Learning how to manage money in your 20s feels like just another item in the overwhelming listing of properly adulting.
Right above figuring out how to make more than one good meal and below finding a job that actually pays decently.
We’ve felt the same way.
Your 20s is a time when you basically learn everything there is to be your own self-reliant adult.
That includes all of the financial aspects of life.
And, it’s crucial that you learn how to manage money properly in your 20s.
It’s all about creating habits that you’ll have in your 30s, 40s and so on.
Have the wrong habits and you’ll spend your 30s and 40s trying to correct your financial mistakes of your 20s.
There’s a lot to learn so it’s good to start with the most basic but most important aspect of personal finance:
Your spending habits.
Categorize and Track How Much You Spend
How much money you make is important to your financial situation.
However, how much you spend is far more important.
You don’t have a ton of control over how much money you make in the short-term.
When it comes to spending though, you have all of the control.
The less you are able to spend and live a happy life the easier it will be to create a solid financial situation.
Where do you start?
First, you should categorize your expenses into essential and nonessential. If you don’t know what the hell this means, check out this post first.
It’s often here that people realize just how much they’re spending.
When you’re in your 20s it’s probably the first time you’ve ever purchased a lot of different stuff.
Electricity bill. Groceries. Home Goods. Stuff that your parents bought and now you’re buying.
For a lot of us, we go from buying a few things during high school and college to buying everything other adults have to purchase.
This can cause us to start overspending without even knowing.
After you know your essential and nonessential expenses, go a little further and categorize your expenses in 5-10 categories.
Check out our these posts for additional info:
- How to Categorize Expenses
- How to Track Your Income and Expenses
With this info, you can see where you’re spending money and focus on creating good spending habits.
Focus on Your Spending Habits
How much you spend is going to have the biggest impact on your financial situation.
That’s why it’s so important to make sure your spending habits are in check.
You should not only track your expenses but also making sure that you are not overspending in one of your spending categories.
What category do you spend the most money on? Where do you spend the most money?
We often have categories (hello clothing) or exact places (hello Marshall’s) where we don’t realize how much we’re spending.
At the moment it might not feel like too much money but then you see that in total you’ve spent way too much.
It may be good to stop shopping or going to specific places for a little while.
You could even do a no-spend challenge to reset your spending habits by signing up to our email list below and getting our free #SAVEMORE Challenge!
Our spending habits are just starting to develop in our 20s so it’s the best time to create good spending habits that lead to wealth.
A budget is also a great way to help guide your spending habits.
Create a Money Management System
If you’ve already started to categorize and track your expenses, you’ve started creating a money management system.
There’s no better time in your 20s than to create a solid money management system because things are still pretty easy.
You might only have one checking account and one credit card.
It’s better to create your system when your finances are still pretty small and there isn’t a lot to keep track of for managing your money.
So, what’s the next key aspect of a money management system?
A BUDGET!
Of course, it’s always the budget.
Budgets are great but they’re a little overhyped.
Now, don’t get us wrong. We love our budget spreadsheet and our quarterly budget goals. They can be very powerful but simply creating a budget will not solve money problems.
It will help you decide where you want your money to go. It’s up to you to stick to that budget.
So, take those spending categories you created and set spending goals for each.
Once you have a budget, you can start thinking about a financial plan which involves long-term stuff like paying off debt, buying a house, and investing your money.
But, first a little more organization.
Organize Your Financial Information
Bank accounts. Credit cards. Student Loans. Maybe a Mortgage. Recurring Bills. Investment Accounts. Health Insurance. Car Insurance.
There are all kinds of financial stuff that you are starting to get in your 20s.
Make sure that you have somewhere to organize all of your financial information.
We’ve created a financial organization kit that you can access in our free resources.
Save and Invest as Soon as Possible
For most of us, investing is all about the long game.
The longer you can be in the game, the bigger your wealth will grow.
That’s why it’s important to invest as early as possible.
If you invest $1,000 each year for 35 years at a 7% expected return you will end up with around $140,000 in 35 years. Not bad.
If you started 5 years earlier and did the same thing for 40 years you would end up with around $200,000. An extra $60,000.
If you started at a new job you might have a 401k benefit through your employer. Make sure you know how to take advantage of it!
There are a lot of important factors when it comes to investing. Time might be the biggest.
Start Building Your Credit
If you have student loans you already have started building a credit score.
You can also get a credit card to build up your credit score.
If you plan on making any purchases in the future like buying a house or car that will require credit, it’s good to have a solid credit score.
This will likely result in a lower interest rate and cost you less money.
Additionally, some employers looking up your credit score.
What’s great is all you have to do is open a credit card, use it for your normal expenses, and pay off the balance every month.
You didn’t spend any money on interest charges but you’ve started to show that you are trustworthy with credit.
Take Advantage of Credit Cards, Don’t Let Them Take Advantage of You
We love credit cards.
So many free trips and sweet perks (like airport lounges) we’ve been able to access by using credit cards.
That said…we hate credit card debt.
Keeping a credit card balance and paying interest on your credit card debt is terrible.
The interest rates are so high on most credit cards that you significantly overpaying for your purchase.
If you can’t pay off your credit card balance every month, you shouldn’t be spending the money.
Review Your Finances and Money Goals
Create a budget and forget it, right? No!
That’s why budgets are little overhyped. You actually have to review if you were within your budget.
A budget is just a part of your money management system.
You also need to continually track where you’re spending and review your finances periodically (we do so every 3 months).
Also, you should be setting money goals.
Start with life goals, most involve money.
When do you want to retire? Do you want to buy a house? Do you want children? Maybe pay for their college? Go on a vacation.
It all involves money and you have to plan for those expenses.
Insurance
Insurance is one of the most complicated but least thought about aspects of personal finance.
We definitely didn’t think about it enough in our early 20s.
Some of that is just staying on your parents’ medical plan until you’re 26.
You should take one day and just look at all of your different forms of insurance.
See what you’re covered for and where you’re not covered.
It’s all about balancing how much you have to pay for insurance versus the costs you would pay out of pocket for stuff not covered.
Education vs Career
You may be considering going to college for the first or second time in your 20s.
More education is often thought of as an opportunity to earn more money.
Sometimes that happens and sometimes it doesn’t.
Work experience is often more valuable than we expect.
If you are considering delaying getting a job or leaving a job for education you have to consider a lot of different aspects that may impact future earnings potential.
It’s a good idea to sit down and think about how it all may impact your life.
Final Thoughts
Learning how to manage money in your 20s is tough.
You probably didn’t learn anything about personal finance in high school or college.
It’s good to start with the basics like looking at your spend and creating a budget.
Once you have the basics down, you can start creating plans for paying off debt, investing and paying for your financial goals.
