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Financial Tips for your 20s
Money is not a sexy topic to discuss in your 20-somethings. I bet you wave your parents off every time they bring up finances, budgeting, and the like. Yikes.
For some 30-somethings, the previous decade of their life was a sheer blur of partying-till-sunrise, rampant spending, and sun-craving trips to idyllic hotspots. Though the money situation for today's 20-somethings (in the post-Covid-19 era) isn't a low-hanging fruit. Ugh, where do I even begin: an economy bogged down by recession, slashed job prospects, and crippling student debt.
Early last year, I wrote an article in which I encouraged millennials and Gen Z not to fret about having everything figured out by the time they hit 30. I still resist the societal pressure to have your life sorted as your 20s wind up. However, getting a handle on your money at a young age — even if you're cash-strapped in a low-paid entry-level position — will set you up for financial success in the forthcoming years.
A recent survey states that four in five young adults wish they had taxes and finances as a school subject, while 20% are reluctant to handle money or plan for the future month-to-month. Despite these grim economic and fiscal circumstances, the latest generations may learn valuable money lessons the tough way. Below, I've captured six (6) financial tips you can take not only to stay afloat, but also to benefit long-term.
These include:
Stick to a budget
Pay off outstanding debt first
Cut costs where you can
Establish an emergency fund
Get a credit card — but use it sensibly
Start a side hustle
Stick to a budget
The best way to control your cash flow is by following 50-30-20 budget guidelines. These are split into three respective categories: 50% of income should cover what you need (rent, utility bills, insurance, grocery shopping and transportation); 30% should cover what you want (dining out, leisure travelling or charity donations); and you should dispense 20% to goals, i.e., savings or debts.
Take stock of your current financial state and distribute what you can save across your debt(s), expenses, earnings and goals. Budgeting may require you to retain your receipts and to cross-check everything that's happening in your bank account. You'll see that, over time, you'll manage to diffuse all the self-indulgent, spur-of-the-moment purchases.
Pay off outstanding debt first
Tackle any debt eating away at your bank balance and financial sanity before the interest soars. There are various ways to eliminate debt, but the snowball effect is a popular incentive that keeps young people onboard with it.
Keep record of all of your debts from smallest to greatest, no matter what the interest rate is. Settle up the minimum payment for your debts, except for the smallest ones. For the latter, hand in as much money as you can each month. The aim is to repay in full that small debt within a few months, and then sort out the next debt as you go along. You can get guidance and help with debt here.
Cut costs where you can
Retailers, especially in the ecommerce and Insta-marketing realm, became a whizz at drawing our attention and cash during lockdown. Impulse shopping under the wishy-washy guise of self-care and pampering can easily turn into that emotional remedy we all seek. Rather than getting caught up in the whirlwind of luring paid ads, actively observe where your money is actually thrown.
Firstly, separate your non-essential purchases from the past 3-4 months into: a) NO-NOs, b) can do without, and c) no regrets. Secondly, take notice of a continuum of attitudes. Likely to blow your budget on payday? Light-minded buying when you're low or stressed? Dig deep and identify certain behavioural patterns. Thirdly, unsubscribe from treat-laden emailing lists or direct debits you don't need to save yourself from the temptation. Develop healthy spending and cost cutting habits, but if you're still having trouble minimising slack spending, look for professional opportunities like promotions, networking, more education or vocational training to even things out.
Establish an emergency fund
Your parents and grandparents may have urged you to “save for rainy days”. A well-padded savings in the form of an emergency fund (or else, a cash cushion) can be a massive leg up for millennials, often quipped as recessionals.
Shoot to save 10% of your take-home compensation and live off of the other 90%. Once you determine that baseline, level up to having three to six months’ worth of expenses saved so to safeguard yourself against other financial upheavals as, for example, layoffs or unforeseen medical bills, education fees, even other day-to-day expenses.
