If you’re a “younger” millennial and find yourself struggling with your finances in your 20s, pay attention.
There’s no better time to learn about money than when you’re young and broke. The 10 years between 20 and 30 go by fast, and will be full of many important life changes that can shape your overall financial future. Whether it’s financial planning, saving, or investing, the sooner you start, the better off you’ll be.
If you can educate yourself on how to manage the little money you have now, you’ll be better prepared to manage your finances effectively when you earn more and life inevitably gets more complicated.
Lucky for you, today’s technology provides you with a wealth of (free) financial information at your fingertips, including this handy list of expert-approved money lessons to learn on your journey to dirty 30.
9 Things You Should Learn about Money in your 20s
#1: The magic of spending less than you earn
The first financial lesson you should learn is simple enough: spend less than you earn. Most people mess this one up.
At least, Pew Research shows 68% of Americans say they use credit cards and loans to make purchases that they otherwise wouldn’t be able to afford with their income and savings. This leads to more stress in your life, a dependency on debt, and an endless cycle of working to pay off or evade lenders.
Learn to follow a budget well and you’ll easily learn to live within your means. You may even take it a step further in your 20s — save more by living below your means, not just within your paycheck.
“Gain peace of mind that you’re being responsible by setting up guidelines for your spending and savings early in your 20s,” says Dan Andrews, certified financial planner and founder of Well-Rounded Success. The website provides financial guidance geared toward a millennial audience.
If you get those guidelines set early in your life, you’ll likely have an easier time addressing more complicated money topics like homeownership and having kids. If not, a large unexpected bill or the birth of a child could destroy your finances.
#2: Eventually something will go wrong
In the savings hierarchy, your emergency fund should be your first priority.You are bound to run into an emergency eventually.
“I know when you’re a 20-something, you feel invincible, but the fact is, emergencies are still going to arise, it’s not a matter of if, but when,” says Gen Y financial expert and author of The Broke and Beautiful Life Stefanie O’Connell.
The rule of thumb says to set aside 6 to 12 months’ worth of fixed expenses in case of an emergency. You can stash this money in a checking account, savings account, or any of these other options.
If you don’t plan for a financial emergency, you’ll find yourself in a tight spot when an emergency undoubtedly happens. If, for example, you lose your income, a liquid savings buffer might save you from turning to your parents for money or taking on high-interest debt to survive. That’s not an improbable crisis to imagine, as almost half of American households experience volatile income.
“By setting aside money, you can live off this savings while you look for new work, or better yet, have the flexibility to pursue the work you want,” says Andrews.
After the dust settles, you can high-five yourself for handling your crisis on your own.
#3: “YOLO” is a pretty terrible financial strategy
One of the hardest parts of your 20s is learning to think past “today” when making money decisions — especially when everyone seems to want to live in the moment.
Really ask yourself what goals you have for the future: Starting your own business? A family? Now is the time to stop thinking and start planning for how you’ll afford those life milestones when the time arrives.
Make it a habit to plan and save early for these stages before you reach them. When you’re planning, think about what’s most important to you and nearest in your life’s timeline. Don’t forget to consider the time it would take to save for larger expenses.
O’Connell gives the following example: If you decide to start saving for a $50,000 home down payment just two years before you plan to buy a home, you’ll have to save $25,000 a year. That’s tough. But if you think about that milestone money goal from 10 years out, you only have to save $5,000 a year, which is much more manageable.
Not every account has to be for a huge savings goal like a mortgage payment. You can practice the habit of planning ahead with any large purchase you plan to make.
“Create fun savings accounts, like a travel fund or to save up for that Dr. Seuss painting that you really want. These savings accounts motivate you to stash away more money for the financial milestones in your future,” says Andrews.
#4: The key to getting a killer credit score
Don’t get bogged down trying to understand everything about your credit score and why it’s so important right now. Just remember a few key facts so that you don’t mess up your score early and spend the next decade trying to undo the damage.
- Use your credit card, but pay it off in full each month.
- Don’t max it out. In fact, never use more than 30% of your total available limit.
- The best strategy: Put one small bill or recurring purchase (like coffee) on your credit card, and pay it off each month. Use cash for everything else.
If you focus on those things, you should easily avoid derogatory marks on your credit report and quickly build a healthy credit score. Learn more tips to build your credit score here.
#5: One day you will get old and want to retire
Remember how we said it’s hard to think far into the future in your 20s? Well, this is going to be challenging. But it’s crucial to start saving for retirement as early as possible. Your biggest advantage to saving for retirement is your age. The younger you are, the more time you have to take advantage of compound interest on your retirement savings and other investment accounts.
