In a perfect world, your 20s are an exceptionally fun decade. But in reality, many people flail about in their 20s, struggling to define exactly what they want, who they are, and what kind of life they truly want to live.
Money plays an outsize role in that flailing. Too many 20-somethings thoughtlessly chase higher incomes with no clear endgame — and spend every penny along the way, entering their 30s with no financial assets to show for it.
But with some forethought and direction, you can skip most of the mistakes made by your peers. Start with these smart money moves, and you’ll find better footing in every area of your life, not just your finances.
Credit and Debt
Most of us didn’t exactly have sterling financial role models growing up. My parents were better than most, but they still didn’t teach me anything about money. I had to learn on my own, largely the hard way: by making expensive mistakes.
If you carry any unsecured debts, start here.
1. Pay Off Your Credit Card Balances in Full Every Month
Around 41% of all credit card holders fail to pay off their balance in full each month, according to CreditCards.com. And that number actually represents an all-time low, due to lower spending during the COVID-19 pandemic and an abundance of government stimulus checks.
You do not want to carry a credit card balance. Credit cards charge extremely high interest rates, typically ranging from 14% to 25%.
Get serious about paying off your balances for good by using the debt snowball technique. Put all your extra money toward your lowest debt balance, and when you pay that one off, put everything toward the next smallest, and so on. As you pay each balance off, you have more money to put toward the next one — like a snowball getting bigger as it rolls downhill.
If you have to lock your credit cards away in a drawer in the meantime, or even cut them up and throw them away, do it. When you’re in a hole, the first rule is “stop digging.”
2. Pay Off Your Student Loans
If you have student loan debt, you’re not alone. Roughly 7 in 10 college students take on debt to pay for their degrees, according to Student Loan Hero.
The debt snowball method doesn’t just apply to credit card debts. Include your student loans as you knock out your unsecured debts (including any personal loans) one by one.
When you carry unsecured debts, it causes you to think defensively about money. It shrinks your financial goals and vision to just getting out of debt.
Once you pay off your debts, it frees you to think bigger: buying real estate, investing to build wealth and passive income, perhaps even retiring young. More on all of those shortly!
3. Build Excellent Credit
The better your credit, the more doors open up for you.
You pay less in interest for mortgage loans and auto loans. Mortgage lenders charge you fewer points at closing and require a smaller down payment.
Although you can buy a home with bad credit, you end up paying far more for less house.
Which says nothing of starting a business, which you may want to do one day — even if you don’t know it yet. It takes good credit to secure affordable small-business loans.
Paying off your credit card balances and other unsecured debts makes a great start in building credit. Follow these steps to improve your credit score even further.
Safety Nets
Many 20-somethings haven’t lost jobs yet or faced a financial emergency. They still suffer under the delusion that they’re invincible — or at the very least, they don’t spare much thought to protecting against future crises.
4. Build Your Emergency Fund
A financial emergency looms in your future, whether you know it or not.
It could take the form of your employer folding unexpectedly, or an economic downturn hitting your industry hard and forcing layoffs.
Or it could happen due to a health crisis that leaves you with $20,000 in medical bills, or a $3,000 car repair bill, or bailing out your brother’s gambling debt so the mob doesn’t break his legs.
Whatever shape the emergency takes, you probably won’t see it coming. It might hit you tomorrow, or it might not hit for another four years. But it’s coming, and the chaos it causes in your life will depend entirely on how well you prepared for it beforehand.
Start by aiming for just $1,000 in emergency savings, set aside in an untouched savings account at GO2Bank. Then aim for two to six months’ expenses in your emergency fund, depending on how stable and secure your income and expenses are.
The less regular and secure your income or living expenses are, the more you need in your emergency fund.
Once you hit your target, you can stop setting aside money and invest it elsewhere. But you need an emergency fund, so that when unexpected expenses hit, your reaction is “what a bummer” rather than pure panic.
5. Get Appropriate Health Insurance
Everyone needs health insurance. Period.
Not everyone needs outrageously expensive low-deductible health insurance, and if you’re a typical healthy 20-something, you’re probably fine with a combination of a high-deductible health care plan and an HSA from Lively.
Besides, HSAs offer the best tax benefits of any tax-sheltered account in the U.S. You pay no taxes on contributions, no taxes on growth, and no taxes on withdrawals. This means you can use your HSA not just for health expenses, but also as a secondary retirement investing account.
Whatever health insurance plan you choose, make sure you have more than enough savings to cover the deductible. If your job doesn’t offer health insurance, you have plenty of other options to buy health coverage, so no excuses!
