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Financial Planning Tips for Your 20s

By Jacqueline DeMarco · July 14, 2022 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Financial Planning Tips for Your 20s

The 20’s can be a really busy, really exciting time, whether you’re finishing school, building a career, getting married, or starting a family. Sometimes all of that and more happens during a single decade. The “more” can be things like traveling, hanging out with friends, and discovering your passions in life, whether that’s protecting the environment or playing acoustic guitar.

Point being—it can be hard to prioritize financial planning when you have that much on your plate. But it’s important not to miss out on this important decade when major financial progress can be made.

Keep reading for more insight into why financial planning in your 20s matters and how to make the most of this time period. You’ll learn:

•   What things you should prepare for in your 20s

•   What steps to take for financial planning for 20-year-olds

•   What financial mistakes to avoid in your 20s.

Why Your 20s Are an Important Time to Start Being Financially Responsible

So, why is financial planning for 20-year-olds so important? Learning to adopt healthy financial habits when young can help create a strong foundation for your financial future. The sooner you master and deploy these habits, the better off you’ll be now and in the long term.

For instance, one important bit of advice for 20-year-olds is to nurture your credit score. Pay attention and help it grow stronger and higher. That can pay off down the road, because people with a solid credit history typically qualify for lower interest rates on loans. You’ll be grateful for this if you decide to take out a mortgage or car loan.

Also, getting a head start on when you start saving for retirement is very beneficial. You’ll have extra years for the interest to compound and your money to grow. Here’s an example for you:

•   Let’s say you start saving at age 25 and put away $10,000 a year for 15 years, and then stop saving. Let’s also say you earn a 6% return on your money. If that money just sits there, earning interest, you’ll have $1,058,912 at age 65.

•   Now let’s say you have a friend who starts saving $10,000 a year at age 35, does so for 30 years, and earns the same 6% return. Your pal will have $838,019 at age 65.

They saved twice as long as you did, but wound up with less money. That’s the beauty of compounding in action. And it can serve as an important incentive to start saving ASAP.

What Are Things That I Should Start Planning for Financially?

Some people get lucky and earn loads of money early in their careers, but for most of us, it takes time to reach financial goals. Your 20s can be a very busy time, and it’s easy to push saving for financial goals off until things feel more stable and you’re earning a higher income.

But if you can buckle down and focus on the money goals that matter now, your financial fitness can benefit greatly. You can develop a financial strategy for achieving the following:

•   Buying a home

•   Retirement

•   Child rearing expenses

•   A child’s college education

•   Emergency fund

•   Paying off student loan debt

•   Paying off credit card debt

These are all important components of good money management and building wealth. They’ll keep you financially stable in your 20s and beyond.

Financial Steps to Take in Your 20s

There’s a lot of financial advice for 20-year-olds out there, but it’s wise to focus on the things you can do to set up a strong financial future.

Let’s take a closer look at how to manage money in your 20s.

Opening Your Own Bank Account

If you’re a 20-something who doesn’t already have a bank account, you’ll want to open one so you have a safe place to save your money while earning interest on savings. You’ll also want a checking account so you can direct-deposit your paychecks, easily pay bills electronically, and have a debit card for daily spending. Having a bank account makes it easier to stay organized and work towards financial goals clearly.

Budgeting Your Expenses

If you’re like many young adults, you may earn a limited income while building your career. Creating and sticking to a budget can be a very helpful move. Alongside budgeting for what are considered your living expenses, you can also add savings goals into your budget. Financial planning in your 20s can be hard to accomplish without a strong budget in place.

There are various ways to learn how to budget as a beginner, like the envelope system or the 50/30/20 rule. You can also find many apps that will help with this task. Checking your account balances is another good step, as it helps you stay in touch with your money and course-correct if you are out of sync with your budget.

Don’t Overspend While Having Fun

The reason it’s so important to add savings goals into a budget is so you can prioritize them over fun spending. Sure, it can be very tempting to spend any extra cash on things like travel, entertainment, and new clothes.

However, being a financially responsible adult involves slowly chipping away at savings goals like retirement or a downpayment for a home. It can be helpful to set aside 10% to 15% of your earnings each month for your savings goals. (Bonus tip: Stash some of that money in an emergency fund; it’s a wise move to have three to six months’ worth of basic living expenses set aside for a rainy day.) You can have that 10% to 15% amount automatically transferred from checking to savings on payday, for instance, so you aren’t tempted to overspend.

