If you’re anything like me, you weren’t super worried about money in your 20s. After all, most of us are young and too busy having fun to worry about serious investments or savings. But the truth is, whatever choices you make in your 20s are set to impact the rest of your life. Here are some tips for managing money in your early 20s.
1) Don’t Pay Too Much in Rent
Most of us leave home in our late teens or early 20s, which means we’re out in the big bad world trying to balance bills and everything else. One of the biggest mistakes I’ve seen many of my friends make is paying too much in rent. At the most, rent should be no more than 30% of your total income. Figuring out your max budget for rent is easy: take your after tax income and calculate 30% of it. This is the highest number you can really afford to spend on rent while leaving enough money for groceries, entertainment, electricity and even some money for savings. Ensuring that your rent is a realistic amount of your total income will help ensure that you have left over money to save.
2) Avoid Debt
There’s good debt and there’s bad debt – but the truth is all debt should be avoided or minimised. Some of us find ourselves needing to get a college loan in order to pay our fees – that is something I would consider a good debt because it’s an investment into your future. Likewise a mortgage is a more positive form of debt, so long as you’re sure you can afford the repayments. Things such as credit card debt is something I would consider to be bad debt. I suggest paying your credit card balance off every week or month – but never spending more than you can afford to pay back. I know of too many people who got credit cards too young and overspent, ruining their credit rating and putting them into massive debt at a really young age. Be smart with debt because the choices you make now will effect you for the rest of your life.
3) Start Saving
You’re never too young to begin saving, the sooner you start, the better. Having a good amount of savings will help you for so many reasons: you’ll have more to put towards a home deposit when you reach that stage, you’ll have spare money in case of an emergency, you will have a greater sense of financial security and you can even have your money make money for you. There’s also a great thing called ‘compound interest’ which is when your savings account builds up interest, and over a long period of time this can really snowball your savings.
4) Consider Investing
Investing may seem really intimidating when you haven’t ever tried it before. You can get right into trading stocks and bonds, but if you’re looking for something a little easier, why not consider mutual funds? That’s a type of investment where a portfolio is managed by a professional. Usually there’s a minimum investment amount and you just set it up and forget about it. When you’re in your 20s it means you have at least 40 years until you will be retiring. Why not set up some mutual funds, leave them in for the long run, and watch your money grow? There is a risk with mutual funds so be sure to check out the portfolio performance before investing. If you can find one with around a 10% rate of return or more then that can be a good place to start. Be sure to do your own research, because there is a risk of having a loss or losing all your money. That’s why I suggest diversifying so that you can offset some of this risk.
When you’re in your 20s, you literally have your entire life ahead of you. If you can get on the right track financially now, you’ll reap the benefits for the rest of your life.