Lifestyle Design
Most people live within 50 miles of where they grew up, fall into their jobs, and live a life similar to their parents’.
While there’s nothing inherently wrong with any of that, it also means most people don’t intentionally choose the exact kind of life they want to live.
Start bringing more introspection to your ideal lifestyle, and you’ll find that most of the “identity” questions native to your 20s end up resolving themselves on their own.
6. Design Your Career Around Your Ideal Lifestyle
Your career dictates many aspects of your lifestyle at large: where you live, how many hours you work, which hours you work, the kind of people you associate with, your income, your paid time off, your benefits.
In other words, you can’t separate the two.
Too many 20-somethings fixate on salary rather than thinking holistically about the exact life they want to live. Instead, start with lifestyle design first, then find a career that fits the lifestyle you want.
For example, my family and I spend 10 months each year living overseas and two months in the U.S. visiting family and friends. I prize freedom and flexibility above all else, so I built a series of self-employed income streams.
I own an online software company, invest in real estate, swing trade, and of course write about personal finance and investing for publishers who share my mission of financial education.
All of which I can do from anywhere, on my own schedule.
If you want to live your own uniquely perfect life, intentional lifestyle design comes first, and mapping your career path comes second.
7. Create and Automate Your Budget
Many 20-somethings treat budgeting like a dirty word. When they hear the “B-word,” they think of sacrifice, of delayed gratification, of not getting to do what they want.
Instead, reframe how you think about budgeting: it’s how you’ll build wealth and achieve all your long-term goals, not something your parents nag you about.
What’s your current savings rate? If you don’t know, or if it fluctuates month to month, your budget needs work.
Set aside a half-hour to create a new budget from scratch (this can be done through apps like Tiller). Not only will it identify the leaks in your current budget, but also the opportunities to save and invest more money. Which, after all, is how you build wealth and passive income streams.
With enough passive income, you can cover your living expenses and working becomes optional. But we’re getting ahead of ourselves.
8. Avoid Lifestyle Inflation
When most people get a raise, they immediately find new ways to spend the extra money. They move into a larger home, buy a flashier car, go out to dinner more often, or buy snazzier clothes.
This is precisely why most people never get ahead, and never build much real wealth no matter how much they earn.
It’s called lifestyle inflation, and it’s insidious.
On a recent podcast, I interviewed a father who retired a millionaire at 36, and we covered all the regular talking points like his income (he never earned six figures) and his investments (real estate and index funds). But his real “secret” was simple: he avoided lifestyle inflation.
He and his wife locked in their living expenses and avoided spending more each time one of them got a raise. What started as a modest 15% savings rate ballooned to 30%, 40%, and eventually well over 50%. His investments started producing their own income and compounding on themselves, accelerating his wealth even faster.
You will earn more over time. Avoid spending more, and you’ll build wealth astonishingly fast.
9. Get Smarter About Housing
Too many Americans overspend on housing. Beyond avoiding lifestyle inflation, reframe how you think about housing.
The first question most people ask mortgage lenders is “What’s the most I can borrow?” They then go out and look at houses at the very top of their price range.
Instead, ask “What’s the least I can spend on housing and still be happy?”
Better yet, aim not to spend anything. Find a way to house hack, or explore jobs that offer free housing. Thanks to tactics like these, I haven’t paid a cent in rent for six years.
10. Ingrain the Habit of Ongoing Education
Every single one of the most successful people I know has a voracious appetite for ongoing education.
They pursue new certifications or degrees. They constantly read books and industry publications relevant to their field. This means they know more than their peers and rivals, and inevitably earn promotions or own more profitable businesses.
Build this habit now, while you’re young and have more career opportunities ahead of you.
Subscribe to business and financial newsletters if you work in those fields. Open an account with Audible to listen to books on your commute or during your daily workout. Or better yet, get a library card and consume your books, e-books, and audiobooks for free.
11. Denounce Status Symbols
Housing isn’t the only cost that people aim to spend as much as possible on. Most of us do the same with cars, clothes, and other status symbols that visually display our “success” to others.
The paradox of wealth is that the more you spend on status symbols, the less wealth you actually build.
Rather than putting money into investments that compound over time, most people put their money into depreciating assets like cars, clothes, and gadgets, or momentarily pleasures like dinners out and entertainment.
If you want to build real wealth, make a conscious decision to stop playing that game. End the conspicuous consumption.