Avoiding Credit Card Debt

Credit card debt comes with pricey interest charges and fees which can make it hard to pay it down. As of this writing, the average credit card interest rate on new offers was just a tad under 19%. Think about it: Purchases cost a lot more than they seem to in the moment when you consider that interest getting tacked onto the purchase price. Plus, those high rates can mean that paying only the minimum amount due on your balance will take quite a while to pay off.

Whenever possible, it’s best to avoid taking on credit card debt. Otherwise, the interest charges will just mount. If you do have credit card debt, explore offers for balance transfer cards that give you no or super low interest rates for a period of time so you can hopefully get out of debt. Or consider a lower interest personal loan or talking to a debt counselor at a non-profit like NFCC (National Foundation for Credit Counseling).

Being Smart About Student Loans

If you’re out of school and are paying back student loans, that can certainly take a bite out of your disposable income. Whether you have a federal or private student loan, you can benefit by regularly making extra payments, if possible, so you can pay down your debt faster and spend less on interest.

Still in school? Carefully calculate how much you need to borrow so you don’t wind up taking on more debt than you truly need. The more you borrow, the more you need to pay back and the more interest you’ll owe. Major student loan payments can really make a dent in your budget when you are in your 20s. If the amount you owe seems overwhelming, you might look into options for switching repayment plans or consolidating your loans.

Earning Interest on Your Money

As noted briefly earlier, it’s possible to earn interest on savings by keeping them in a savings account. To earn even more, 20-somethings can turn to high-yield savings accounts which tend to earn more interest than traditional savings accounts do, which is of course a good thing. These accounts also keep your cash liquid, meaning your funds are very accessible.

Or, if you have additional funds available and are comfortable with taking on more risk, you can look into investing in your 20s.

You might also seek professional guidance on managing your money, though there’s likely a cost for working with a financial advisor.

Investing for Retirement Early

It takes decades to save for retirement, so the younger you can start saving, the more time your savings have to grow. Once you enter the working world, if your employer offers a 401(k) plan or a different retirement account type, you may want to go for it; you can really benefit from this kind of tax-advantaged saving. If your employer matches some of your contributions, that’s even better. It’s akin to free money that helps you grow your savings for the future.

Paying Your Bills off on Time

It may seem like a no-brainer that it’s important to pay bills on time. But doing so isn’t just about the joys of punctuality; it’s also a great way to improve your credit score. Paying bills on time is one of the largest components of your credit score, and a solid credit score can help you borrow money in the future (say, when you take out a mortgage) at the best possible rates.

Not sure where your credit score stands? You can pull a free copy of your credit report annually from each of the big three reporting agencies (Equifax, Experian, and TransUnion) to see how you’re doing and report any errors.

Building Your Credit

Speaking of credit scores, it takes time to build a credit history, and you need to take out credit to do so. A credit card is a great place to start. If you can apply for a credit card in your 20s and make payments on it month after month, this can help your credit score grow. Just be sure not to charge more than you can afford to pay off.

Another tip is to keep your credit utilization ratio low; under 30% is good, and under 10% is even better. Here’s an example of how this plays out: If your credit limit is $10,000, a wise move is to avoid carrying a balance of $3,000 (30%) or more on it. Ideally, you can keep that number at $1,000 (10%) or lower.

Open a Free Checking and Savings Account With SoFi

Now you know the basics for smart money management in your 20s. It’s a combination of getting financially savvy, starting to save, and avoiding pitfalls like too much debt. Taking proactive steps today will keep your money in good shape and prepare you to navigate and enjoy the years ahead.

One of the best places to start is simply opening a bank account online with a financial institution that’s all about helping you meet or exceed your goals. SoFi can partner with you to help your money grow faster. Open a Checking and Savings with direct deposit, and you can earn an amazing 1.80% APY while not paying any account fees.

Bank smarter with SoFi.

FAQ

Should a 20-year-old have a financial advisor?

While hiring a financial advisor isn’t necessary, some 20-year-olds may find it valuable. This is especially true if you’re earning a high income and aren’t sure how to best save and invest your money.

Where should I put money in my 20s?

Paying down high-interest credit card debt is a great place to allocate any extra money when you’re in your 20s. After you pay off your credit card debt, you may want to turn your focus to student loan debt. The less interest in your life, the better.

Where should I be financially at 25?

There’s no right answer to this question; each person moves at their own pace. That being said, a good goal at any age is to focus on paying down debt and saving for retirement.


Photo credit: iStock/Wiphop Sathawirawong

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