5 Steps for Financial Success in Your 20s
By: Bill Kirkpatrick
Tags: Investing, Saving Money, Personal Finance, Financial Freedom, Money Management

The steps to having financial success in your 20s are not only attainable but are also not very difficult to achieve.

Photo by Serpstat from Pexels

But if you are like me, there was one major setback we all started with.

Back in high school and even in college there was one topic that was rarely if ever even addressed. And that was anything to do with your personal finances and how to effectively manage them.

So, it’s not surprising to see so many young adults are forced to learn some of these topics on managing their money, only after they have already made some very common mistakes.

When this happens, you end up dealing with financial anxiety and the unknown consequences throughout your 20s and into your 30s until you can finally get control of them.

Following these 5 steps will keep you on the right track to financial success in your 20s, so you can avoid those common pitfalls people make.

Step 1 > Spend Less Than You Earn

This should go without saying, but one thing’s for certain. If you are spending more money each and every month than what you are earning, there is absolutely no way you are going to be able to build wealth.

It doesn’t matter if you are just starting out in the workplace making $35,000 per year, or if you are parents of 3 with a combined income of $250,000 per year.

In either case, if you are spending just $1,000 more each year than what you’ve earned, you are simply not going to improve on your financial goals.

Getting your spending habits under control is equally important (if not more) as earning more money.

And if you do not start when you are young, this will just make your path towards financial independence a longer struggle.

Worry less about how much you earn until you have a solid grasp on how much you are spending and how to control your spending habits.

You can always increase your earnings, whether through working an additional part-time job, having a side-hustle (or two), getting a raise at work, or working additional hours.

But if you keep on spending more, none of that extra income matters.

To start improving your spending habits you first need to know exactly how much you are spending every day of the month.

It is essential to know what your expenses are, so you can figure out where to start cutting back.

A great way to do this is by having a budget. Seeing everything written down can be quite eye-opening, especially when you’ve been racking your brain trying to figure out where all the money’s been going!

I like using a spreadsheet (like this simple one) that I can fill out on my computer or device. One that can be completed every month so I can refer back to previous months and quickly find where I may have gotten sidetracked with my spending.

I also like having redundancy, by using free budgeting or investing apps. There are many to choose from, but I like Personal Capital and Empower.

Both of these apps are fantastic, and they allow you to sync information with multiple users so you and your significant other can always stay on top of your spending.

There’s really no excuse for not knowing exactly how much you are spending and on what.

Once you have this down and have cut your spending, you can concentrate on putting that extra money to work for you.

That may involve paying down debt you have incurred, building the down payment for a home, or adding to your retirement savings.

But before you can effectively do any of those, you need to make sure you have the next step taken care of.

Step 2 > Stay Out of Credit Card Debt

It is very common for people in their 20s to have student loan debt, but did you realize that more have a bigger problem with credit card debt. Combining the two and you could really have a financial disaster waiting to happen.

If you happen to get stuck having both, which could average $35K and you could feel like there is no end in sight. Usually while in your 20s, this is the period when you are just starting your career and your income is often at its lowest point. Statistically speaking, if you’re 25–30 years old you are averaging around $40K per year.

This would mean that your yearly income is nearly matching your debt just from these two factors. That can be very overwhelming, and difficult to get imagine getting out from under.

If you happen to be stuck in this category, then you need to make some serious changes quickly.

If you carry over credit card debt every month, you are simply adding to the problem due to the high-interest charges you will incur. And if all you are paying is the minimum payment due, it makes it nearly impossible to ever pay down the total amount.

Carrying credit card debt is like shooting yourself in the foot in regards to building wealth.

The monthly payment you are making could be used to build your investments, instead of causing you to keep treading water not getting anywhere.

So, if this is you, take the steps to eradicate your credit card debt as quickly as possible.

Once you have, then you can go to the next step and start building your emergency fund.

Step 3 > Build an Emergency Fund

What will you do if your car breaks down today and the mechanic tells you it will cost you $1,500 for the repairs?

Will you simply grab your credit card and add to your debt? Or will you have the extra money in an Emergency Fund for just these types of issues?

If you are like the average American adult between 18–34 you are lucky if you have a savings account with $1,000 in it. This is not even enough to cover a repair that is quite small in most regards.

Understandably, most people in their 20s are battling to pay down their student loan debt and build up enough for a down payment on a home.

But realize when you build up an emergency fund to cover those types of issues that may come up, you can avoid getting into the credit card debt trap. And then you will be able to add more money to your student loan debt or home loan down payment savings.