Buy an inexpensive used car, or share a car with your spouse if you’re married. Better yet, design your lifestyle so that you can live without a car entirely.
My wife and I have been car-free for two years, and walk and bike everywhere. I don’t miss the time wasted in traffic, the gas station fill-ups, the maintenance costs, the insurance, or any of the rest of it.
All those extra costs add up: the average American spends $9,561 each year on total car ownership costs according to AAA.
Career and Income
Even if you know exactly what you want to do as a career — which many 20-somethings don’t — it usually takes time and effort to achieve.
Your 20s are the perfect decade to focus on creating your ideal career and lifestyle.
12. Shadow as Many Jobs as You Can
When you ask children what they want to be when they grow up, they all give the same few answers like firefighter, police officer, teacher, pro athlete, doctor, or nurse.
Why? Because they don’t know any of the million other jobs available. And you probably don’t either.
When I graduated college, I didn’t know what search engine optimization was, or conversion rate optimization, or any other Internet marketing niches. I didn’t know what loan officers’ or account executives’ jobs involve, or what a PR specialist’s or internal sales executive’s daily routines look like.
I certainly didn’t know anything about lab safety officers or ESG investment advisors or back-end web developers or grant writers or Foreign Service workers, although today I have friends in all of these careers.
When it comes to the millions of career paths you could possibly take, you don’t know what you don’t know. But the more you explore, the better your odds of finding a great fit.
Sit down with every single person you can think of, and ask them about what they do for a living. Ask about what their normal daily routine involves. Then ask them about what their five closest friends do for work, and ask if they would introduce you so you can shadow them for a morning.
Your mission: to get a sense of the daily life in as many careers as you possibly can. Pick your favorite, and pursue it relentlessly.
13. Find a Mentor
All too often, young people think they can conquer the world on their own.
You’re thinking about it the wrong way. Just because you can achieve your goals on your own doesn’t mean you should. By getting help from others, you can get there much, much faster.
Stop trying to reinvent the wheel and get help from a mentor — or better yet, several. They can steer you around common pitfalls that you would have fallen into, can show you shortcuts up the mountain, can introduce you to influential people in your field that can make your dreams a reality.
If you really want to show off how smart you are, swallow your ego and find a mentor. Try MicroMentor.org to connect with volunteer mentors for free, and skip all the mistakes and heartaches along your career path.
14. Learn How to Negotiate
My grandfather taught me “You don’t get what you deserve in life. You get what you negotiate.”
It’s why more assertive and aggressive people earn more money. As an employer myself, I don’t run around volunteering to pay people the absolute most I can afford to pay them. But when they ask for more money, I give it to them — if they’re worth it, of course.
Start by learning how to negotiate a higher salary and benefits. Then start thinking of everything in life as negotiable, from housing prices to hotel prices, and practice negotiating at every opportunity. For example, every time I’ve signed a lease, I’ve negotiated lower rent.
15. Start a Side Business
Side hustles provide more than just money, although the extra income certainly helps.
If you like the idea of starting your own business, start one on the side of your full-time job. You can try out business ideas without risking your day job, see what you like and what you don’t, and just have some fun with a hobby business if you like.
You’ll probably try a few before you find something that clicks; in my mid-20s I started a custom snowboard decal business. It didn’t take off, but I learned some invaluable lessons about entrepreneurship, had fun, and got to write off a trip as a business expense.
Not sure what kind of business to start? Try these side business ideas to get your creative juices flowing.
Investing and Long-Term Goals
The bad news: most 20-somethings don’t know anything about investing.
The good news: you can learn the necessary fundamentals in just a few minutes. In fact, you can earn strong returns with even the most basic grasp of those fundamentals.
16. Decide When You Want to Reach Financial Independence
No one says you have to wait until your 60s to retire. Or, more importantly, to reach financial independence and be able to live on your investment income alone.
Because with enough passive income you can cover your living expenses and quit your job at any age. I know people who retired as young as 30.
It comes down to your income, your savings rate, and your investment returns. Read a quick overview of extreme early retirement to understand exactly what it takes.
But even though early retirement grabs the headlines and attention, everyone I know who’s retired young has gone on to do some other type of work. Many have fun with a hobby business, others work closely with nonprofits or start their own. The difference is that they work entirely on their own terms.
And pursuing financial independence young also comes with many hidden benefits, such as avoiding some of the expenses that hound “normal” middle-class people.
For example, because my family lives entirely on my wife’s income and invests all of mine, and because our net worth has grown quickly as a result, we don’t have to pay for life insurance or long-term disability insurance. If one of us died, the surviving family members would be just fine financially.
