As someone currently in my 20s, I can attest that managing and growing my money is an ongoing work in progress. There is less job security. Students are graduating with obscene levels of debt. And to make matters worse, we never learned basics of money management.
In June 2015, I graduated with $50,000 of student loans. From then until now, I taught myself how to budget, where to invest, and how to plan for the future - all the while aggressively paying down my loans on a legal aid salary. I’ve narrowed down the ten key things that every 20-something needs to know, so they hopefully don’t repeat the financial mistakes that I made.
- Create a Realistic Budget. This is the single most important tool to financial success. Determine your fixed expenses and variable expenses. Subtract that figure from your net earnings. Allocate the remainder towards your financial goals.
- Build an Emergency Fund. You should be able to cover 3 - 6 months worth of expenses. If you lose your job, your car unexpectedly breaks down or you have to purchase a last-minute flight to see an ailing relative, trust me, you do not want to add “financial anxiety” to the list of things that you already dealing with. Plan for the unexpected.
- Park short-term savings in a high-interest savings account. Do not leave your savings in your chequing account. There are multiple reasons for this, but the main one is that your money won’t grow (or even outpace inflation). If you’re saving for a new car, a down-payment, or even your Emergency Fund, transfer that money into an account that will actually earn you a little bit of money through the interest. Online banks tend to offer the highest interest rates, mostly because they have less overhead expenses.
- Start saving for retirement. The best time to start was yesterday. The second best time to start is now. Ultimately, the type of investment vehicle you choose is much less important than when you start investing and how much you contribute. Start allocating a portion of each paycheque (ideally 15–20%) to your retirement and let compound interest work its magic. When you’re in your 20s, time is your best friend.
- Pay off your debt. Unless you have no choice, never pay the minimum amount. Do you really want to pay unnecessary additional interest on your principal amount? Instead, trim down your budget and throw as much money as you can towards your loans. If you have multiple forms of debt, concentrate on one at a time. There is no hard and fast rule as to which loan you should pay off first. Start with the one that bugs you the most.
- Adopt a frugal lifestyle. Being frugal does not mean you have to be cheap. It just means getting the most value out of the products that you decide to purchase. Figure out the things that bring you the most joy, and eliminate spending on everything else. When you narrow down your ‘wants’ to a few things, you will waste a lot less money.
- Get off the “Keeping Up with the Joneses” treadmill. Avoid the comparison game. Don’t succumb to the notion that expensive cars, clothes, gadgets and houses will bring you lasting joy. Yes, you may experience a temporary peak in happiness, but your mood will level out within a matter of months. The sooner you realize that the treadmill never stops, the quicker you can make the decision to get off.
- Read a personal finance book. Raising your financial literacy has a 100% return on investment (ROI). Spend $20 and learn how to budget, invest and save for the future. I recommend starting with The Millionaire Next Door.
- Learn to say no. This is the hardest of them all. Peer pressure is unavoidable, so I recommend strategically choosing which events you are willing to spend money on and which ones you feel okay declining. You can also recommend cheaper alternatives, such as picnics, coffee dates or a night-in with a movie and some wine.
- Learn about your company’s retirement plan. There’s a chance that your company offers some type of a retirement plan, most commonly in the form of a matching contribution plan. Take advantage of this. Never turn down free money.
There is no one-size fits all solution when it comes to money management, but it does, universally, require patience, discipline and consistency. If you don’t follow the above tips, I ask that you leave with knowing one thing: Every purchase is a trade-off, saying yes to one thing means saying no to something else. Figure out what you want now - wait to buy the rest later.