Most people in their 20s are earning money for the first time and have full control over how they spend it. Many people at this stage are paying bills to their parents while attending university and aren’t fully aware of how they spend. As soon as you graduate and start your career, you’re suddenly paying all the bills. It’s a big step for a lot of people.
Building good financial habits can make life easier later on. You don’t have to have everything figured out in your 20s, but how you spend your money in this decade can have a big impact on your future. Your goal should be to create a financial system you can monitor and control to make wise financial decisions.
Know Where Your Money Is Actually Going
Start with tracking expenses to see where your money is going. Many people know how much they make, but few have a clear idea of how they spend it each year, let alone each month. Tracking your expenses helps you see where your money goes, starting with fixed expenses (e.g., rent, health insurance, car loan) and then flexible expenses.
Many people spend more than they realize, especially when smaller purchases add up over time. Start by listing your fixed monthly expenses, such as rent, insurance, phone service, and other recurring bills.
Then look at your variable spending and group it into categories like groceries, transportation, dining out, and entertainment. Breaking your spending down this way gives you a more accurate picture of where your money is going and makes it easier to spot areas where your habits may have changed without you noticing.
Digital tools can be enough to keep track of your finances when your situation is relatively simple. Spreadsheets and budgeting apps, for example, can help you organize income, expenses, and recurring costs in one place.
As your finances become more complex, you may also turn to an AI financial advisor to get a clearer picture of your current situation, explore different financial scenarios, and consider how the choices you make today could affect your longer-term goals.
Build a Cash Buffer Before You Need It
An unexpected expense in the form of a car repair, medical bill, broken laptop, or even a move can upset an already stressed budget. This is especially true for those early in their careers who haven’t yet had time to grow their income.
Building an emergency fund helps to manage unexpected expenses and their impact on your monthly spending. You don’t need to save several months’ worth of expenses at once, and even a small amount set aside for emergencies is better than nothing.
Consistency matters far more than trying to save a lot of cash at once. How much you can afford to save each month determines the size of your cash reserve. Even a small amount can go a long way, and you can always add more later.
Understand Your Debt Instead of Ignoring It
Debt is much easier to manage when you have all the information about the debts you owe. Therefore, make a simple list of your outstanding debt, including the total amount, interest rate, and repayment term for each. Then decide how you want to pay off the different debts, i.e., in order of highest interest rate or otherwise.
Decide whether to focus more on higher-interest debt or pay down lower-interest debt as aggressively as possible. Interest can add a significant amount to the total amount repaid over time.
At the same time, however, avoid the other extreme: refinancing loans with long repayment periods just to lower your monthly payment. When you do refinance, make sure you have enough savings to cover unexpected expenses before you can pay off the loan.
Start Saving for Long-Term Goals Earlier Than Feels Necessary
Even if retirement seems miles away (for example, you’re in your 20s and focused on paying off debt, saving for a down payment on a house, or financing travel), think about how starting to save for retirement now will let your money grow over time.
Look into the retirement savings plan your employer offers. Learn what percentage of your salary your employer will contribute, what investment options are available, and consider contributing as much as possible.
Saving for the long term doesn’t have to start with a large portion of your income. Start with an amount you can maintain, then work to increase it over time.
Be Careful About Lifestyle Inflation
Your spending can easily increase as your earnings do. You may see big increases in spending on apartments, dining, and travel. Clearly, having more money is not automatically good for your finances—you must plan carefully how to use your extra money.
After you receive a raise, you can choose to spend it on additional current expenses such as travel, dining out, clothes, etc., or direct some of it toward future goals such as retirement, buying a home, and paying for your children’s education.
When you earn more, it’s smart to allocate that increase to instant gratification and to building your financial future in the most meaningful way possible. Just make sure you aren’t immediately throwing that cash at an upgraded lifestyle.
Review Your Finances as Your Life Changes
By 28, your financial priorities may be vastly different from what they were at 22. Perhaps you’ll change jobs, relocate to a new city, get married, go back to school, or decide to purchase a home—to name just a few possibilities.
A financial plan is something to refer back to over time. Your priorities at 22 will most likely change by 28. For this reason, it is best to review your financial situation for your income, for your spending, for your savings, and for your goals periodically, especially after major life changes.
By establishing these basic money management habits in your 20s, you will be in a much better position to make whatever financial decisions you need to when larger money issues arise later in life.
