6 Smart Money Moves to Make in Your 20s

Quick Answer

  • Your 20s are the ideal time to lay the foundation for a lifetime of financial stability.
  • Get on track with these six good money moves for your 20s: Create a budget, invest for retirement, track your credit score, create an emergency fund, pay down debt and set savings goals.
  • Working on your finances now can allow you to meet long-term goals, like securing a mortgage and earning competitive returns on investments.
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Your 20s are a defining decade in your life, and the financial choices you make now can reverberate to impact your long-term trajectory. Becoming intentional about how you're spending your money and starting smart money habits can set you up for long-term success.

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 in retirement. Here are six good money moves to make in your 20s.

1. Create a Budget

Building a budget is a key money move 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 put 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. Being stricter with your cash when money's tight means enjoying more guilt-free splurges overall. Going out for sushi, taking a road trip, buying designer brands or collecting vinyl—whatever your purchase of choice, it'll spark more joy when you're sure you can afford it and still pay your electric bill.

Budgeting apps like Mint or YNAB (You Need a Budget) simplify budgeting by automatically importing transactions and giving you a clear overall picture of your spending.

2. Start Investing for Retirement

Retirement may feel eons away when you're in your 20s, but starting now puts you at an advantage in a few major ways:

  • Contribute less, earn more. More time between you and retirement means more time to contribute to your retirement account. By starting early, you'll be able to invest a lower percentage of your pay and see higher returns as your investments have time to grow. In one example, an investor with 40 years until retirement could save just $232 each month and meet a $1 million retirement goal, assuming an 8.7% rate of return (the average for a retirement account that's evenly split between stocks and bonds, according to data from Vanguard). All else being equal, an investor with only 20 years until retirement would have to save $1,545 each month to reach the same goal.
  • Pick growth assets. Young investors can afford to expose themselves to higher levels of risk because their portfolio has more time to ride out market volatility. Investors with a long time horizon can choose riskier assets that have the potential to result in higher returns. As you approach retirement, you'll gradually shelter your retirement income from loss by switching to safer assets like bonds.
  • Let compound interest roll. Investing early means many more years for your investments to grow exponentially bigger, thanks to the magic of compound interest. Think of compound interest like a snowball barreling down a hill, increasing in size and momentum as time passes. The sooner you start investing, the more time between you and retirement, the more colossal your retirement snowball can become.

The easiest way to start saving for retirement is to automatically defer a portion of each paycheck into your workplace 401(k) if one is offered at your job. If your employer offers to match your contributions, always prioritize contributing at least enough to exhaust it. That's free money toward your retirement.

If your workplace doesn't offer a 401(k), a traditional IRA offers the same benefit of deferring taxes until retirement. Deferring taxes goes a long way when you factor in compounding, and the other advantage is that you'll likely pay taxes at a lower income in retirement.

Opening an IRA through a major brokerage like Schwab, Fidelity or E-Trade is fast and easy. Each of these online brokers allows you to set your preferences to tailor your investments to your risk tolerance automatically.

3. Track Your Credit Score

Add monitoring your credit report and score to your financial routine. Tracking your credit and exploring ways to improve your score can help you access credit you may need down the line, like a mortgage, an auto loan or private student loan, and help you qualify for favorable loan terms.

When you sign up to monitor your credit score for free through Experian, you'll receive alerts about changes to your score and customized suggestions for areas of improvement. You'll see how the most important credit factors, such as your credit utilization and payment history, affect how lenders might view you as a borrower.

4. Establish an Emergency Fund

A flush emergency fund could allow you to weather a crisis such as a large medical bill, a necessary auto or home repair, or a loss of income without derailing your budget. If you don't have emergency savings, you could be at risk of missing bill payments or relying on credit cards or loans in the event that something pops up. That could easily become an entry point into a debt spiral, which is often difficult to recover from.

Experts suggest keeping enough to cover three to six months of living expenses in your emergency fund. But start with a goal that feels attainable for you, such as $500 or $1,000, and build from there. Add to your emergency fund by automatically directing a portion of each paycheck into a high-yield savings account, or funnel a windfall like a tax refund or bonus into your emergency fund.

However you fund it, resist the urge to dip into your savings except in the case of a true emergency. Quickly prioritize replenishing funds you do have to use.

5. Pay Down High-Interest Debt

If you're carrying a balance on a credit card or a personal loan with a high interest rate, it's best to pay it down ASAP. High-interest debt is expensive, and it can stunt your progress toward other financial goals.

Not only does shouldering high-interest debt put a burden on your budget now and cost a lot over time, it also means missing out on investing your money and earning big returns. Or, it might cause you to divert money you'd otherwise use to start saving for a downpayment on a home, where you'd eventually start building equity.

That's why one of the best money moves for your 20s is to aggressively pay down credit card debt and adjust your spending habits to keep your debt levels low.

Start by creating a plan for how you'll get out of debt. Consider debt repayment strategies like the debt avalanche method, debt snowball method and debt payoff gamification. If money's tight, look at strategies tailored to paying down debt on a low income.

6. Create Savings Goals

Start creating savings goals in your 20s outside of your retirement and emergency savings. Then, watch what you can accomplish by contributing a little money each week or month toward your goal.

For example, you might save to make a down payment on a house, prepare to have children, continue your education, go on your dream vacation or pay for a wedding.

One way to save for a future goal is to use sinking funds. You can think of sinking funds as a financial choose-your-own adventure. Sinking fund aficionados hack their budget into a warehouse of funds for future expenses, both practical and fun.

Some budgeters like to use cash envelopes to hold their sinking funds, while many simply organize their funds through budgeting apps like YNAB and Mvelopes, which are modern takes on the classic envelope budgeting system. If you won't need the money for a while, you can also earn passive income on your savings.

Build Good Money Habits Now, Benefit for Life

Establishing good financial habits in your 20s will not only help your money go farther now, but the positive effects include tangible long-term returns: a higher 401(k) balance, more spending power and savings to cushion whatever lies ahead.

No less important, implementing good money moves in your 20s means carrying the confidence of a seasoned budgeter, the security of a healthy emergency fund and financial prowess into your 30s and beyond.

On top of monitoring your credit report and score, you can also get credit for the bills you already pay. Experian Boost is a tool that gives you credit for eligible streaming, cellphone and utility bills. Users who see a score lift earn an increase of 13 points on average.

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