial situation improves.
– Open a Separate Savings Account: Keep your emergency fund separate from your regular checking account to prevent spending it on non-emergencies.
– Build Slowly: Even if you start with a small contribution, like $50 or $100 a month, it adds up over time.
– Use High-Interest Accounts: Consider placing your emergency fund in a high-yield savings account to earn interest while you save.
3. Early Retirement Investment
Investing for retirement might seem far off when you’re in your 20s, but starting early can make a world of difference. The earlier you begin investing for retirement, the more time your money has to grow. Compound interest works best when you give it time, and by starting now, you allow your investments to multiply over decades, ultimately providing you with financial freedom later in life.
A study by Fidelity found that if you start saving $200 a month at age 25, you could accumulate over $500,000 by the time you reach 65, assuming an average 7% return. However, if you wait until age 35 to start, you would need to save $400 each month to reach the same amount by retirement. That’s the power of compound interest! If you are starting out, you might want to consider investing in Index funds for a better risk to reward ratio for your long-term investment.
Start Investing for Retirement:
– 401(k) Contributions: If your employer offers a 401(k) plan with a company match, contribute enough to take full advantage of it. This is essentially free money that can grow over time.
– Roth IRA or Traditional IRA: Open a Roth IRA or a Traditional IRA to get federal tax benefits while saving for retirement. Both accounts offer tax advantages that help your savings grow more efficiently.
– Invest in Index Funds: Low-cost index funds provide exposure to a diversified group of stocks or bonds and are an excellent option for beginners who want to invest long-term.
4. Pay Off Debt
Getting rid of high-interest debt should be one of your top priorities in your 20s. High-interest debt, such as credit card debt or student loans, can make it difficult to get ahead financially. It feels like a never-ending cycle of payments that don’t actually help you make any progress. Prioritizing debt repayment is a great financial habit and can free up your finances for other important goals, like saving and investing.
According to NerdWallet, the average American carries $5,221 in credit card debt, with an average interest rate of 18%. This interest can easily add hundreds of dollars to your debt balance each year. Failing to pay down this high-interest debt fast enough can cost you thousands over time.
Strategies for Paying down Debt:
– Debt Avalanche Method: Start by paying off the debt with the highest interest rate first, while making minimum payments on other debts.
– Debt Snowball Method: Alternatively, focus on paying off the smallest debt first to gain momentum, then tackle larger debts.
– Consider Debt Consolidation: If you have multiple high-interest debts, consolidating them with a personal loan may help lower your interest rate and simplify your payments.
5. Invest in Stocks
Investing in the stock market is one of the best ways to build long-term wealth. While it may seem intimidating at first, getting involved in stocks is easier than ever with platforms like Robinhood or Fidelity. The earlier you start, the more time your investments have to grow. Saving money is great, but investing allows your money to work for you, especially when you’re still young.
According to a Charles Schwab survey, 52% of millennials have investments, but 35% don’t feel confident about their investment knowledge. Learning the basics of stock investing early on can set you up for future success and help you make informed decisions about your money.
Start Investing in Stocks:
– Start Small: You don’t need a large amount of money to start investing. Many platforms allow you to invest in fractional shares with as little as $50.
– Focus on Long-Term Gains: The stock market is volatile in the short term, but over time, it tends to increase in value.
– Diversify Your Portfolio: Avoid putting all your money in one stock. Diversifying across various sectors can reduce your risk and increase the potential for growth.
– Robo-Advisors: If you’re unsure where to start, a robo-advisor can help you create a diversified portfolio that aligns with your financial goals and risk tolerance.
6. Continuous Learning Pays off
Your 20s are not only for building wealth but also for building your career and skills. The more you invest in your personal growth, the more likely you are to see an increase in your earning potential. Learning new skills, gaining certifications, and staying current in your field are all ways to enhance your future financial position.
Pew Research found that college graduates earn, on average, $1,000 more per month than those with just a high school diploma. But personal development doesn’t stop with formal education. Learning new skills through online courses or professional certifications can help you level up your career and increase your earning capacity.
Ways to invest in yourself:
– Take Online Courses: Platforms like Coursera, Udemy, and LinkedIn Learning offer affordable courses in everything from coding to marketing.
– Attend Workshops and Seminars: Networking and learning from others in your industry can open doors and provide valuable career insights.
– Stay Current: Subscribe to industry journals, blogs, or podcasts that keep you informed on the latest trends and skills. You are also welcome to visit voxtopics to learn more about finance, investment and personal finance management.
How to be smart with your money?
Being smart with money starts with understanding where it goes. One of the best financial habits you can use is to create a simple budget using the 50/30/20 rule: 50% for needs, 30% for wants, and 20% for savings or debt. Automate savings so you’re not tempted to skip it. Avoid lifestyle inflation—just because you earn more doesn’t mean you need to spend more. Also, prioritize needs over wants and think long-term. Did you know? Paying bills early or on time boosts your credit score over time.
How to start investing with a low budget?
Start small, even if it’s $10 a month. Apps like Acorns or Robinhood let you invest spare change or small amounts in stocks or ETFs. Consider fractional shares—these let you buy portions of high-value stocks without needing large sums. Start with index funds; they’re low-cost and diversified. A fun fact is even $100 invested at 8% annually can grow to over $1,000 in 30 years thanks to compounding.
Should I invest in real estate in my 20s?
Real estate can be a smart long-term investment, but it’s not always ideal in your 20s. It requires a significant upfront cost, ongoing maintenance, and can tie you down geographically. Instead, consider REITs (Real Estate Investment Trusts) for exposure to real estate with lower risk and cost. Fun fact: The average ROI for residential properties is around 8–12% annually.
What app should I use to budget?
Apps like Mint, YNAB (You Need A Budget), or Goodbudget are excellent for managing expenses. Mint connects to your bank account and categorizes expenses automatically. YNAB focuses on giving every dollar a purpose, helping you stay proactive. Interesting to note: YNAB users report saving $600 in the first two months!
How to set your financial goals?
Set SMART goals: Specific, Measurable, Achievable, Relevant, and Time-bound. Instead of saying “I want to save money,” decide on “saving $5,000 in a year.” Break big goals into smaller steps. For instance, saving $5,000 means putting aside $417 a month. Studies show people who write down their financial goals are 42% more likely to achieve them!
Bottom Line
Your 20s are the time to build habits that will shape your financial future. Whether you’re just starting your career or you’re ready to take control of your financial life, the habits you adopt now will have a lasting impact. By budgeting, building an emergency fund, investing for retirement, tackling debt, learning about stocks, and continuously improving your skills, you’ll be setting yourself up for success—financial and otherwise.