Decide when you want to reach financial independence and make your job optional, because it impacts your savings rate and investments.
17. Take Advantage of Matching Retirement Contributions
There aren’t many universal laws when it comes to personal finance and investing, but here’s one: always capitalize on your employer matching contributions.
Some employers offer to match your contributions to a retirement account, such as a 401(k) or SIMPLE IRA. Often they offer to match you dollar for dollar up to a certain percentage of your income, such as 4%, or match you $0.50 for every dollar up to another percentage, such as 8%.
Take them up on the offer — it’s effectively free money.
18. Open a Robo-Advisor Account
You don’t need to become an investing whiz. In fact, unless you’re going to make a career in the financial industry, you’re probably better off not trying to get fancy with picking stocks or trying to time the market.
Instead, outsource your investment management to a robo-advisor. You fill out a questionnaire when you first open an account, and they then propose an investment allocation appropriate for your financial goals and risk tolerance.
You can either approve it or tweak it, and then set up automated recurring transfers into your account. The robo-advisor does all the rest, managing your investments and rebalancing your portfolio periodically.
Robo-advisors cost far less than a human investment advisor if they charge at all. Some of the best robo-advisors charge nothing at all. Try SoFi Invest or Schwab Intelligent Portfolios as excellent free options.
19. Invest Through a Roth IRA
When you open a robo-advisor account, open both a taxable brokerage account and a Roth IRA.
You don’t get the immediate tax deduction when you contribute to a Roth IRA. You get something better, at least for a 20-something: your money compounds tax-free, and you pay no taxes on withdrawals in retirement.
That’s particularly useful for younger adults, both because they will probably owe higher taxes in retirement, and because their money has decades to compound tax-free.
Roth IRAs come with another huge benefit for young people as well: flexibility. In a pinch, you can pull your contributions back out of your Roth IRA, penalty-free and tax-free because you already paid taxes on them.
That means your Roth IRA can double as a secondary emergency fund, and you can even raid it to help with your down payment if you find your dream house. Not that you should, mind you.
Just beware that your Roth IRA won’t help you with retiring young because you can’t withdraw earnings until 59 ½ — at least not without paying a penalty to Uncle Sam. But even if you do plan to retire early, set aside some money in your Roth IRA each year to boost your income in your golden years tax-free.
20. Stick to a Core Investing Strategy
Everyone should have a core investing strategy, and it should be boring. For the average person, a robo-advisor with automated transfers on every payday is sufficient.
If you want to spice things up, start with an indirect real estate investment or two. A few that allow non-accredited investors include Fundrise,Streitwise, and GroundFloor.
Alternatively, if you have a true passion for real estate investing, you can learn the ropes to flip houses or invest in rental properties, but beware it takes far more work, knowledge, and expertise to do properly.
If you insist on getting fancy with picking stocks, day trading, cryptocurrencies, or other high-risk investing strategies, do so only with a small percentage of your investing funds — no more than 10% (and preferably 5%). Consider it “fun money” and don’t go crying if you lose all of it.
As a general rule, keep your investments simple and boring for the best results.
21. Track 3 Numbers Every Month
That which gets measured gets done. So take five minutes each month to measure your financial progress.
You can do that with three simple numbers: your savings rate (covered above), your net worth, and your FIRE ratio.
You probably already know the concept of net worth: the sum total of all your assets, minus your debts and liabilities. I recommend not including your home equity when you calculate your net worth, because you can’t actually use it without selling your home or going into debt.
In fact, you don’t have to “calculate” your net worth at all — you can track it automatically with services like Mint.com or Personal Capital.
Despite the intimidating name, FIRE ratio is also extremely simple. It’s the percentage of your living expenses that you can cover with passive income from investments.
For example, if your investments generate $400 per month in passive income, and you spend $4,000 per month, you have a FIRE ratio of 10%. When your FIRE ratio reaches 100%, working becomes optional, no matter your age.
By tracking these three simple numbers each month, you keep your finances front of mind, and it makes your financial progress tangible.
Final Word
Most young adults don’t get serious about financial literacy until their 30s. Don’t make that mistake.
The earlier you start investing, the more you can rely on compounding rather than cash savings to build wealth. And the earlier you design your perfect life and get on the ideal career path for you, the less time you spend flailing about in a career or lifestyle you fell into by accident.
Invest some time to assess exactly where you want your life to go — and start moving purposefully in that direction.
