Managing your finances is an essential life skill you should cultivate. You don’t want to spend the next ten or twenty years worried about money and not being able to enjoy life! You are young, and you have a bright future in front of you. Don’t bring in the “clouds” by being negligent.
The good news is that taking care of your finances is not as complicated as you think. In this article, you’ll learn what you must do now to ensure a healthy financial situation in the coming years. Even for the rest of your life!
Here are the top 5 ways to be smart with money in your 20s:
- Manage your budget.
- Start investing.
- Do your admin work.
- Don’t forget to enjoy your life.
- Prepare for the future.
Manage your Budget
First things first, you need to manage your budget carefully!
Honing the skill of keeping a balanced budget will be extremely valuable for your life. It will make the difference between a constantly-in-debt-stressed-out nightmare to a relaxed and enjoyable life.
There are several points to consider to control your budget.
Make a Debt-repayment Plan
Many people in Canada live in debt.
According to the Bank of Canada: ”The vulnerability associated with elevated household indebtedness […] is significant and has increased over the past year. This vulnerability has built up over the past two decades as a growing share of Canadian households have accumulated high debt levels relative to their incomes.”
This kind of debt is not a situation you want to be in. It is not normal to be in debt, even if it is so common that it may feel like it.
You must dedicate a monthly amount to pay off your debts (student loan, auto loan) in your budget. The higher, the better since you’ll pay less interest. It is worth making sacrifices on other expenses to get back to a healthy situation.
After all, if your body is sick, you won’t say: “I’ll cure it when I get older.” Instead, you do what it takes to enjoy a healthy body as soon as possible—the same needs to happen with your finances.
The second most important financial habit is to save money regularly. But, again, you shouldn’t see that as an option for when your wage will be higher.
There is no reason to delay building savings, even if it is $1 each month. What counts is the habit in itself! You will be able to adjust the amount depending on your income.
Build an Emergency Fund
The first type of saving you should consider creating is an emergency fund. Right now, everything is fine (we hope!). But at some point, you will very likely have to spend a good amount of money to buy, repair, or replace something.
It could be a new computer, a car, a fridge. Those things can break for nothing and without warning. So, you’d better be prepared! Not to mention potential health-related expenses!
Your emergency funds should cover at least 3 to 6 months of essential expenses. If you are a homeowner, you may want to reach 10-12 months given there will be more chances that you will have to repair something. The more possessions (and the more expensive they are), the more savings you want.
How Much to Save Each Month
There are all sorts of advice on the internet regarding this topic.
One common rule is the 50/30/20 popularized the senator Elizabeth Warren. The idea is to use:
- 50% of your income for your bills and mandatory expenses.
- 30% for your “fun” expenses (going out, hairdresser, shopping).
- 20% for your future (savings, investments, learning).
Feel free to set your own rules to fit your situation. For example, it might be more 70/20/10 if your bills are higher, or your income is too small to allow for more savings.
As far as you have clarity about the different “buckets” of expenses, you’ll be good. First, however, see if all these expenses are necessary or if you can cut back on some of them. For example, moving to a less expensive home, or finding a better mobile phone deal, can positively impact your budget.
Be smart with your money now and set yourself up for financial success!
Start Saving for Retirement
We know retirement is far from your preoccupations now. But we remember when a teacher told us in the first year of university to take care of our retirement.
We were laughing.
Well, we’re sorry to tell you that they were right! If you don’t want to regret that later in your life, you should start now. It will build up slowly by compound effect during your career. You’ll be ready when the time to say goodbye to your colleagues comes.
Let’s look at an example.
You are 20, no initial funds, and you start placing $100 each month at 10%. According to this simulation tool, at the age of 67, you will have $1,281,915.
That is not a typo!
If you wait for your 40s to start saving into a retirement fund, you will only have $164,569! We wish that the professor showed us these numbers. We would all have started at that time!
Before investing in anything (or buying the latest NFTs, hoping you will make millions!), go back to the previous section and read it carefully. Then, make sure you have sorted out your savings and debt! This is the highest priority, and we won’t leave you alone with this!
If you are already good with that, what to invest in? Stocks are a popular option, for example. There are many apps to help you invest in stock with various levels of risk. It can be fun to do this, and if you start small and stay within your budget limits, you will learn a lot. If you can get advice from a financial consultant, it will be worth it.
