One of the most difficult adjustments to make in your 20’s is to master your finance management skills. This is so important at this stage because there are so many things that start happening that you all of a sudden have to consider. You have more responsibilities and most of them require that you have enough money to get them done. That is why it is important to get your finance management skills on lock down as early as possible. Luckily you have this guide to help you with just that!
I know I keep using the phrase ‘finance management’, I apologize for using such formal and intimidating words. You really don’t have to worry too much about it. This guide will simplify everything for you. It will show you a few changes that you can implement in your life to manage your money much better and achieve your goals. So let’s get into it. These are the things you can do to start the right finance management techniques in your 20’s which will lead to you flourishing!
Maintain a Student/Simple Lifestyle
I started with this one because it can make all the difference when you are still adjusting. As a student, it was probably easier for you to get by on a small budget. This is probably because you had way less responsibilities. So the level of finance management that was required was much less.
When you start working though there are so many changes that are happening all at once. All of a sudden you have to worry about about things like rent, insurance, getting professional clothing and other things that creep up during this time.
The best thing that you can do early on is to limit the new expenses that you take on at this stage. It is just better to try and maintain a simple lifestyle until your income increases. Or until your expenses have stabilized and become predictive.
In the beginning, I couldn’t believe how radically my expenses were changing from month to month. There was always something new coming up, and I just felt like my income was not enough. My budget was really not working. I always went over budget because of all of the variable expenses that I had to deal with. That was because I took on so many changes at once. New job, new apartment, new car and new ‘work clothes’. Yes some of these changes were absolutely necessary but they did not all have to happen all at once. So the best thing to do is to delay some of the changes.
Move Back Home…Temporarily
In the topic of delaying all of these changes, consider moving back home temporarily. This is not my favorite option because I generally prefer having my own privacy and you probably do too. But if it is more feasible to stay at home you should try it. Especially if home is close to your new job.
There is no rush to move out and have your own place. I know it sounds exciting but it will really do you good to delay just a little bit. It will increase your financial flexibility. And your finances will be a lot more stable during this radical time of changes.
So how long do you have to stay at home before getting your own apartment? Just until you have made a plan on how you are going to tackle your expenses and any student loans you may have. Also, the perfect time to move into your own apartment would be when your expenses are more stable and predictable. The best way to track your expenses is by creating a budget.
Create A Budget and Stick to it
A budget is one of the most effective tools used in finance management. Contrary to popular belief, a budget is not a dreadful task that forces you to cut back on everything you love. It is just a written summary of your total income and expenses that will help you know the money you are left with. And if you don’t like that amount you can make changes to increase it. It also works if you find that you are spending more money than you have and you want to cut back. The only way you can make changes in your finance management is if you know where the money is going. And then you can re-evaluate everything.
Okay so I know it might still sound overwhelming. But I have created a great budget template for you to use.
This template is great because you get to have the numbers written down. And unless you write it down, the budget does not exist. Also, if you create a budget and not look at it or review it, it’s the same as NOT having a budget. So the best way to even begin your finance management journey would be to start budgeting. And fortunately the basics of budgeting have been explained.
Limit Bad Debt
Okay so it is common knowledge that being in debt is bad. So what do I mean by limiting bad debt you ask? Not all debt is entirely bad. Some debt is good. See the Good debt vs Bad debt post. But debt is considered bad if it is due to a purchase of a depreciating asset. A good example of this would be credit card debt.
Credit card debt is especially bad because of the high interest rates. If you can completely avoid credit card debt, that would be amazing. However, if you already have one then you should prioritize making payments on time to avoid additional charges.
Most people having multiple credit cards and are constantly paying off this debt. But do not be fooled, having debt is not a normal thing to have. So it is important that you put a plan in place to get rid of bad debt as soon as possible.
Make a Debt-eradication Plan
If you are in a position where you keep making the minimum payment to all of your credit cards but it seems like there is no change. You are in an endless loop of this debt. then the next step is to sit done and make a debt-eradication plan.
An example would be to pay minimum payments to every credit card except the one with the highest interest rate. So you would then put in most of your extra cash into that one. This will help accelerate the process and when the credit card is paid off, then you could move on to next one.
