Between graduating, starting a career, potentially moving to a new city or into a new home, getting married, and countless other life-defining events, your 20s are years filled with new experiences, opportunities, and life lessons.
Among the most important, and confusing: Figuring out your finances. And while everyone’s situation is different, there are some general financial habits and skills that experts recommend honing in your 20s. Now is the time, they say, to establish a sound financial foundation to build on for the rest of your life.
“It’s easy for younger consumers to kick the financial can down the road when they feel like they have their entire life to make better choices,” says Rod Griffin, senior director of consumer education and advocacy for credit reporting agency Experian. But “the choices they make and habits they form while they’re young will follow them throughout their adult life.”
With that in mind, here are the tips and tricks financial experts say recent grads and twentysomethings should know.
1. Consider—and possibly rewrite—your money story
One of the most important things to consider when you’re starting your financial journey is your money mindset, says Nicole Wirick, a Michigan-based certified financial planner. What is your relationship to money—for example, are you a spender or a saver, do you consider it scarce or abundant—and how does that shape how you treat it? What money scripts, or unconscious beliefs about money, do you follow?
“For many people, money could be seen as something that was used as a means of control, or maybe money was something that was approached willy nilly, or maybe it was really scarce,” she says. “Those memories of money from childhood can be really important to understanding what money means as an adult.”
Once you have that knowledge, you can use it to form better habits.
“We have the power to rewrite our money script, but we have to be aware of it first,” she says. “Otherwise the patterns can repeat themselves.”
2. Understand inflows versus outflows
Once you understand your feelings about money (and how they may help or hurt your finances), you can move on to building a solid financial foundation for the future, says Wirick. The most important: Understanding how much money you have coming in, and ensuring it’s more than how much you’re spending.
Sounds simple, but it’s easy to start overspending—and difficult to reign in once you start. Just look at total credit card debt in the U.S., which topped $1 trillion last year and keeps growing. Of course there are nuances, but Steven Conners, founder and president of Arizona-based Conners Wealth Management, says to avoid that kind of debt at all cost.
To do so, you need to know what you’re earning. Conners says to use your net income—meaning post-taxes—as your baseline for how much you can spend each month and what you can afford.
Having that understanding early on will help you start saving early. Saving money is like any other habit, Wirick says, in that it takes practice and patience but becomes easier over time.
“Carve out a portion of the inflows for savings and investing. Treat it like any other bill and automate,” suggests Wirick. “We’re forcing ourselves to create good habits and treating saving as any other bill because it’s just an important.”
Ideally, you want to start building toward having a few months’ worth of expenses stashed away in a high-yield savings account. Financial planners differ on exactly how much to put away, but most commonly will suggest enough to cover three to six months of essential expenses, including any debt or loan payments. The more nervous you are about a potential layoff or loss of income, the more you’ll want saved, simply for the peace of mind.
This stash of money is typically known as an emergency fund. But Wirick says another way to think about it is as an opportunity fund.
“Opportunities are the good things, like a destination wedding. There’s a lot of that in your 20s,” she says. Try to have some money set aside to pay for the unplanned expenses that crop up.
And though you might feel like it’s too difficult to save money when you’re just starting out, all of the financial experts interviewed for this article stressed its importance, with many saying their biggest personal regret was not starting to save sooner.
“One important thing I always tell younger clients is that there’s never a good time to save money,” says Ron Tallou, founder and owner of Michigan-based Tallou Financial Services. “I try to get them on some kind of a saving plan, and they want to put it on hold. If that’s your mindset, you’re never going to get into it. There’s always going to be a new bill, so you just have to do it.”
3. Start investing as early as you can
It’s hard to overstate how important it is to start investing early. Though that might seem like a scary prospect, it’s easy enough to get started. The entry point for many is a 401(k) or other retirement account, like an IRA. Buy low-cost, diversified index funds within these accounts and consistently contribute a portion of your paycheck (10% is great, but at least up to the employer matching contribution percentage, if you get one; 1% is a fine start, too, if that’s what you can afford), and you’re off to a roaring start, financial advisors say.
The good news is that many members of Gen Z are already investing for retirement. In fact, reports find that they are doing it earlier than previous generations did at the same age, including a February survey from the Investment Company Institute.
“Our research found that younger households are more likely to prioritize saving for retirement, have retirement accounts, and have more in those accounts, compared with similar-age households in 1989,” Sarah Holden, senior director of retirement and investor research at ICI, said in a statement about the survey.
That pays off in the long run. Time in the market is one of the most important factors in investing. The money you invest early in life has the longest opportunity to grow and compound, meaning “the dollars you save today are likely the most valuable dollars for your future,” says Wirick.
Here’s an example: Let’s say you save $7,000, the max amount you’re allowed, in a Roth IRA each year for the next 25 (that limit is increased, but for simplicity’s sake, we’ll use the same figure each year). With a 7% annual return, you’ll have around $450,000 by the end, while only contributing $175,000 of that.
That said, even if you can only afford to invest $50 per paycheck when you get your first job, it’s better than nothing, says Wirick. As you age and earn more, you’ll be able to invest more.
“It can be really exciting to get the larger paycheck after school, but make sure you don’t become accustomed to spending all of it,” says Wirick.
Avoid investing in the latest craze, like crypto, meme stocks, etc., until you have a solid foundation built around low-cost index funds, says Justin Stivers, a financial advisor and founding attorney at Florida-based Stivers Law. Be boring.
