Personal Finance in Your 20s Understanding the Basics
Written by: Cora Gold
When you enter adulthood, you quickly learn how expensive life can be. It can be difficult to know how to manage your finances when you’re navigating so many life changes. If you’re in your 20s and interested in upgrading your money management skills, here are the basics of personal finance you should know.
What Is Personal Finance?
Personal finance is all about managing and leveraging your money to achieve your financial goals and build a stable future. People who engage in personal finance have long-term and short-term goals that involve money, like owning a home, buying a car, or retiring early.
Personal finance is a skill many Americans think they should learn in school through a financial literacy curriculum. One poll revealed 88% of adults said their state should require a semester- or year-long financial education course before graduating from high school. While 23 states have implemented a similar program in some educational institutions, online resources can supplement the financial knowledge of those living in areas that don't require it yet.
8 Basics of Personal Finance
Personal finance encompasses several activities, such as investing, budgeting and saving. It’s the best skill you can learn in your 20s.
1. Learn How to Budget
As a finance newbie, the first pillar you must learn is budgeting to live within your means. Dividing your money between your expenses and savings helps you slowly build your way to financial freedom.
In your 20s, you'll likely join the workforce and receive your first paycheck. Before you spend that money, put a small portion toward your contingency or retirement fund. The rest you can split between bills, debts and necessities. Note how much you pay in a budget journal so you can hold yourself accountable for your spending.
2. Build an Emergency Fund
You might have heard people say, “Pay yourself first.” This adage does no relate to buying wants or treating yourself to something luxurious. Instead, it’s about paying your future self by saving — precisely why you must take a small cut from your paycheck before spending it.
Open a high-yield savings account where you can deposit your contingency fund. These savings options offer up to 12 times higher interest rates than the national average of conventional savings in the bank. Plus, they have low risk, so your money is secure.
How much should this fund be? Aim to save enough to cover between three and six months’ worth of expenses. You can use this liquid cash during unexpected situations, such as to pay for rent if you get laid off from your job.
3. Pay off Debts
If you have debts — such as a student loan — take a chunk of what remains from your salary after deducting savings to pay what you owe slowly. Debts accumulate hefty interest you could’ve put toward your savings or retirement fund.
Like budgeting, you can also strategize debt payments, such as consolidating them into one account or using the snowball method. Choose whichever option suits your financial situation.
4. Settle Bills on Time
Pay credit card bills on time. Investopedia reported the average credit card interest is 24.12% as of November 2023. In personal finance, figures can guide you in making sound money decisions.
In this case, where the interest rate is excessive, do your best to pay your credit card bills before or on the dot. Doing so gives your credit score a boost while skipping penalties. The same goes for your other expenses, such as utilities and rent — settle them on time to continue using the services.
5. Sign Up for Bank Loyalty Programs
Many banks reward loyal members with cashback, travel miles and other amazing perks. Some also offer huge discounts if you use a credit card to purchase in their partner shops.
Take advantage of these incentives. Use your credit card on necessities you buy regularly — such as your weekly groceries — to collect reward points. However, remember to limit your spending and pay what you’ve borrowed before the due date. Once you have enough points, ask the bank about special offers or ways you can spend them.
6. Get Insurance
Another smart financial move is to sign up for insurance in your 20s. Age affects insurance premiums, meaning younger people like you get better deals than someone twice your age. Under the Affordable Care Act, there's a 3:1 age ratio that sets 21-year-olds as a baseline for older enrollees.
In a nutshell, older enrollees pay up to three times the standard premium of a 21-year-old. You can find abundant insurance options with the best coverage and most affordable premiums in your 20s, making it the ideal time to invest.
7. Save for Retirement
The perfect time to save for your retirement in IRAs and 401k plans is as soon as you get your first paycheck in your 20s. It's because their interest compounds, making time your best ally in growing your money exponentially. These types of savings are long term, so you can put in a small amount monthly. Your money accrues interest, which then adds to the principal to compound.
8. Invest Your Money
Investing covers a wide range of financial tools, including your retirement plans. You can also try methods like dividend-paying stocks, certificates of deposits and treasury bonds.
You’ll likely hear about investment appetite, which refers to the amount of risk you’re willing to take as an investor. The ones mentioned above are low risk. Options that require high risk tolerance include cryptos, options and hedge funds. Financial advisors are valuable sources of investment information and advice — consider working with one of them if you’re ready to invest.
Master the Basics of Personal Finance
If there’s one thing that can help you master personal finance, it’s self-discipline. Managing your money is a skill you must develop, which you can hone with practice and make it a habit.
Remember to balance your financial lifestyle by budgeting, saving, paying your debts and investing. When you balance YOLO-ing in your 20s with marginal wealth building, you can achieve your financial goals while enjoying one of the best decades of your life.