Getting your financial life started in your 20’s can feel scary, but it doesn’t need to be. The biggest challenge you’re likely to face in this decade is, frankly, how boring financial planning and building can be.
Here at Planswell, many of our clients ask us: “What should I be doing with my money right now?” It’s an excellent question, and it’s important to remember that every financial situation is unique.
We’ve organized a series of advice that can help you make the smartest money moves throughout your life, that Future You will seriously be thankful for.
Keep in mind that although the advice is organized by decade – money management is about where you are going, not where you are at the current moment in time. Don’t panic if you and your money experiences don’t exactly fit on this timeline.
Welcome to your twenties – the infamous decade of “adulting.” You may not feel like you have much to put towards your financial goals because you are just starting out. Your career is in its early stages, and you’re somewhat new to having financial independence.
You may not be sure to start, but at this point in your life, your finances are the simplest they will ever be.
So where do you start? And then what? Here are six smart money moves to make in your twenties.
First things first, sit down and figure out how much money you have coming in and how much is being spent. In your twenties, it’s common to have smaller paycheques, so it’s essential that you keep track.
Figure out how much you can contribute to your goals by putting together a budget. You can create a realistic spending plan using our interactive budget calculator. This will be the most simple, yet most effective tool to being financially stable.
Living within your means is a skill that many learn the hard way. To ensure that you save for long and short-term goals, while developing positive money skills and habits, make sure you’re not living paycheque to paycheque.
Being in debt has become such a standard way of living that as we grow older, our urgency to pay off our debts, including student loans, credit cards and personal loans, decreases significantly. But the truth of the matter is that the money you need to pay down your debts will hold you back from reaching other goals.
You may think that you’ll make bigger payments as your income grows, but as you mature, other commitments and opportunities will come up. Ultimately, dealing with your debt in your twenties is one of the smartest money moves you can make. That way, you’ll start your thirties with a clean slate.Be sure to create a plan to tackle any credit card debt that you may have first. With an interest rate of 20% being fairly common, it’s the most expensive type of debt there is. It can end up costing you thousands of wasted money, solely in interest. Known as “snowballing”, you move the entire payment (minimum + extra cash) to the next highest-interest rate debt once you’ve paid off the first debt. Continue this until all debt is paid off.
In your life, it’s not a question of if you’ll need an emergency fund, but when. Stashing away somewhere between three and six month’s worth of take-home pay is the smartest way to prepare for an emergency. This protects you from taking on unnecessary debt to account for things such as unexpected job loss, car repairs, or even something like vet bills.Having an emergency fund can make the difference between just a bad day and a total financial disaster. And just in case you’re thinking it, no, this is not what credit cards are for. Paying 20% interest on top of a surprise expense is just too expensive.
Your most valuable asset, especially when you’re in the early stages of your career with many more years of life and work ahead of you, is your income earning power. If something happens to you that prevents you from working, critical and disability insurance replaces at least some of your income.
An emergency fund may be able to get you through a short absence from work, but being unable to earn a paycheque for an extended period of time can throw even the best-laid financial plans off track.
You may be thinking to yourself – “I’m young and healthy, what are the odds I’ll even need this?” Well to answer your question, 50%.
One in two people are diagnosed with a critical illness or are required to stop working due to a disability. And here’s the truth: with very few exceptions, the younger you are when you purchase insurance, the less you’ll pay. While hundreds of factors determine insurance premiums, age and health are the most critical components, and they make a strong case for getting covered as early in life as possible.
After you’ve finished paying off that high-interest debt and building your emergency fund, that part of your budget will now be free to start investing.
Whether it’s in a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), the earlier you begin to invest, the more your money will grow. It quite literally pays to take advantage of compound interest in your twenties, thanks to the magic of compounding returns.
Even if you don’t have a lot of extra funds to spare, start small and increase that amount as your income grows so you can take full advantage of compounding interest over time.
Don’t forget to live it up a little! Sometimes we get so focused on saving and planning for the future, we forget that money is meant to be spent – especially when you have a bit more financial freedom in your twenties.
Set up a short-term savings account, so you can spend your money without the guilt of thinking you’re slacking on planning for the future. You work hard for your money, so why not put some aside to treat yourself or try something new?
When you’re in your twenties, you’re building a solid financial foundation for your future. The choices you make in these years will affect you for the rest of your life.
Remember, you can enjoy your twenties while still planning responsibly for the future – take these steps now to successfully manage your finances.If you need assistance along the way, remember that Planswell is here to help. Having a financial plan that evolves and grows as you move through life, will ensure you achieve and maintain long-term financial health.