The 6 Biggest Financial Decisions in Your 20s


Back in my early 20s, I didn't have a strong interest in personal finance; as long as I had enough money for the bar, I was good to go. Of course I knew the importance of paying my bills on time (and I did), but planning for the future and learning about credit management were the last things on my mind. I wasn't alone, either. Most of my friends were the same way a decade ago, and if you're in your 20s now, you may not give your personal finances much thought.

Although you're young and have the rest of your life to be responsible with money, there are reasons to get a head start on positive personal finance practices. Don't wait until your 30s or 40s to get serious about your money.

1. Start Saving for Retirement

If you're dealing with low wages and high student debt, you may feel you can't afford to save for retirement. However, starting a retirement savings plan while young can have a tremendous impact on your future financial health because you'll maximize your retirement income thanks to the magic of compound interest. No one's saying you have to contribute the maximum each year to your IRA or a 401(k). Do what you can afford. As long as you're contributing something, you're on the right path and doing better than a lot of 20-something adults.

2. Live Within Your Means

After graduating college and getting a job, you might be in a mad rush to achieve the lifestyle you were accustomed to growing up. But realize it took your parents years to acquire what they have, so don't expect the same lifestyle in your first couple of years out of school.

If you learn how to live within your means in your 20s, you can carry this good habit throughout your entire adulthood. You're less likely to get into deep credit card debt. And living beneath your means makes it's easier to save for retirement and enjoy other things in life, such as the occasional vacation.

3. Avoid Credit Card Debt

The debt you accumulate in your 20s can haunt you for decades. So before you buy houses, cars, or start a family, tackle your debt. The older we get, the more responsibilities we take on. Lingering debt means additional interest rates, and it becomes harder to wipe out these balances. You might be ready to move out and exert your independence after graduating college. But if you can, stay home for a little while longer and use this time to pay off student loan debt and credit card debt.

4. Get Insured

Just because you're young doesn't mean you're invincible. You can get sick, injured, or die unexpectedly, just like older folks. No one likes to think about bad situations, but you need to prepare for the worst. The best time to buy insurance is while you're young and healthy. This includes health, life, and disability insurance. It's not only a responsible way to protect your finances, but you also might qualify for a better rate because of your age. If you live on your own, make sure you get a renter's insurance policy to cover the replacement cost of personal belongings in the event of a natural disaster, theft, or fire.

5. Build an Emergency Fund

Your 20s is also one of the best times to start building an emergency fund. Talk to any adult in their 30s or 40s with a mortgage or kids and they'll tell you it's harder to save when there's so many financial responsibilities. If you're still living at home, try living off half your income and save the other half until you build a nest egg of at least three to six months' living expenses.

6. Establish Your Credit History

You can't rely on your parents forever. Now's the time to establish credit if you plan to buy a house and be financially independent in the future. Applying for a student loan is a good start, but diversifying your credit can build an even stronger credit score. You can apply for another installment loan, such as an auto loan, or you can apply for one or two credit cards. It isn't enough to apply for credit, you have to use credit responsibly. Don't get in over your head. Only charge what you can afford, and make every effort to pay off your credit card bills in full every month, and on time. Credit building is a slow, gradual process. And regularly monitor your credit report to check for inaccuracies or identity theft, which can drive down your credit rating.

What other smart decisions should you make in your 20s? Let me know in the comments below.

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