It might be a good idea to open a separate savings account and automate it with a standing order that whisks the sum out of your reserve balance on each payday.
Invest today to rest tomorrow
If you wait for at least five years (you can sidestep any bumps in the market during this time), learning to invest in shares and stocks is a rewarding initiative long-term. Your options to prove your investing prowess and kick off the starting blocks with as little as £1 are:
DIY investing
The name speaks for itself: do it yourself. Picking your own funds, stocks and shares can make financial adulthood seem daunting. So, get a 'robo-advisor', AKA a digital financial toolkit, such as Wealthify, Nutmeg, or Moneybox, which does all the investing legwork for you via clever algorithms.
Fetch a human financial expert
Not so tech-savvy? Do not despair! Speak to an actual financial expert who can give you bespoke pieces of advice and offerings. Either way, it's wise to keep a cash buffer in place to ride you through any contingencies (you must expect the unexpected in this day and age).
Get a credit card — but use it sensibly
At some point, you might start shopping around for mortgages rather than sitting on a rental property any longer. If you're trying to climb the housing ladder, a Lifetime ISA (LISA) might be your go-to. It's a kind of ISA with which you can save towards a first home or retirement. With this account, the government will offer a 25% bonus of what you put in every tax year until you're 50. Having a credit card or overdraft can help you build up your credit score for this.
A credit score is a tool that lenders leverage to decide whether one qualifies for a loan or other finance agreements such as a mortgage or car finance.
Your credit score, which is essentially a numerical figure, depends on how many credit arrangements you've made in the past, and how much of your available credit you’re using. The key to smashing credit use is to always ensure you stay accountable. A credit card shouldn’t be something you lean on each month to make ends meet. So, be mindful to spend within your means and make timely payments, at least for the minimum each month. Consider switching to debit, cash, or cheques for everyday transactions.
Start a side hustle
I've pretty much covered the alternatives of emergency funding, but I haven't clued you up about emergency earning. Do you have a tangible skill that can become your little cash machine? Then, think about branding yourself on websites such as People Per Hour or Fiverr. Rather than offering generic, for instance, copywriting services, pitch clients or provide tailored services as individual ‘gigs’, which are currently in demand. Web, social media and infographic outlets can be handy.
Or you could make extra money by running an Etsy online shop, selling clothes on Depop, doing remote tutoring in your field of expertise, going for Uber driving, Deliveroo food delivery cycling, dog walking — the list is inexhaustible.
Envision your retired self
When you add into pension contributions, you receive money back from the government in recognition of the taxes you’ve paid on those earnings. So, ensure you start socking away a reasonable amount of your payslip allowance for you retirement.
I know, senility is the last thing that occupies your head when you're 20, for you're likely to have other, conflicting priorities. But as Darren Ryder, Director of Automatic Enrolment at The Pensions Regulator, argues:
In years to come, young people in their twenties who started saving today will reap the reward of a retirement they can look forward to [so] balancing goals is important to achieving short, medium and long-term aspirations.
Choosing short-term goals at the expense of your future can mean you fall short in the future. Your financial plan needs to consider all your goals, whether they’re just around the corner or several decades away. It can be difficult to understand where your savings are best placed; this is an area we can help with.
So the earlier you start preparing for your declining years, the better.
Every employer must now automatically enrol eligible employees into Workplace Pension, and should contribute a minimum of 3% to your pension pot. Your entitlement depends on the following factors:
You work in the UK
You are aged between 22 and the State Pension age
You earn at least £10,000 annually
You're able to opt-out of your auto-enrolment. Though, this might not be in your favour when you consider the tax relief (e.g. for every £80 saved, the government provides £20 in tax relief) and investment returns in the long run.
Conclusion
The financial crisis of 2020 has left lasting scars on millennials and Gen Z. Though on flipside, it has also toughen them up to fend off future financial wrong turns when it comes to monthly spending, money savings, debt repayments, investment, credit card usage and retirement.
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