Your early 20s are an exciting time filled with new responsibilities and opportunities. While you may feel overwhelmed or unsure about managing your finances, the actions you take today can set the stage for your entire financial future.
Here are 9 smart ways to start building wealth in your early 20s:
1. Create a Budget
The first step is to get a clear picture of where your money is going each month. Track your income and expenses for 1-2 months using a spreadsheet or budgeting app. This will reveal spending leaks and help you allocate funds effectively.
Aim to save 10-20% of your income if possible. Budgeting keeps your spending on track so more money can go toward saving and investing.
2. Build an Emergency Fund
Before investing, build a starter emergency fund with 3-6 months’ worth of living expenses. This provides a financial cushion in case you lose your job or face an unexpected expense like medical bills or car repairs.
Start small if needed – even $500-1000 can prevent relying on credit cards or loans when an emergency strikes. Prioritize this safety net as it prevents debt and helps you sleep easier.
3. Pay Down High Interest Debt
Credit card or loan debt can hold you back from investing and wealth building Make a debt payoff plan to attack high interest balances first while paying minimums on lower rate debt
Consider consolidating multiple balances to simplify payoff. Reducing debt frees up cash flow to divert toward positive wealth building goals.
4. Contribute to a 401(k) or IRA
Retirement may seem ages away in your 20s, but time is your greatest asset. Contribute enough to get any 401(k) match from your employer. If no workplace plan is available, open a Roth IRA and contribute regularly.
Maxing out annual IRA contributions each year gives your investments decades to grow through the power of compound interest.
5. Invest Outside Retirement Accounts
While retirement accounts should be your first priority, any extra funds can be invested in a taxable brokerage account. Consider index funds, blue chip stocks, ETFs or real estate.
Investing early, even small amounts, gives your money decades to compound and grow. Reinvest dividends along the way.
6. Use a High Yield Savings Account
Keep 3-6 months’ expenses in an emergency fund using an online high yield savings account earning over 2% APY. This keeps your money accessible yet earning interest far exceeding brick and mortar bank rates.
7. Establish Good Credit
Having good credit saves you money through lower interest rates on credit cards, loans, and mortgages. Establish credit responsibly in your 20s using one or two cards and always paying balances off in full each month.
Making every payment on time is key, along with keeping credit utilization below 30%. Monitor your credit reports and score regularly.
8. Purchase Renter’s Insurance
Renter’s insurance is crucial protection that’s often overlooked. It covers theft and damage to your belongings for much less than you’d think – often under $20 per month. Without it, you’d have to replace stolen or damaged items out of pocket.
9. Develop Healthy Money Habits
Building wealth isn’t just about how much you earn. It’s the habits you implement around spending, saving, and investing that make the biggest impact.
Avoid lifestyle inflation as your income rises. Continue living like a student for a few years into your career to maximize savings. Establishing healthy habits in your 20s prevents bad money habits down the road.
The actions you take today determine your financial trajectory for years to come. Implementing even a few of these tips will help you build wealth and harness the power of time and compound interest. The sooner you start, the brighter your financial future will be.
Set up an emergency fund
One of the best steps you can take in your 20s is to establish an emergency fund to cover any unexpected expenses that may arise, such as medical bills or car repairs. The money in your emergency fund can help you avoid taking out a loan or carrying a balance on a credit card, which can save you money on interest charges.
When you set up an emergency fund, consider keeping the money in a high-yield savings account, like Marcus by Goldman Sachs High Yield Online Savings or Ally Online Savings Account. These online accounts only allow you withdraw money up to six times a month without penalty, which might help reduce the temptation to withdraw money for non-emergencies.
Experts generally recommend putting three to six months of expenses into an emergency fund, but amid the coronavirus pandemic and high unemployment rates, some financial experts are offering more realistic advice about how much people should try to save. Instead, you should focus on saving as much as you can afford, after covering necessary bills.
Its OK to start with a smaller goal. Saving $20 a week (roughly $3 a day) adds up to $1,000 in a year, which is a good cushion to get you started.
Build a good credit score
Establishing a good credit score is key to qualifying for the best financial products, like credit cards and loans. Plus, the higher your credit score, the better terms youll receive, which can save you thousands of dollars in interest in the long-run (we always recommend you pay your balance on time and in full each month).
One of the catches of building credit is you need to have some credit history in order to qualify for a credit card, but its hard to qualify for a card without any credit history. One option is to become an authorized user on a family member or friends credit card. You could also consider applying for a secured card, which works the same as a regular credit card, but youre required to put down a deposit (typically $200).
There are also a few options that can help you raise your credit score without a credit card, like *Experian Boost®. This is a free feature that lets you link positive payment history for monthly utility, phone and Netflix bills, potentially boosting your FICO® Score.
Once you have a credit card, the easiest way to improve your credit score is to regularly use the card, be mindful to spend within your means, make sure you pay at least the minimum on time every month and pay in full whenever possible.
Check out more tips to improve your credit score.
What I Wish I Knew About Money in My 20s
FAQ
What to do with money in the early 20s?
- Create a budget and stick to it.
- Build a good credit score.
- Set up an emergency fund.
- Start saving for retirement.
- Pay off debt.
- Develop good money habits.
Is it normal to struggle financially in your 20s?
What should I invest my money in in my 20s?
For your long-term goals, stocks are considered one of the best investment options. You can buy stocks through ETFs or mutual funds, but you can also pick individual companies to invest in. You’ll want to thoroughly research any stock before investing and be sure to diversify your holdings.
What should I do with my money as a 22 year old?
Most financial advisors recommend keeping two to six months’ worth of expenses in an emergency savings emergency savings account. Aiming to save your first $1,000 is a great place to start. Prioritize an emergency fund and your retirement plan when it comes to your saving goals.