What if I told you that mastering your money in your 20s could be one of the most rewarding and, dare I say, entertaining experiences of your life? If you get on the path to financial freedom now you’ll end up having more money to spend and enjoy for the rest of your life.
As a 20-something, you’re probably feeling pretty invincible. You’ve got the world by the tail and you’re ready to conquer it. But there’s one thing that’s often overlooked in all the excitement of young adulthood: managing your finances.
First things first, let’s get real about spending habits
You’ve probably heard the phrase “live within your means” a million times, but what does that even mean? It means not spending more money than you make. I know, ground-breaking stuff. But seriously, it’s easier said than done.
Take it from someone who’s been there. In my 20s, living in NYC I’d think nothing of dropping $50 a day on eating out three meals a day. I rarely cooked at home. That’s $1,500 a month down the drain! If I could go back in time, I’d give myself a talking-to and use that money to buy a flat instead. You can still have fun, just make sure you’re saving for your big goals too. I could have had just as much fun spending quite a bit less on eating out.
Because I loved shopping and eating out, I didn’t get serious about saving and investing until I had a more enticing goal than the vague “save for a rainy day.” (Or save for some unknown, very dull-sounding, distant future called “retirement”.) After all, it’s hard to get excited about a goal that is so far into the future you can’t even imagine it. This is why going for big financial milestones might just be the secret to getting and staying motivated around mastering your money in your 20s.
Let’s get started with the basics…
Set a big, audacious goal that excites you
Are you saving up to buy a flat or a house? Or saving so that you can be financially free faster and do whatever you want? Honestly, saving for retirement sounds super dull. But, saving so that you can retire while you are still young and can do more creative or fulfilling work sounds pretty cool! Same with saving so you can tell your boss “I ain’t working here no more!” if you hate your job. That could be super motivating! If you are excited about saving up to buy your first home or apartment, then start with that goal.
If that doesn’t interest you, how about saving up enough that you could tell your boss where to take a hike? Or, if that doesn’t motivate you, how about having enough money that you never need to work again while you are still young enough to actually enjoy life? Until you find a goal worth saving for, unless you are naturally frugal, you will likely spend everything you earn and then some, which is what I did.
Saving for an emergency fund isn’t motivating enough unless you’ve just had an emergency and sorely wish you had saved some money so it wouldn’t be the massive problem it now is. That is why you need a big, hairy audacious savings goal! The bigger and more exciting the better!
Get a grip on your spending without a budget
The first step to mastering your money is to get a grip on your spending habits. I know budgets are boring so I don’t bother doing them. But what you do need is a spending plan, a plan about how you are going to squeeze the maximum joy out of every dollar you earn. To do that, you actually need to know what you are currently doing with your money. So, track your expenses in detail down to the penny for a month to see where your money is really going. Chances are, you’ll be surprised at how much you’re spending on things you don’t even remember buying. (And that aren’t adding much joy to your life.)
It’s a lot easier to change your spending habits when you have a clear picture of what they actually are. You might be shocked to learn that little expenses do add up. The good news is that you don’t have to budget if you hate doing so or can’t be bothered. You do, however, need to make sure you are funding your big savings goals first. And, you need to pay off your credit cards in full every month so you aren’t going into debt. Then, quickly review your credit card statements to ensure the bank hasn’t made a mistake, and presto, no budget is required! If you find you are spending more than you can pay in a month, go back to tracking your expenses down to the penny for the next month. And…
Stop burning down your financial house
If you have a month where you find you can’t pay off your credit card balance in full, this isn’t just a small problem. This is a financial emergency. Your financial house is on fire and you must quickly call in the fire brigade to put that fire out as fast as you can. That means cutting all extraneous expenses that aren’t absolutely necessary. Then, you apply those savings directly toward that debt until you’ve paid it off in full.
The first sign of financial trouble is going into your overdraft or not being able to pay your credit card in full. Act quickly to put this fire out before it burns your financial house to the ground! Credit card debt quickly adds up thanks to the ridiculous interest rates you’ll end up paying. Don’t give your money away to these financial institutions. Keep it for yourself by paying off your credit card in full every month.
Ramp up the savings big time
Forget about the common wisdom to save 10 or 15 percent of your income. That means you’ll be working for 35 to 40 years. That’s fine if you love your job, but what if you don’t? Simply by increasing your savings rate, you’ll be able to set your own retirement date. I know, saving sounds about as exciting as watching grass grow. But having a cash cushion can give you the freedom to make spontaneous purchases without feeling guilty or worried about how you’ll pay for them. It’s a win-win! And, if disaster strikes and you need to fly out to visit an ailing friend, you’ll have the cash on hand. First financial milestone –save $1,000 in your emergency savings account.
Plan for your retirement now
Think about the future now, while you are still young. I’m not saying you need to have everything figured out, but it’s never too early to start planning for retirement. I know, it feels a million years away. But you’ll have to trust me when I say your future self will be grateful you started investing now when you least feel like it. Just start small and make sure you’re contributing the max to a 401(k) to get your company match or IRA. The only way to take advantage of the power of compound interest is to start young. The sooner the better!
Try playing around with Financial Mentor’s free retirement calculator to see how much you should be saving to retire when you want to. This can be an eye-opening experience.
Play the FIRE (Financial Independence Retire Early) Game
And don’t just save any old way. Make it a game and have fun with it! Yes, money can be fun, especially once you can see some real progress. Challenge yourself to save a certain amount each month, and reward yourself when you reach your goal. For example, if you save $500, treat yourself to a nice dinner or a night out with friends. You’ll feel proud of yourself and you’ll have a fun memory to look back on.
