Saving money in 20s is key to building a rich life. Your twenties are an essential time to create better money habits. These financial habits will create wealth for you in your 20s and throughout your life. It doesn’t matter where you are in the world, you will have the financial habits for success. If you start applying these now you’ll fast-track your financial and lifestyle goals.
Some of these habits have put me top of the class compared to other people my age. That’s because may people wish they’d started saving money in their 20s. If you start applying these habits now, you will fast forward to financial freedom. Many people who don’t have these healthy habits. They’ll be only too familiar with that feeling of running out of money by the end of the month and wishing it was pay-day.
Disclaimer: This is not investing advice. You are responsible for your own investing decisions. When investing capital is at risk. This article may contain affiliate links.
The Better Your Habits The More Fun You Will Have
I truly believe that money management is such a crucial skill to learn at a young age. It’s not restrictive as many people would have you believe but liberating. If you saving money in your 20s you tend to have more money for fun stuff. You are not just scrapping by pay-check to pay-check.
Unfortunately, many people fall into debt in their 20s. This is because they spend more than they have and accrue credit card debt. This can damage your financial prospects in the long run. The difference between saving money or falling into debt here are 12 money habits. When you start saving money in your twenties it’s going to help you reach your money goals in the long-term. Check out the 11 Steps To Financial Freedom: A Practical Money Saving Approach>
#1 Create A Budget
This might sound boring and laborious but don’t think of it as being a restrictive budget. Instead, this budget is designed to help you understand how much you can save and invest for your future.
This is one of the simplest and most effective financial planning tools. By using a budget you will create an awareness of where you are spending your money. This will give you control over your hard-earned cash.
By creating a budget you can set an intention for your money. When you set estimated spending limits, you can learn to judge what is a responsible amount to spend. This is a much better money habit to have because you can set guilt-free spending amounts. For example, you can take that luxury holiday you’ve always dreamed of.
You can download my excel monthly budgeting template to start if you want a hands on way of managing your finances. However, i’d also suggest you check out the likes of Snoop or Cleo to help you build better money habits.
#2 Set Specific Financial Goals
Using your newly created budget, calculate how much you can save over the next 6-months, 1 year, 5 years. You can always continue to adjust this as your income increases or your expenses go down. Financial goals motivate you to save and keeps you accountable to your intentions. It’s important that behind these financial goals sits a reason for saving that is congruent with you.
Remember that everyone’s financial position is different. So your goals may be different compared to other people’s depending on what is important to them. Some people will want to get out of debt, some to buy a house and some will want to target financial independence.
If you are focusing on large financial goals, make sure you break them down into micro-goals. Then you can can check-in with every now and then by using a net worth tracker. Better money habits will smooth out the process of reaching your financial goals. So, start tracking your net worth using my personal excel template.
You can download my excel monthly budgeting template. That’s if you want a hands on way of managing your finances. Technology can also help you boost your savings. I’d also suggest you check out the likes of Snoop or Cleo to help you build better money habits. By automating how you track your finances you make things a little less painless.
#3 Pay Off Bad Debt
If you do have bad-debt then pay this off first before trying to achieve bigger financial goals. Otherwise, it will feel like swimming against the tide. In order to do this break your debt down into manageable chunks.
Financially it would be logical to pay off the highest interest debt first. However, paying off the smallest debts first can be great debt psychology. It gives the feeling of winning and this can help you gain momentum against your debts. This is the debt snowball method. can be contrasted against the debt avalanche method. Find what works for you. Ten you will pay-off debt without it feeling overwhelming.
Remember that all debt is bad. Student Loans in the UK will not go against your credit score. You will only pay a percentage off anything you earn over a threshold. After 25 years the debt will be written off. This means that you likely will pay a far less amount paying this minimum than if you try to pay off the full amount.
#4 Stop Impulse Shopping
You will likely start to earn money in your mid 20s and this might be good money too. Whilst you should treat yourself and enjoy your new source of income, you must learn to curb your impulses. There are very few impulse purchases that you will still appreciate a few months down the road. You will have little to show for your months of work.
The odd impulse buy is not going to derail your financial future but you very quickly erode your potential savings. That’s if you don’t know when to exert some willpower. This is financial death by a thousand cuts. So ensuring you have better money habits when it comes to shopping is critical.
It’s important to avoid situations where you know you will be susceptible to impulse buy. If a certain location is unavoidable then:
Write out a list of what you actually need
Use the call-it-out method and say out-loud why you need to buy the item
Slow things down by telling yourself you can buy it in 24 hours if you still need it.
Remember your financial goals and saving plan. What are you saving for in the future that will make deferring the purchase worthwhile?
