Your 20s can be one of the best decades of your life. Done well, they can set you up for financial success and peace of mind for the rest of your life. Sadly the reverse is also true – if you don’t manage your money well in your 20s, you could be signing yourself up for decades of financial hardship.
Managing your money well in your 20s doesn’t equate to a life of boredom. Quite the opposite. Once you get a few financial priorities straight and good habits in place, you will soon feel liberated to enjoy your 20s far more than those who are uninterested in their financial development.
Here are 10 things you should do in your 20s to get yourself started on the path to financial success.
1. Create a pinch fund.
If you haven’t already, do whatever it takes to immediately create a stash of money that you can only use for emergencies. This is for those unexpected expenses that usually get put on the credit card and take months (and lots of interest) to pay off.
2. Decide that consumer debt isn’t the way forward for you.
The interest you pay on servicing loans and credit card debt is stealing the opportunity you have to save and invest for your future. Just make the simple decision today that you aren’t going to use debt in your life. No personal loans to buy a car. No furniture on store credit. No holidays on the credit card. Once you get in the habit of saving money each month (instead of having it taken for interest repayments), you will discover how easy it is to pay for things upfront instead of popping everything on the credit card.
3. Decide what you really want.
Many of us want lots of stuff in life – but the truth is we can’t have everything. Take time to decide what will and won’t be your financial priority. Do you want to go to Europe next year? Great, save for it, but you also need to decide what you won’t spend money on. Perhaps you need to spend less on eating out and tighten the belt on your clothes budget.
4. Set yourself a savings goal.
People focus on increasing their earnings as much as possible and that’s great – but don’t neglect to increase your savings rate. The only way to build wealth is to save more than you earn. If you’re still living at home with your parents, why not set the goal to save 50% of your income? Saving a percentage (as opposed to an amount) of your income is a good way to set up your work towards your goal because with each pay rise you will automatically increase your savings rate and decrease the temptation to increase your spending.
5. Sort out your superannuation.
Your retirement may seem far away right now, but your older self will thank you if you take the time to sort out your retirement savings in your 20s. Contributing to your superannuation in your 20s is a tax effective way to save your future. Do your best to contribute as much as you can as early as you can, and choose a fund with low fees.
6. Start investing and use the power of compound interest.
If you don’t have the power of compound interest working for you yet, then you should start as soon as possible. A 20 year-old who invests $5,000 earning 8% interest per year, who then retires at 65, will have $180,000. If this same investment was made at age 40, the investment will only be worth $40,000 at age 65 – because 20 years have been lost for the power of compound interest to work its magic. The rule: invest as much as you can as young as you can. Then let compound interest do the heavy lifting for you.
7. Invest in yourself.
“But what should I invest in?” Good question. That’s why you need to also invest time into yourself and your financial education. Learn about the share market, property and business. It may seem overwhelming at first, but take the time to learn so you know where your money should (and shouldn’t) go. Also, ensure you are investing in your career skills to increase your earning potential. The more skilled and knowledgeable you are, the more you can earn and the more wisely you can invest your savings.
8.Create a will.
This is simple but so important. Sadly, too many people neglect it. Take the time to create a will; it doesn’t have to be too lengthy. It will give you (and your family) peace of mind in case it is sadly and unexpectedly needed.
9. Have a monthly financial check up.
Whether you’re single or have a partner, take the time out once a month for the sole purpose of reviewing your spending for the past month and set a plan for the month ahead. By taking regular stock of what’s happened with your money and deciding the priorities for the month ahead, you’ll posses a true picture of your financial state. Sticking your head in the sand and ignoring the state of your finances won’t make everything better.
10.Hang out with people who are financially smarter than you.
You become like those you hang out with, so make sure you purposely make friends with people who have sound financial wisdom and success. Ask them questions. Observe how they save. Aim to become like them, rather than like your other mates who simply burn through their cash and live on credit.