6 Personal Finance Tips to Manage Money Better in Your 20s

“Money without financial intelligence is money soon gone” 

Says New York Times bestselling author and renowned American businessman - Robert Kiyosaki, in one of the most-celebrated personal finance books of all time - Rich Dad, Poor Dad. 

As someone in your 20s, you are probably dealing with how confusing and challenging a decade it can be. From setting audacious goals and working relentlessly to achieve them to exploring the world and making the most of what life has to offer, there is never enough time to do it all. As a result, what most people end up neglecting is the importance of developing a sharp financial acumen. 

Just like Robert asserted in his book, simply focusing on earning endlessly without building the financial intelligence required to make money work for you for years to come, is not the best use of your time in your 20s. More so because time is of the essence and can be the biggest game-changer in the results you reap. Therefore, while you work on growing your bank balance, be sure to understand the basics of personal finance management, so you can sow the seeds to a stress-free future. 

To get started, here are some tips to manage your money better and improve your financial literacy.

First Things First: Pay Off Your Debt  

Before getting into budgeting, savings, investments, and future planning, the first step would be to pay off your student loans as soon as possible. Don’t defer your payments hoping you’ll repay your loans once you start drawing a bigger paycheck. Over time, your responsibilities, aspirations, and needs are only going to rise, and you don’t want to hold on to your student loans until then. Moreover, the more time you take to repay your loan, the higher will your interest rates be. So, best to not fall into that trap and get rid of debt as early as you can.

Pay off your student loans as soon as possible

A Penny Saved is a Penny Earned: Always Set Aside a Percentage of Your Income 

We’ve all heard that old adage - “a penny saved is a penny earned”. However, inculcating the habit of saving regularly and smartly does not come naturally, especially when you are in your 20s. Therefore, instead of saving as an afterthought, set aside a percentage of your income and then plan your monthly expenditure. This small habit can completely evolve your financial situation and ensure you never completely exhaust your earnings. 

So, as a rule of thumb, many people like to follow a budgeting framework they can fall back on, especially when they are just starting out. The 50-30-20 strategy is an effective strategy that can take all the guesswork out of the equation and give you a formula to rely on. As per this rule: 

• 50% of your earnings must go towards fulfilling your needs 

• 30% of your earnings must go towards fulfilling your wants

• 20% of your earnings must be set aside for savings and investments 

The 50-30-20 savings rule

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So, for every $100 you make, start by setting aside $20 each month to either save or invest, and then move on to creating a budget for the rest $80. The sooner you start practicing this habit in your life, the smoother your personal finance journey is going to be. 

Start Building a Healthy Credit Score 

Owning and managing a credit card may seem overwhelming to some, which is why they avoid getting one. However, starting a credit line and maintaining a healthy credit score early on can be extremely beneficial in the future. Since, scores depend tremendously on your “credit age”, starting early can do wonders for your credit report. And with a high credit score, you are assured of less interest rates on mortgages, better rates on car insurance, quick approvals on increased credit limits, and so many more benefits. If you start early, you have time on your side and the freedom to learn from mistakes, rectify them, and keep working towards a higher score. 

Start building a positive credit score 

Understand and Leverage the Power of Compounding 

The best time to start investing is yesterday! Yes, you read that right. It’s never too early to start investing and if you haven’t already begun, the best time to take the plunge is right now. This is because the law of compounding comes into play here. Compounding happens when the interest you earn on your invested amount is reinvested to yield more interest, and this snowballs to keep increasing your returns. Therefore, if you start early, your money has more time to benefit from compounding and thus drive higher returns. Those who understand compounding and how they can put it into practice can really make money work for them over the long run. 

The following graph depicts how compounding works with an example: 

How compounding works

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Avoid Maxing Credit Cards Like the Plague

Using your credit card moderately, while keeping your limit in check is even more critical than getting one. Maxing out your credit cards could severely hurt your credit score, making it hard for you to get approved for mortgages and insurance, and even harder to repay the higher amount. Remember that the ideal credit utilization ratio is between 10%-30%, so never spend more than 30% of your credit limit. 

In fact, if you are just starting out, make it a point to never spend more than you own in your checking account, even if you are paying with your credit card. Resist the temptation to buy today and then figure out how you are going to repay your credit card bills. 

Never max out your credit card

Prepare for a Rainy Day: Start an Emergency Fund Today

If the pandemic has taught us anything about managing our finances well, it’s that not having an emergency fund to rely on can be really risky. So, from the 20% that you are saving each month, set a little aside to create an emergency fund, only for rainy days. This habit will allow you to live stress-free, knowing that you have got yourself and your loved ones covered in case of emergencies. And if you don’t end up using it for years, imagine how much more you can contribute towards your retirement, even if you set aside a tiny fraction of your salary. 

Start an emergency fund and add to it regularly

Start Early, and Achieve Financial Freedom Faster

While these actionable tips are a great starting point, consider them only that - a starting point. There is so much to personal finance intelligence that can help you take control of your money, save more, invest smarter, and plan a hiccup-free future. Inculcating the habit of reading books such as The Psychology of Money, The Intelligent Investor, and Think and Grow Rich will help grasp concepts faster, implement them better, and achieve financial freedom faster.