< How To Stop Spending Money: 4 Money Habits To Boost Your Savings>
#5 Don’t Spend More Than You Have
Credit cards can be useful and savings are critical but they are not excuses to spend more than you have. Financial elasticity is good as long as you do not stretch it to breaking point. A credit card is not an excuse to buy things you do not have the cash for. You should always approach them with the mindset that you could always pay them off in full if you wanted.
Likewise, you should not be saving money in your 20s to bail yourself out from a spending spree or an impulse purchase. Without a level of discipline, all your efforts to save will be in vain. That’s like collecting water with a leaky bucket. Despite all your good intentions will fail to start saving money in your 20s. You can also use innovative Fintech banking apps. These will help you budget and automatically track your spending. This is one of 8 Genuine Ways To Save Money Without Suffering.
#6 Have An Emergency Fund
Most people in the US have less than $500 saved for a rainy day. So, don’t feel too bad if you are in the same position. I have a very intelligent friend, who in conversation mentioned he didn’t have an emergency fund. He’s just a really relaxed guy and great at winging life. When he realised his financial miscalculation, asked me how much he should have.
I suggested he should have somewhere between 3 and 6 months. The way to think about it is what lifestyle could you afford to continue if you had no source of income. How long would be able to last at your current or minimum level of spending?
Saving up this amount might seem like a highly challenging or stressful task. Especially if you are not used to saving, so break it down into manageable amounts such as £100 per month. Any emergency fund is better than no emergency fund. You can use my financial wellbeing checklist. Calculate How Long You Could Last If You Lost Your Main Source Of Income.
#7 Plan For Your Retirement
You might think this is too far away to bother and that you don’t have the money to spare for something that is 40 or 50 years in advance. However, the earlier you start the less effort and money you will have to put into your retirement fund because of the stock market returns and compound interest. For example:
- Lizzy starts investing at 25 and invests £200 per month.
- Dave starts investing at 35 and invests £200 per month.
The Results At Age 55 (assumes 7% average per year return from the stock market):
- Lizzy Invests a total of £72,000 with total returns of £245,417
- Dave Invests a total of £48,000 with total returns of £104,793
The interesting part is that: Lizzy invests just –£24,000 more worth of deposits. So, those 10 years resulted in a portfolio difference of £140,624 between Lizzy and Dave. That’s an extra +£116,624 after the -£24,000 is deducted!
Meaning that those 10 years of extra planning has allowed for over £100,000 extra worth of lifestyle. Following the 4% rule, that’s an extra £4,000 a year. Which returns that extra £24,000 investment in just 6 years! Such a small price to pay for such a massive portfolio increase, don’t you think?
This highlights that creating better money habits in your 20s rather than 30s can make an astronomical difference, even if you are just saving small amounts. Use my financial freedom calculator to discover how much you need to invest each month quit the 9 to 5!
#8 Pay Your Bills On Time & In Full
You need to pay your bills first and understand how much money you have to spend after these are deducted. Many people forget this, have too much fun with their pay-check and then remember they have bills to pay.
There is little room left after this to save, never mind invest money for the future. Saving then becomes an afterthought. Getting into the habit of paying bills will give you back the mental bandwidth to decide what amazing things you want to use your money for.
Remember to pay yourself first. Set up direct debits and standing orders to automate your checklist of bills. This should include rent, gas & electric, water, phone bill, broadband. Followed by direct debits to your savings accounts and later, investments. You should also check out What To Do Every Pay Day, that will boost your savings.
#9 Have Multiple Accounts For Your Money
One of the best things you can do is to create separate pots for your money. You have a current account for your working balance; salary, bills and fun money. Your cash savings account for your cash purchases within the next 5 to 10 years (e.g. house deposit). Then your investment accounts (which we will come to shortly).
The trick with each of these accounts is to keep each pot of money in as high an interest account as possible. This reduces the effects of inflation. Some current accounts have a maximum caps on what you can earn interest on e.g. 2.5% on balances up to £1,500. You may find yourself gamifying this to exploit all the interest-paying accounts.
The result of this is that you’ll likely forget you even have this money. Your spending behaviour will then be driven by your primary current account balance. Which will end up being a small percentage of your net worth. For example, mine is around 5-6% of my total net worth. to do a check-up on your financial health and Upgrade Your Finances.
#10 Learn About Investing
This is the one thing I wish I had known about sooner. If only I had known about the average return of the stock market when I was 18 and not 25. This could have significantly increased my portfolio value by now. Make sure you check you learn what the stock market is and how you can make money from it.
Once you have paid off debt and created an emergency fund you should be researching how to invest responsibly for your future. As you have seen from our retirement calculations (run your own here), the sooner you invest the better.
