While teenagers and adults are often stressed by the importance of money management and financial planning, not many understand the right way to do it, and as a result, get carried away with no proper direction.
A solid and practical understanding of money management can facilitate good decision-making when creating budgets, saving, investing, managing debts, and paying taxes.
However, despite the health increase in literacy rates, education, and the exchange of information, a global survey by Standard & Poor’s Ratings Services found that, on average, only 33% of adults globally are financially literate.
One main reason behind this is that adults do not start early. This article will give a basic guide on how to manage money in your 20s, with five moves every working adult should master early in their earning phase.
First things first, always start by tracking your cash flow. This means you need to understand how or through which your money is coming in and going out. Tracking your money improves your attentiveness to how you spend and save. It points out areas in which you are spending unnecessarily and helps you cut down on them, redirecting them to savings, which can be useful for future investment decisions.
There are many ways and approaches to budgeting. Whether you create budget categories or follow a traditional budgeting method, always make sure to prioritise your essentials. Focus on food and housing first. Then, aim to pay off debts if you have any, and then boost your progress towards your savings goals.
Once you have sorted these out, you can make space for meaningful spending that makes you happy or productive. This can be travelling, having night outs with friends, or having a monthly allotment for doing things you enjoy.
As discussed, developing good budgeting closely aligns with the famous 50/30/20 savings rule. This rule states that you spend 50% of your earnings on essentials, 30% on wants or things that make you happy, and the rest 20% on savings and debt repayment.
Anyone trying to understand how to save money in their 20s should take some time to assess their debts clearly and have a breakdown of them. It is not uncommon for those in their early twenties not to have debts. The thing about debt is that not all are bad. Student loans, especially, can be a great investment for the future. Some debts can also come in the form of credit card balances.
To repay them, look for places where you can cut down expenses. Then, reroute these to repaying debts. Hold yourself accountable by building payments into your budget and automating them if possible.
If you have developed the habit of overspending, this can be the perfect time to regain money management skills. Debt repayment is the first step towards financial freedom, and it can open many other doors of opportunities for investing, saving, and allocating funds for emergencies.
Gaining this financial flexibility expands your capacity to better manage unexpected expenses, and most importantly, it reduces financial stress, contributing to overall physical and mental well-being.
Many financial advisors recommend that people in their 20s keep six months’ worth of expenses in an emergency savings account. Although often overlooked, this goes a long way in helping you navigate the risks that come with exploring career opportunities and job instabilities. Aiming to save your first $1000 can be a great place to start this habit.
To make this practice easier, and if your budget allows, try to consider setting up automatic transfers from your bank account and/or paycheck to a savings account opened for a specific goal.
Your savings goal can be for retirement, emergency, or even things like a particular trip, college, marriage, buying a car or house, or even investing.
By doing this, you won’t have to think much about savings, as you know the amount you have is what you have to work with for the month. This also goes a long way in preventing you from dipping into funds that should be earmarked for savings.
A good credit score makes more things possible when you are financially tight. Most importantly, it helps you in securing a low interest rate when you need to borrow money. This allows you to spend less over time on large purchases like houses or vehicles.
Similar lenders are more likely to approve loans to people with good credit scores, as this clearly indicates a lower risk of default. You can also enjoy higher credit limits with a good credit score, increasing financial flexibility as you have more commitments down the line.
Nowadays, even some employers check credit scores as part of the hiring process, especially for positions that require financial responsibility or access to sensitive information.
Paying off your credit card balance every month and making loan payments on time are good first steps toward improving your credit score.
Did you know the retirement savings gap is a growing concern on a global scale? Yes, late retirement is becoming common as people are less prepared to retire fully. The elderly face significant gaps between their retirement savings and their perceived needs.
This infamous trend is observed globally, with many retirees expecting to outlive their savings by many years. This reflects a major concern: retirement planning and savings are not keeping up with the increasing lifespans and rising costs of living. It also addresses the urgency for better money management and financial planning altogether.
This is why understanding how to manage money in your 20s should inevitably include a properly defined plan for retirement savings.
Thankfully, today, there are many different methods of saving for retirement; all it takes is proper research and planning.
That said, it is highly recommended that you seek professional help to understand how to manage money in your 20s, given the uncertainties and confusion surrounding it.
AIX is a pioneer financial advisor in the UAE who has the expertise to help people navigate the dynamics of investing to better prepare for retirement and achieve financial freedom in the long run with options that best meet their unique goals.
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