So figure out what retirement savings options your employer offers (typically a 401(k)) and open an account. If your employer offers a match, then that is amazing and don’t miss out — it’s free money.
Contact your employer’s human resources department for help working through your options. That is what they are there for. A great, hands-off option for young savers is a Target Date Fund. Then set up an automatic payroll deposit at least high enough to capture any match your job offers.
Don’t worry about the swings of the stock market. Don’t worry about picking the perfect portfolio. Just put money in your retirement fund as early as possible and get to the complicated stuff later. The point is that you start saving for retirement — not that you become the next Warren Buffett right away.
“Too many young people don’t take advantage of all the benefits they can get at their workplaces. Simply ask your HR department if there’s a match on 401(k) contributions,” says Andrews.
Once you get a good grasp on retirement savings, you can upgrade to more sophisticated investing strategies.
#6: How to be your own “tax guy”
Do your own taxes at least once. The experience will give you a better idea of how the tax system works and can save you an average $273 you’d otherwise spend on tax preparation fees. Many free and low-cost options exist to e-file your taxes, including free filing options found on the IRS website.
“When you do your own taxes it also helps to demystify the process. If you decide to pay for help in the future, you’ll be able to vet your future accountant and hold your own in conversations,” says O’Connell.
She advises young people to take the opportunity to learn about how the tax system works and any tax strategies you can use to save money in the future, like making Roth IRA contributions, tuition payments, or charitable donations.
Another reason to learn now: Your taxes may never be simpler to understand. There may be special circumstances that require you to hire a tax professional when you’re older, like getting married, investing in the stock market, or owning your own business. If you feel like you need professional help, look for a tax preparer since their rates are typically cheaper than hiring a Certified Public Accountant.
#7: When to ignore social media
Don’t get caught up in spending your money to catch up with whatever your other friends are doing. You don’t know what anyone’s financial picture looks like behind all those Instagrammed vacations or a wedding album fit for a princess.
“Your day will come when you make your friends jealous, but that’s not the point. The point is to focus on your financial life to give you the foundation to live your great life,” says Andrews.
He advises 20-somethings to gain resilience while young, because you’ll likely compare your lifestyle to others at every age.
#8: Your debt won’t go away if you ignore it
If you do decide to ignore your debts, you could suffer consequences even worse than a dinged credit score.
Debt collectors can sue you for payment. If you ignore a debt lawsuit, the resulting judgment could result in garnished wages or lost assets.
“You’ve got to become proactive about your debt. It has to go from being something you procrastinate to something you prioritize. And a priority is something you build your life around,” says O’Connell.
O’Connell suggests you change your mindset to think of debt as an emergency that needs to be addressed immediately.
“In moments of crisis we don’t make excuses, we get ruthless because we have to. Excuses like, ‘but it’s a special occasion’ or ‘I can’t give up my vacation’ don’t even cross our minds,” says O’Connell. She adds getting ruthless might mean making some sacrifices and hustling to earn more income, but it’ll be worth it when you’re debt-free.
#9: How and when to negotiate your salary
Remember, the salary you earn at your first real-world job “will serve as the anchor from which you negotiate future raises, making your starting salary, arguably, the most important of your career,” says O’Connell.
That in mind, it’s worth negotiating a bit to get the best deal you can when you’re presented with your first employment offer. Hiring managers and recruiters expect candidates to negotiate; to them, it demonstrates initiative. The experience will also give you an opportunity to educate yourself about negotiation skills and get valuable, real-world practice.
Again, the internet is your friend here. You can learn salary negotiation tactics from numerous online resources, then practice with friends or mentors so you’re ready when a real offer is on the table. One word of warning: Don’t bite off more than you can chew. Remember, you can ask for much more than more money (think: commuter benefits, education credit, etc.).
If you’re asking for a raise with a current employer, consider the average pay raise for salaried employees in 2017 is 3%, according to the Economic Research Institute, a think tank that provides salary survey data to Fortune 500 companies. So asking for a salary hike from $50,000 to $60,000 is pushing it at a 20% pay raise without much experience to justify your ask.
To sum it all up…
Just do your best. Focus on learning these concepts, but don’t beat yourself up. If you stray from your path to financial freedom every now and then, it’s all right. You can’t expect to be a perfect money manager — even accountants have accountants — but if you correct yourself when you make mistakes early on, you’ll be glad you made the effort later on in life.