How to Manage Money in Your 20’s

Being 20 years old is an amazing milestone. As you embrace this new chapter, it’s a great chance to develop good money habits.

Don’t stress; managing your finances doesn’t have to be a struggle. With a few tips and tricks, you can be well on your way to financial success — or at least not living on ramen for the foreseeable future. From maintaining a frugal living to taking a personal loan, here is everything you need to know.

Simple strategies for managing your money

When it comes to planning for retirement or establishing a wealth-building strategy, you don’t need to “just wing it.” There’s plenty of sound advice you can take from experts to help ensure you’re on the right side of money management.

1. Create a budget

Before you can manage your money, you need to know where it’s coming from and where it’s going. Take the time to create a budget and track your expenses. This can be as simple as a spreadsheet or as fancy as a budgeting app. Whatever works for you, just make sure you’re aware of your financial situation.

2. Avoid lifestyle inflation

As you start earning more money with promotions at your job or an extra side hustle, it can be tempting to upgrade your lifestyle. But this can quickly lead to lifestyle inflation, where your expenses increase to match your income.

Avoid the urge to splurge and stick to your budget and financial goals. Instead of spending the extra money you have, consider using it to boost your savings or pay down any outstanding debts, which may help you achieve financial stability even faster.

3. Build an emergency fund

Life is unpredictable and you never know when you might face an unexpected expense — like a car repair or a medical bill. That’s why it’s crucial to have an emergency fund. The general rule of thumb is to have three to six months’ worth of living expenses saved up in your emergency fund. If you’ve properly calculated your budget, you should be able to easily figure out what’s needed for your emergency fund.

4. Start saving for retirement

Retirement is the period in your life when you stop working and begin to enjoy the fruits of your labor. It’s essential to start saving early because the more you save, the more time your money has to grow through compound interest. By starting early, you may not need to save as much each month to reach your retirement goals.

Here’s a quick breakdown of two common retirement plans:

• 401(k): A retirement savings plan offered by many employers allowing you to save and invest a portion of your paycheck before taking your taxes out.
• Individual Retirement Account (IRA): A tax-advantaged account you can open independently if your employer doesn’t offer a 401(k). There are two main types: traditional IRA and Roth IRA, each with benefits that will suit different individuals.

5. Don’t neglect your credit score

Your credit score is like your financial report card. It’s a number that represents your creditworthiness and can impact everything from your ability to get a loan to the interest rate you’ll pay on credit cards. So, it’s essential to keep an eye on it and ensure it stays in good shape.

To maintain a good credit score, you can:

• Pay your bills on time: Late payments can negatively impact your score, so make sure to meet payment deadlines consistently.
• Keep your credit card balances low: A high credit utilization ratio (the percentage of your available credit that you’re using) can hurt your score. Aim to keep it as low as possible every month.
• Limit hard inquiries: Too many hard inquiries (such as when you apply for new credit) can lower your score.

According to the FICO® scoring model, a good credit score generally falls within the range of 670 to 739.

The bottom line

Managing your money in your twenties can be challenging, but it’s also an important step toward financial stability and freedom. By applying excellent money management strategies early, you can set yourself up for success in the long run.

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