What Are Smart Money Decisions To Make In My 20s?

Making smart financial decisions in your 20s can help set you up for long-term success. Your 20s are all about finding balance: laying a responsible foundation after graduating from college, enjoying life at the moment, developing your career, expanding your family, and deciding what to spend and save.

Taking control of your finances at a young age – even if you feel cash-strapped in an entry-level job, will make it easier for you to achieve your goals in your 30s and beyond. The right financial choices can help you design the lifestyle you want to live, establish financial stability down the line, build passive income, and unlock financial freedom towards retirement. 

What are Smart Financial Habits to Consider? 

Here are a few financial habits you may want to develop in your 20s: 

1. Create a Budget 

Building a budget is a smart money decision to make in your 20s. Budgets don't have to be associated with time-consuming upkeep and annoying restrictions. Instead, you can view budgets as a tool that allows you to keep more of your income toward your goals and the purchases you actually want to make. If you're struggling with overspending, a budget can help you reel it in and kick the paycheck-to-paycheck cycle.

Don’t just think about your budget in terms of planning for boring necessities. Make sure to include in your budget room for having fun. Being smart with your money just means having a sense of control over how you spend it without creating unnecessary stress down the road. It’s ok to act like a 20 year old and spend money on yourself and explore the things that make you happy!

2. Automate Your Savings 

It's recommended to keep two to six months' worth of expenses in an emergency savings account. Aiming to save your first $1000 is a great place to start. Prioritize an emergency fund and your retirement plan when it comes to your savings goals. 

If your budget allows for it, set up an automatic transfer from your bank account or paycheck to your savings account. That way, you won't even have to think about it. Also, you won't be in danger of accidentally dipping into funds that should be earmarked for savings. 

3. Build a Positive Credit Rating 

Using credit wisely and conservatively is the best way to build a good credit rating. A favorable credit rating is essential when the time comes to buy a home or apply for a business loan.

Once you meet the requirements to obtain your first credit card and find a card that fits your needs, the easiest way to improve your score over time is to regularly use that card and make payments on time. A common practice is to replace regular spending on things like gas, groceries, and other routine purchases from your debit card to your credit card, paying off the balance every month. A healthy ratio for credit card use-only use 30% of the available balance and pay it off each month. This is a great way to improve your credit without creating new spending habits. Be mindful to spend within your means so that you don’t get hit with high interest fees.

4. Get Appropriate Health Insurance 

Everyone needs health insurance. Not everyone needs outrageously expensive low-deductible health insurance, and if you're healthy and in your 20s, you're probably fine with a high-deductible healthcare care plan. 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, check out other available options in the marketplace.

Depending on your state, you may also want to check and see if you're eligible to continue with staying on your parent’s health insurance plan. If your parents are able and ok with the idea, it’s worth exploring whatever savings you can while you’re still young and building your own wealth.

5. Stop Impulse Spending

Impulse spending may seem harmless in the “every now and again” mindset, but it can really add up! Before you buy yourself something, ask yourself whether you actually need it or not. For the things you need, you’ll most likely account for it in your budget planning. When you start cheating on your budget, your bank account balance may come back to haunt you! Focus on buying things you really need for a living first, and build into your budget room for fun spending so as to not hurt your finances in the long run. 

6. Establish an Emergency Fund 

An emergency fund is an insurance fund, but for your finances. It can give you peace of mind that you will be covered in the case of a large unexpected expense, like a car accident or illness. If you are paying your student loan, your emergency fund may be smaller, perhaps $1,000. As you pay off the debt, you'll continue to add that fund until you've six months of living expenses saved. 

Paying Off Student Loan vs. Investing 

Student loans are a financial burden for many people, with over 43 million Americans carrying student loan debt. Paying off student loans first can take some time, but for many borrowers, it can relieve a lot of stress and free up more cash for other goals, including investing. It can also make your life feel a little less complicated. You should consider paying off your student loans if you have high-interest rates, unpredictable cash flow, or you're looking to remove debt from your finances. 

On the other hand, investing could be a better option to explore when you can reasonably expect a return that's higher than your student loan interest rate. While many people want to pay off their student loans as quickly as possible, throwing every extra dollar toward your debt might not always be the best approach. Make sure you balance between paying your student loan and saving some money in your savings account. 

Renting vs Buying a Home 

Buying a home is a huge dream for everyone. Choosing to buy or rent a home, though, is a major decision that affects your financial health, lifestyle and personal goals. The choice you make depends on your lifestyle and financial situation. Both usually require a regular income – so you can afford the payments and associated costs – and may also require a certain degree of effort to maintain. 

Homeownership brings intangible benefits, such as a sense of stability, belonging to a community and pride of ownership. However, you should consider other factors as well when making this decision. For instance, how long do you plan to stay in the area? Typically, the longer you plan to stay in a home, the more financial sense it makes to buy. However, if you have a variety of workstations, home-ownership would not be such a good idea. The final decision is ultimately up to you to know what works best for you and adapt it as your homeownership option. 

What Should My Financial Goals be by the Time I turn 30? 

To reach your lifelong dreams, you need to set financial goals. By setting long-term, mid-term, and short-term financial goals, you'll be one step closer to being financially secure. Also, if you're not working toward anything specific, you're likely to spend more money than you should. Here are some of the financial goals you should make by the time you turn 30: 

• Manage your debt 
• Start saving for retirement
• Get a credit card 
• Get comfortable with investing 

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