Never be so frugal that you forget to have fun and enjoy life. After all, you are only young once. On the other hand, YOLO can backfire if you spend everything you earn and then some. Since you do only live once, why not maximize your fun and spending throughout your life? Save some, spend some. Enjoy life fully by maximizing your spending throughout your life by getting started now. Learn more about how to become financially free in the FIRE course.
Make financial freedom easy by…
Starting small
Even if you can only afford to invest a small amount each month, starting early can have a big impact over time thanks to the power of compound interest. You can increase your contributions as your financial situation improves. Increase your automatic deductions to 75% of every pay raise into your financial freedom fund. By doing this you’ll not only be happier, but wealthier.
Preventing hedonistic adaptation
Remember, if you were happy living as a poor student, why upgrade too quickly? If you can live like a student in your 20s and increase your savings rate to 50 to 70% of your salary, you’ll be on the fast FIRE path. By doing this you could possibly retire in 10 to 15 years on the FIRE plan. Then work becomes entirely optional and you can do what you wish.
Automating your savings
You can set up an automatic transfer from your checking account to your retirement account each month, so you’re investing without having to think about it. This can help you stay on track and avoid spending the money on something else. I use Vanguard for my retirement investments because they have the lowest fees in the industry.
Not sure how to get started? You can pick a one-size fits all account like the Vanguard Life Strategy funds and it is a cinch to set up automatic investing every month.
Every time you get a raise, celebrate with a special treat or occasion and then increase your automatic savings by the amount of your raise. This prevents hedonistic adaptation and will get you to FIRE faster.
Cutting the big expenses
Yes, you can look at your spending habits and see if there are easy areas where you can cut back, such as eating out less or cutting cable TV. Then, immediately transfer the money you save into your financial freedom account or a house deposit savings account by using automatic investing. (I like I bonds for short-term savings like house deposits). But, to really make an impact, the big expenses matter. The three biggest expenses are housing, transportation, and food. If you can reduce these you can probably afford to have the fancy coffees out you want.
Maximizing free money
Take advantage of employer-sponsored retirement plans: If your employer offers a 401(k) or other retirement plan, take advantage of it. You can typically contribute a portion of your paycheck, and your employer may even match some of your contributions. Head to the HR department at your workplace and make sure you are getting the maximum company matching benefit to your 401K plan.
Starting a side hustle
Your 20s are the ideal time to start that side gig. Why? You are young and have lots of energy. You probably don’t have kids yet, which would take up all your spare time. Possibly you have student loans and some debts to pay off and could really use the extra dosh to do so. And, you probably want to buy lots of big expensive things like a car and or a house.
So now is the time to start that passion project in the evenings and weekends while you still have time because once you have munchkins running about, you won’t have any spare time! My kids are 16 and 18 now so I’m finally getting some free time now that they are much more self-sufficient.
If you have a skill or talent that you can monetize, consider starting a side hustle to earn extra income. The extra money you earn can be put toward your retirement savings.
Remember, the sooner you start saving for retirement, the more time you have for your money to grow and compound. By making small changes and focusing on your long-term goals, you can find the money to invest for retirement, even with all of the other expenses you may have.
While mastering your money in your 20s may not sound like the most thrilling experience of your life, it will give you the freedom to live the life you want. And that is indeed thrilling! So, take control of your finances, have some fun with it, and enjoy the journey. Your future self will thank you!
Studying compound interest until you fully appreciate what a big deal it is
What is compound interest? It’s the secret to being a millionaire without breaking a sweat.
Imagine you have $1000 that you put into an investment account that earns a 7% interest rate each year. After the first year, you would have $1,070 ($1,000 x 1.07). If you leave that $1,070 in the account for another year and it continues to earn a 7% interest rate, your money will grow to $1,144.90 ($1,070 x 7%). This is the power of compound interest. You earned over $144 without lifting a finger!
Every year, the interest you earn becomes part of your principal, and you earn interest on the increased amount. Over time, the interest you earn grows larger and larger, and your money multiplies in a self-sustaining cycle. This is why compound interest is often referred to as the “miracle of compounding”. Allegedly, Einstein said that compound interest is the most powerful force in the universe. But, it won’t help you if you don’t use time to your advantage.
Now imagine that you start investing when you’re young in your 20s. Then you keep investing for 30 years or more until you hit your 50s. If you add $850 a month to an 80% equity/20% bond Vanguard Lifestrategy index fund or similar at Fidelity earning at least 7% annual average return, you will likely have $1,000,000 for your early retirement. That million would generate a passive income of $40,000 a year based on the 4% Rule of Thumb. Not the life of the rich and famous but enough to live on if you have also paid off your 30-year mortgage. This is why it’s important to start investing in your 20s, so you can take advantage of the power of compound interest, which needs time to work.
Learning about personal finance and investing
In addition to really getting to grips with compound interest, to get and stay wealthy you’ll need to learn about personal finance and investing. You can start with my FIRE Course if you want the fast track to financial freedom Or, I’d recommend Just Keep Buying by Nick Maggiulli as a good investing primer.
Your 20s are the ideal time to get on the path to financial freedom and learn to master your money. And yes, you can still enjoy life while also getting on a solid financial path. Start by taking these simple steps and then automating your way to success with money. Of course, what’s easy to do is also easy not to do. Don’t let procrastination or ignorance about your finances get in the way of your freedom. Get started now and don’t be afraid to get help or ask for support. No one expects you to know this stuff early in life, but they will later so best to get financially savvy now.
