How To Set Yourself Up For Financial Success In Your 20s
In your 20s, you may be getting out on your own for the first time, securing your first grown-up job, dealing with your fair share of heartbreak, paying your own bills, and discovering new things about yourself. Your 20s are also the best time to start good habits to set yourself up for future financial success. To that end, here are nine things everyone in their 20s should be doing to set themselves up financially.
Map Out Your Goals
To set yourself up for financial success, the first step is defining what that looks like. Here are some examples of what financial success might look like to different people:
Reaching a specified income level;
Owning a home;
Never having to report to a boss;
Retiring by age 60;
Reaching a level of financial independence where you can work because you want to, not because you have to;
Owning a car or art collection;
Becoming a millionaire by a specific age; and
Vacationing a specified number of months per year.
Financial success looks a little different to everyone. So, think through your priorities, quantify those goals, and set a timeframe you’d like to achieve those goals by. Being able to envision the goals you’re working toward will make taking small steps toward them much easier.
Build An Emergency Fund
Before investing for the future, it’s critical to ensure that you’re taken care of today. Without a sufficient emergency fund, the best laid plans can be derailed by unexpected expenses. Your emergency fund should be based on your average fixed expenses per month and your income. Let’s say your income is reliably $7,000 per month and your expenses are consistently $5,000 per month. In that case, you would want to have a minimum of three months of expenses in reserve, which would be $15,000.
If you have inconsistent or varying income, your emergency reserves should typically be higher than that of someone with a consistent W-2 salary. Let’s say your income can range between $1,000 and $15,000 per month but you have $5,000 in expenses per month. Your emergency reserve should be at least six months of expenses, or $30,000.
Budget
In your 20s, your income is typically rising each year. This is the time to build good habits around budgeting. To keep a budget, it doesn’t require the kind of work some people think. You don’t need to enter every single expense into a spreadsheet and track expenses daily. You will want to look back on your typical spending and break things into categories, such as:
Rent
Utilities
Gas
Subscriptions
Groceries
Fun/entertainment
Eating out
Shopping
Vacations/trips
Keeping these categories in mind will help prevent overspending. With a budget, if you’re deciding between cooking at home and eating out but you remember that you’ve already spent the amount you allocated toward eating out this month, you may choose to cook the food you have.
Once you have this framework, it’s time to assess how you can save your excess income toward your financial goals. The easiest way to save for those goals is to automate savings, whether that’s to a retirement plan or to an investment account.
Think Through Major Purchases
If major purchases require taking on debt or dipping into your emergency reserves, think critically about how that will impact your long-term goals. Reassess the budget to ensure you still have room to save and rebuild the emergency reserves if necessary.
Advance Your Career
Many organizations, including the Economic Policy Institute, have observed that the typical worker’s pay increases have not matched productivity increases. Largely, that increase in productivity is not passed on to workers’ wages.
Since companies are not defaulting to pass the bounty to workers, it’s critical to advocate for yourself. When you receive a job offer, negotiate your salary. In performance reviews, request feedback and specific metrics to hit. When you hit all your metrics, ask if there is an open door to a raise or promotion. If there’s no chance for career or salary advancement, consider making a change.
According to Pew Research Center, staying in the same role can sometimes lead to a decline in inflation-adjusted earnings. Sometimes, it’s necessary to switch jobs to get the real increase in wages you’re seeking. In 2022, workers saw an average of a 9.7% increases in inflation-adjusted wages by switching jobs, compared with a 1.7% decrease for staying with the same employer.
If neither of these options yield the results you’re seeking, consider furthering your education through grad school or other vocational training. I have a lot of friends who opted to return to school in their mid-to-late 20s to advance their career opportunities.
Use Tax Advantages
Depending on your future goals, you could have the ability to grow your money on a tax-deferred basis. The easiest example of this is a retirement savings goal. If your goal is to save for retirement, you should aim to maximize your tax-advantaged retirement accounts like 401(k)s, IRAs, and other plans before starting to save in after-tax sources.
Be Properly Insured
The purpose of insurance is to finance an unexpected and costly circumstance. Since many people in their 20s don’t have massive amounts of wealth built up yet, insurance can reduce the risk of one event leading to financial ruin. Sufficient health insurance and car insurance coverage are typically going to be most important to those in their 20s. People with kids should also consider life insurance.
Take Breaks
If you completely burn out on the world of work before your 20s are through, you’re no good to yourself or any company. Taking breaks, enjoying your life, and going on vacation can set you up for more success than the immediate cost sets you back.
Use Evidence-Based Investing
Research shows that stock picking, even among expert analysts, has a terrible track record compared with index funds, per a CNBC report. In spite of this, I see so many individual investors picking individual stocks in their investment portfolios. While stock picking does have entertainment value, it decreases your risk-adjusted expected returns. If you’re investing for the long run, consider sticking to a diversified portfolio.
Conclusion
If you put the right systems in place today, you could set yourself up to meet your future financial goals with success. If you need support with your personal financial picture, consider consulting a qualified financial professional.
This article was originally published by me on Forbes.
This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-6573865.1 (4/24)(Exp. 4/26)