This is a skill to develop, and you will be able to make better decisions with time. With high returns on investments, of course!
Do your Admin Work
Keep your Papers in Order
When we say papers, we mean documents, virtual or not. Make sure you archive and collect all your bills and payment receipts. Get your hands on personal documents such as your birth certificate.
You may still have several documents held by your parents. Or even accounts in their name for you. It is time to take charge of those!
This will depend on your occupation but be sure to do your homework. You don’t want to pay extra because you are late filing your income tax.
The good thing is that you may get a tax refund and other benefits.
You may still be eligible for certain benefits even if you have finished school. Your employer may offer help for supplementary medical coverage, for example. This takes a bit of time to find out what you are eligible for and how to claim your benefits, but this will positively impact your financial health.
Build up your Credit History
Not all loans and credit are negative. First, you want to make sure not to be in debt. But with a balanced budget, you can start using small loans or a credit card that you pay back quickly to build a (positive) credit history. You can start by checking your credit with our partner, TransUnion®.
This will help you down the road when you apply for a larger loan. For example, a mortgage to buy the beautiful house you dream of! Also, if you’re thinking about starting a business, you may need to borrow some funds. Again, showing that you control your personal finances will help your banker give you the “green light” to follow your ambitions.
Clean up your Online Presence
OK, we won’t talk again about what happened the other night—just kidding! But have you checked that no epic pictures remain on a Facebook page or Instagram account?
You probably want them to stay private. For example, you don’t want a questionable photo to appear on the screen of an HR Director when they are assessing if you are a suitable candidate for this high-paying job.
Don’t Forget to Enjoy your Life
We talked about many things to do, even sacrifices. But life is not all about that.
Enjoy Life Without Going Broke
If you are managing your budget correctly, you should be able to have some fun while keeping your finances in shape. With a regular income and the appropriate financial plan, you will soon be out of debt and make savings while keeping a fair share to spend freely.
Live within your Means
To avoid putting yourself into a bad situation, you need to control what you spend. We talked about the 50/30/20 rule, for example, to maintain a balanced budget. They are other rules, but the general idea is not to spend what you don’t have.
Easier said than done when you have a credit card, for example. You may lean on its flexibility and not realize that you are crossing the red line.
Be wary of this when you choose what you will do in your free time. It is a constraint, but it is worth it. A regular check-in with yourself (weekly or each month at least) will help you stay on the right path.
Surround Yourself with People Educated in Personal Finance
If people with no healthy financial habits surround you, it may be more difficult to keep up with your good intentions. Even if we don’t like to admit it, we are influenced by our environment and the people around us.
What about helping your partner or friends by sharing this article so they learn more!
Life is full of surprises, but they are not always pleasant. Having the right insurance will provide some financial security if something happens.
Be sure that you have the mandatory insurances at least. You can and should take extra insurance to help you be safe in case of health issues (we wish you not, but who can predict that?).
Prepare for the Future
It is very difficult to think about the future at your age. We already talked a lot about your retirement, and we know how it sounds. But let’s talk about a nearer future.
Net Worth at 30
It is always good to have some vision of where you are going. Of course, this is true when you take to the road, but in finance, it is as important even if not as visible. You don’t want to be stuck in a financial dead-end!
Take some time to think about where you want to be in your 30s. For example, you should aim to have half of your annual average salary in your 20s as a net worth when you turn 30.
Check your numbers and calculate what you should reach. It will help you have a realistic vision of your net worth evolution and motivate you to be serious about your budget.
Life Insurance at 20?
Again, we are talking about the far future, but you should consider taking life insurance now. Even with a small amount each month, it can pay off later in the form of hundreds of thousands of dollars, according to Investopedia.
BONUS: Invest in Others
If you want to have a bigger impact on the world, you could reduce your 30% of fun to 25% and use the remaining 5% for donations and charities.
Still having fun while helping others is a win-win situation, in our opinion!
You now have all the baseline advice you need to start getting your finances in order in your twenties.
For the last time, please starting investing now, and for the rest of your life. Your future self will thank you when they see a comfortable amount of money in their retirement account.
Don’t forget to share this article with your friends, partner, or colleagues. They might thank you later as well!