“I don’t think it’s a great idea for young people or any people to jump onto the latest craze,” says Stivers. “A lot of young people are more susceptible to that, and that’s part of the marketing strategy: ‘This isn’t your parents’ investing.’ But there is something to said about traditional investments and traditional models.”
Twenty-five or 30 years can seem like a long time to keep your money invested, especially when there are so many needs in the present. But Conners says if you can make some sacrifices now, you’ll be better off.
“Look in the mirror and say, ‘I am patient when it comes to my investments,’” he says. “If you’re baking a cake and you looked at it 50% of the way through, it might have looked like mush. But when it’s done, you pull it out and it looks wonderful.”
4. Consider the Roth IRA
Okay, so you’re set on investing—how to actually do it? Again, your first step should be starting to contribute to your workplace 401(k) if possible. The benefits there are plenty: It lowers your taxable income, and often your employer will match your contributions dollar-for-dollar up to a certain percentage. That’s a 100% return on your investment.
But if you don’t have a 401(k) or you want to invest outside of it, financial planners love IRAs (individual retirement accounts), and especially for young people, the Roth IRA.
A Roth IRA isn’t tied to a specific workplace; you can open one on your own whenever you want at a bank or financial institution like Fidelity. It has some different benefits compared with a 401(k), the biggest being when you are taxed on your contributions: With a Roth, you are investing money you’ve already paid taxes on. That means your money will grow and compound, and when you take the money out in retirement, you won’t be taxed on it (assuming you follow the withdrawal rules).
With a traditional 401(k), you get the tax savings now but pay taxes later. There is such a thing as a Roth 401(k), but it’s less common. Both pre-tax and post-tax accounts, as they are often described, have a place in your retirement planning.
Why is the Roth such a good deal for young people? Generally speaking, employees earn less when they are young than they do when they’re older. That means you’re essentially pre-paying your taxes in a lower bracket. (This isn’t true for everyone, of course. You need to consider your specific salary and tax situation.) Roth IRAs are an especially good deal now, given how low federal income taxes are. That may change slightly in just a few years.
There are other benefits to Roths. One, says Wirick, is that because you have already paid taxes on the money you contribute, it’s much easier to withdraw money from your Roth IRA without incurring penalties or fees. You can withdraw contributions (not returns on the investments) at any time, in fact; that can be helpful for young people who haven’t yet built up a huge safety net. Ideally, you won’t touch your retirement contributions at all, but, hey, life happens. Better to have the option.
One thing to remember when investing: “You have to actually make sure that the money you put into your account is invested,” says Wirick. Many people open a Roth IRA and don’t actually take that next step and pick the index funds or other investments. Spend some time on a site like Morningstar or searching fund names to get familiar with their holdings (the companies they’re invested in) and returns, and then make sure your contributions actually buy shares of those funds.
5. Learn how credit and credit cards work
Your credit score is what lenders and other financial institutions use to determine a variety of things, including your interest rate for buying things like homes and cars (a higher score = a better interest rate). FICO, the most-commonly used score by lenders, ranges from 300 to 850. When you’re young, you are likely on the lower end and don’t have much of a history, and that’s normal. You can build it up over time.
One way to build up your credit score and credit history is by using a credit card for some expenses and paying it off in full each month. Credit cards get a bad wrap, but they can be helpful tools if you do three things: Don’t overspend (know your monthly inflows and outflows), make your payments on time and in full, and keep your balance low. (Another benefit: rewards such as airline miles.)
There are a number of ways to get a credit card; young people without a credit history of their own might ask a parent or other trusted family member to be added as an authorized user on the family member’s card. They can also get something called a secured card, which uses a cash deposit as the credit limit, meaning it’s harder to overspend, suggests Experian’s Griffin. Some banks also offer student credit cards.
“Keep in mind that building a good credit score is a marathon, not a sprint. It takes time, consistency and responsible money management,” says Griffin. “All consumers should avoid taking on debt, missing payments, making late payments, and spending more than they can afford.”
Andrea Woroch, a budgeting expert, suggests treating a credit card like a debit card, only spending what you can afford to pay off in full. Woroch recommends setting text alerts for purchases and daily balance updates, and to only use up to 30% of your credit limit at one time (to help maximize your credit score).
“These pieces of plastic can help build credit, which you will need to rent an apartment, open a utility account, buy a car, buy a house,” and so on, Woroch says.
6. Don’t forget estate planning
No one likes to think about death. And as a twentysomething, that may seem like a particularly far-off concern. But, as Wirick notes, “Life is messy—it rarely goes according to plan.”
Everyone should have some sort of estate plan, no matter their marital or parental status. But it is especially important for those who get married and/or have children.
“It’s really important to make sure you’ve updated your beneficiary designations, that you have the appropriate powers of attorney, medical and financial, in place,” says Wirick. “If you have a minor child, it’s important that you have a will with some guardianship provisions in place.”
Part of that could entail a whole life insurance plan, says Tallou. And then there’s disability insurance. There are two main types, own occupation and any occupation. Tallou says to go for “own,” which means you will get payments if you cannot perform the duties of your specific job.
If you can afford to do so, Tallou suggests getting these policies separate from any that your workplace might offer, because those policy payouts are contingent on employment. If you get really sick, you won’t want to work until you die.
The costs are based on health and age, “two things that don’t get better with time,” says Tallou. Premiums typically increase as you get older. “You want to lock in that rate when you’re young and healthy.”