The sooner you invest, the sooner you can buy your freedom. Time is a precious commodity and a source of passive income is the source of it. The stock market is one possible way to create passive income. Check out the Fidelity fund navigator for a place to start your investment journey. This will tell you the fund most suitable for you based on your tolerances to risk. Whether you’re adventurous or cautious, it’s important to decide how much risk is right for you to achieve your investment goals.
Access the 8 Index Funds that make my personal shortlist when it comes to investing. These are 8 hand-selected index funds with a very strong performance over decades.
Give Your Money A Purpose
Regarding our earlier point on having multiple accounts. Giving your money a purpose is key and will stop you touching this money. This is especially true with your investments. As these will be for the long-term of 15-20 years into the future.
The combination of volatility and potential returns from the stock market, should make you reluctant to touch this money. In fact meddling with your investments can cut your returns in half, so don’t try to time your investments.
Investing doesn’t have to be scary of complicated. In fact there are just 8 funds I have on my shortlist that I would consider investing in. You may ask yourself if the stock market will crash again? If so, what you can do to prepare. These funds essentially provide a very simple path to wealth.
#11 Start Working On A Side-Hustle
Don’t just focus on saving money in your 20s. Focus on building your income too! This is another behaviour I wish I’d started sooner. It’s easy to think that everything has been done already, or only the super-intelligent people of the world can create a successful business, or even that you need to implement the perfect idea.
This is simply not true, you just need to start somewhere. In this last sense, “the best, is the enemy of the good” because taking action is better than waiting for the perfect idea. Businesses are formed through trial and error and it can take time to work on your skills.
If you fail at something you can always take the learnings and apply it to something else. However, from what I have learned a consistent effort is what results in a successful product.
Learn How To Start A Blog And Start Your Side Hustle Today:
How To Start A Blog In Under 20 Minutes: You Could Have Your Own Blog Today
5 Reasons Why You Should Start A Blog Today: What I Wish Someone Had Told Me
How I Made My First $100 Blogging: You Can Make Money As A Beginner Too
#12 Build Your Credit Score
Many people our age are scared of credit cards, I know I once was. This is especially so if you know someone who has mishandled credit cards. This is often a result not of the credit cards themselves but people spending more than they have and seeing credit as free money.
Used well, credit cards can be used to spread payments (see 0% interest credit cards) and can also be used to gain rewards. For example, you can get 6,000 Avios points with Amex when you spend £1,000 in the first three months (please note: if you sign up with my link I’ll get 4,000 points too.
Keep On Top Of Your Credit Score By Tracking It
Always check the terms and conditions of your credit card. If your credit card does not have an interest free period, then you will need to pay the balance off in-full each month. This will help you to build up a credit card, should ever you want to take out a loan or a mortgage. You can use theMoney Super Market Credit Monitor to keep an eye on your credit score.
No credit score is almost as bad as a bad credit rating, so building up a score can be important for later down the line. For example, you may get a better mortgage rate. To review your credit score you can use free tools such as Clear Score or Cleoto track and build your credit score.
< Explore: How To Use Credit Cards & Not Get Into Debt >
Create A Positive Money Mindset For Better Money Habits In Your 20s
Our culture often dictates that spending and materialism are socially desirable behaviours. Saving money in your 20s is seen as boring. Those who are responsible are perceived as boring and cheap. There is a false dichotomy that people are either fun and spend money or save and do not have fun.
The truth is that good financial habits will ultimately give you significantly more financial freedom. You’ll have money to spend on the things you enjoy. Therefore, saving money in your 20s set you on a path to wealth and this gives you options. People who do not have good money habits will spend years, even decades longer in the workplace. They will have to spend extra time, effort and money to become financially independent.
Saving Money In Your 20s Could Set You Up At 40
By contrast, you might be relaxing on a beach at 40 if you play your cards right. You will also have the money to take a career break as I did at 28 to travel and/or spend time on your passion projects. Money gives you options, so put your money
We are the sum of our habits so you don’t necessarily need to be outcome-focused. As you will become a natural saver when you develop better money habits. You will enjoy spending your money on the things you love. All whilst your bank account and investments grow.
Bonus Tip: Build Atomic Habits To Save Money In Your 20s
If you want to create better money habits or habits in general I would recommend Atomic Habits by James Clear. A habit based approach will definitely put you in good stead for saving money in your 20s. Reading this book is an easy and proven way to build good habits and break bad ones.
James Clear is an expert of habits and frequently appears in publications including the New York Times, Forbes and Business Insider. In this ground-breaking book, James Clear reveals exactly how you can make minuscule changes that grow into such life-altering outcomes.
In this book, you will quickly learn simple life hacks such as Habit Stacking and Two Minute Rule, which you can use to drive your health, productivity and finances. I read this book using Amazon Audible, which is great for when I’m cooking in the kitchen or out for a walk and I’d highly recommend reading Atomic habits in this format.
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