Alternatively, you could work at paying off the card with the lowest credit limit. The motivation behind this is that if you exceed this limit you will be charged extra and it will negatively affect your credit rating. This is especially a problem because your 20’s are the years to work at improving your credit rating.
One strategy is to limit your access to these cards. Therefore remove them from your purse. You may leave one in case of an emergency. You will not be tempted to make impulsive purchases on credit if you implement this.
I know I have been going on and on about credit card debt, but you can definitely apply these strategies to other forms of bad debt that you may have. Okay enough on the bad stuff, let’s move on to the good practices that you could do for your finance management.
Build an Emergency Fund
Your emergency fund is the money that you set aside for use in case of an emergency. So this includes fixing your case when it suddenly breaks down or even the savings you use if you lose your job or contract ends. So I think we can agree that an emergency fund is really important.
Now how do you determine how much goes into your emergency fund? Your emergency fund should contain between 3 to 6 months worth of your expenses. So if you just did a quick calculation of how much that is, you probably think it is not possible. But no need to worry. An emergency fund is a priority, but you can build it over time. It takes time to build one.
Another advantage of an emergency fund is that if something happens, you don’t have to dig into your other savings. So your savings for that holiday in Maui will not be disturbed. You can reach your goals without being distracted.
Start Saving For Retirement
Wait, did you read that right? Yes start saving for your retirement. And no, it is not too early. The earlier you start the better. It will make you achieve your retirement goals sooner. Ever heard of the power of compound interest? Well that is at play here.
Do research on different ways you can achieve this. You should also take advantage of 401(k) options that your company offers. With the standard of living increasing so quickly, you want to make sure that you can save up enough to retire comfortably. And starting in your 20’s is the responsible thing to do.
Make Long Term Goals
Stating your long term goals helps you keep them in mind. These could be buying a home, travelling, or even starting a family. Knowing of your long term goals will make you plan for them better. Then you will not be burdened with it later, when there is not much time left.
Some of these goals may seem far off right now, but it helps to make plans and start working towards them. You can even start saving for some of them right away. Also, writing and articulating your goals will help you achieve them within your time frame.
This is where the importance of saving comes in. You should always save. At any point in time, there should be something that you are saving for. So set goals, and achieve them by making plans and saving for them. Look into other investment options that can help you reach these goals sooner. This is very important in your 20’s because your risk profile is generally higher.
Another one of those responsible things to do. And is a sure sign of Adulting. Okay why is this important? Your biggest asset right now is your mind and body. Essentially your health is very important right now. The only way that you are making money right now is by working. So if you can’t work, the money stops rolling in!
It only makes sense to insure yourself so that you still have an income in case you can’t work because of health issues or disabilities. Another thing, one illness can easily rack up extremely high medical bills that will cripple your finances. Also, imagine after all those all-nighters and exam stress being unable to work and not having income. Not good.
While you’re at it, it’s also a good idea to get other forms of insurance. This could be rental insurance, car insurance or even life insurance if you have any dependents.
Practice Impulse Control
Lastly, impulse control is an important one. Especially when you are still starting out. Still new at getting a monthly salary. That’s one that fascinated me as well when I started working. I felt like I could buy all of the stuff that I want immediately, because I knew that I will receive my salary the following month. So no worries right? Wrong! This kind of behavior will seriously affect your finance management.
You should learn to not get carried away. Because buying everything all at once comes at a very high price. I’ll give you one tip that I used to solve this problem. When you see something that you want and “think” you absolutely need, set a reminder for 24 hours later. Then when the reminder goes off the next day, you might not really want the item anymore. If you still do, then you should buy it. This has saved me from so many impulsive shopping incidents.
The Next Step…
Wow this has been a lot to take in! But these tips will be very helpful and you will avoid a lot damage in your finances later on. So keep them in mind, and implement them one by one. A simple to start with right now is your budget. So grab your free template here.
If you have any questions you can leave them in the comments section below or feel free to drop me an email. Take your time with this information and remember that they will help you flourish in your 20’s…well at least as far as your finance management is concerned.