How much should you have in your emergency fund?

Having at least 3 months of your expenses saved, especially in your 20s, is a great amount to start with. This way if anything unexpected comes up, you won’t have to go further into debt to cover it.

I know you’re probably asking how in the world am I going to save up 3 months of my expenses while still paying down my other debt and saving for a house. Well, refer back to Step 1.

Start spending less, cutting back on things that are completely unnecessary, and slowly build your emergency fund.

It might take you many months of doing this, but if you are diligent and can cut even $200 from your monthly expenditures, you will have $2,400 by the end of the year. I would recommend trying to even double that, so you have closer to $5K.

Once you are at this point you can easily move to step 4 and start investing for your future.

Step 4 > Start Investing Early and Consistently

One of the key steps to financial success in your 20s is to start investing, early and consistently.

Everyone seems to know this and understand the idea, but so many people do not actually get started with investing until later in their 20s or even into their 30s.

Thinking about retirement seems to be what most people relate to the idea of investing with.

While in their early 20s many simply feel they have the rest of their lives to worry about retirement, not realizing how delaying this decision can be a very crucial mistake.

Let’s look at some numbers and understand the power of compound interest to see how delaying the start of an investment plan can negatively affect your earnings over the long term.

For example, starting at the age of 25 you begin with an investment of $100 per month in the stock market. If you never change your contribution, by the time you reach the normal retirement age of 65, you will have a nice amount of $187,000 (assuming the average annual market rate of return at 6%; although the historic rate is 10%, it is recommended to use 6% with the understanding there will be up years and down years in the Stock Market).

But what if you had started 5 years earlier, at 20?

With the same criteria, your money would have increased to a total of $257,000!

With only $6,000 more invested, you will have accumulated an additional $70,000! That is quite a substantial difference!

Now, using the historic rate of 10%, the numbers would look more like this:

Starting at 20, you would have a nest egg of $870,000!

Waiting till you’re 25 you would end up with only $535,000! That is huge!

Do you really want to wait?

Is not worrying about retirement when you’re 20, truly a financially smart decision?

The power of compound interest is an amazing thing, for sure. The longer you allow it to work for you, the much better off you will be in the end.

The easiest way to get started with investing is either through an employer-matched 401k or Roth IRA. And starting with our example amount of $100 per month is fine, to begin with. But ultimately you will want to slowly increase your contributions in line with what your future earnings become.

If you are only 25 and you are earning $40,000, then a $100 per month contribution will be okay. But by the time you are 35 and you are hopefully earning at least double that, around $80,000 then you should have incrementally raised your contribution amount proportionately, to at least $200 per month, if not more.

Following this simple plan will result in a huge snowball effect of growth to your retirement account.

So, start investing early, make it automatic and continue to invest consistently allowing for the growth to build.

Beginning to invest in your early 20s will have huge benefits later in life.

Step 5 > Live Within Your Means

It is quite common that we compare our lives to others, especially to those who have more than we do. But when we are trying to actively take steps for our financial success, especially in our 20s, this can be devastating.

Wanting more than we have always seems to be a huge issue. You get a raise, you move into a more expensive place or buy a nicer car or go on a vacation. All of which you would not have done otherwise.

Each of these may seem wonderful and exciting to have. But they are all short-lived.

Just these few things alone can set you back financially, all because you were not living within your means.

Remember what your financial goals are.

They are YOUR goals, not anyone else’s. So, fight the urge and do not compare what you have, or do not have, with others.

When you get a raise, do not go out and purchase a new car. Instead, put the extra earnings towards your investments, instead.

Using the information from Step 4, even a small amount added to your retirement account can result in a huge swing in gains.

So, if you can add an additional $50–100 per month, do it. It will pay off in the end. And that is so much nicer than haphazardly spending on something that you did not truly need at the time.

Final Thoughts

When you understand the basics of managing your money, taking the necessary steps for financial success in your 20s seems to fall right into place.

There is really no mystery to any of this. But since most of us were never taught anything about financial planning or debt avoidance, or anything else to do with money management, it’s easy to understand how an overwhelming majority of people in their 20s start off heading in the wrong direction.

Hopefully, you can change that. Follow these steps and get control of your money.

Share the information you’ve learned with your friends and family who most likely are in the same boat.

Let’s make it a goal for all of us to live a financially successful life.

What do you think of this list? What do you need to change so you can have success with your finances?