Managing your finances can be a little overwhelming, especially when you’re young. However, the sooner your start making a financial plan for yourself, the more time you have to create a bright future.
The smart money habits you make now can contribute to your long-term success.
I am only 26 years old and I don’t claim to have all the answers since I’m still learning myself. I am fortunate enough to not have any debt (nor have I been in debt before).
In order to pay for my graduate school and fund all my trips, I’ve had to make some sacrifices and set an appropriate budget for myself.
Being smart with your money involves more than just saving a portion of your paycheck each month. It also includes spending wisely (by making educated purchase decisions) and building wealth by investing the money you save in a fairly risk-free option.
Here are a few ways I’ve learned how to save, spend wisely, and build wealth in the last few years. When you make a strategic plan for yourself, your finances will grow and you’ll continue to practice these smart habits going forward.
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Here’s how to be rich in your 20s:
1. Pay off your debt / student loans
Whether its credit card debt or student loans, it’s important to have a good repayment plan in place. Letting your debt linger (or grow) can hinder your financial success for years to come in the form of more interest payments and lower credit scores.
A key ingredient here to be successful is to develop a budget for yourself. You can monitor your income and expenses in an excel spread sheet or by using my free Budget Binder printables. It’s critical to understand how you spend your money and then improve your spending habits to help pay off your debt.
While you can both start building your wealth and paying off debt at the same time, it’s a lot easier to build wealth when you’re debt free.
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2. Invest your money
It can be a little daunting to invest your money if you’re not sure where to start, which is why I suggest reading a book (or two) about investing for beginners or talking to a financial planner about your long-term goals.
Generally speaking, it’s good to start by putting a portion of your paycheck into a high-interest savings account. It’s also important to think long-term.
I just recently finished reading The Only Investment Guide You’ll Ever Need by Andrew Tobias (which I recommend reading if you haven’t already). Even if you didn’t fully grasp everything he mentioned in his book, his take home point is this:
“If you save at least 10% of each paycheck and earn a 7% annual return, it will take just over 30 years to grow your nest egg to equal 10 years of income.”
Saving 10% of each paycheck should be easy, but earning a 7% annual return is not so cut and dry. This can be done a number of ways such as investing in mutual funds, index funds or the stock market.
Do a little research or talk to your financial advisor for more tips.
If you’re interested in learning more about investing and creating a portfolio, I recommend starting with Motif Investing as an affordable option. The investing platform is straightforward and easy to use. You can buy a portfolio of up to 30 stocks or ETFs for a single transaction of $9.95 per trade. Plus you will receive up to $150 when you use Motif Investing by signing up through this link.
3. Think about your retirement
It’s never too early to start thinking about your retirement.
Yes, it may seem far away and hard to imagine right now, but it’s important to plan and take the appropriate steps towards saving for your retirement.
One way to do this is to take advantage of what your workplace offers to their employees. If your employer offers to match your retirement (such as an RRSP), make sure you’re getting the maximum dollar amount possible.
The actions you take now can (and will) impact your financial success in the future.
My recommended personal finance books for further reading:
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4. Live below your means
Many twenty-somethings look to their friends in order to measure how they should be spending their money, but this is not always the best method for success.
If you surround yourself with frugal spenders or friends who practice wealth-building techniques, you can certainly learn a lot from them. However, I recommend living by this motto: spend less than you make (or a lot less than you make).
If you’re making $40,000 per year, don’t spend like you’re making $60,000 per year. Some people try to live a lifestyle on an income they wish to make, rather than spending less than they make.
You may not love your first job, but remember it won’t be your last job.
If you have trouble giving up your lavish spending, aim to find a job that makes more than enough to cover your current habits. Alternatively, you can use money-saving tools to be more resourceful so you can afford the lifestyle you want:
- Swagbucks: Earn cash and gift cards for things you already do online, such as surfing the internet, playing games, and filling out surveys.
- Ebates: Get cash back when shopping online at over 2,000 stores. You can join Ebates for free and get a $10 welcome bonus when you sign up through this link.
- Checkout 51: Get cash back on your groceries with the Checkout 51 app.
- Groupon: Get daily deals for your favorite restaurants, shopping, healthy & beauty, fitness, and more.
- Entertainment book: Use coupons to save money at your favorite restaurants, retail stores, local attractions, and more.
Remember though to always spend less than you make and live within your means.
5. Socialize outside of meal times
Many friends suggest getting together for lunch or dinner, as this is a convenient setting to catch up and socialize. However it can be quite expensive, especially if you decide to order drinks.
Suggest meeting after lunch or after dinner instead. If you must get together during meal times, try hosting a potluck or have a picnic in the park.
You can make your own drinks and there won’t be any shortage of fun.
If you must socialize during meal times, consider looking for restaurant deals on Groupon. I just recently found a deal for $30 worth of food at my favorite restaurant for only $5 on Groupon. (This was a great deal that I couldn’t pass up).
I also like using the Entertainment Book to save money when eating out. Many of their restaurant coupons are for Buy 1, Get 1 Free on lunch or dinner entrees. I’ve been using the Entertainment Book for years to save money on dining out, shopping, entertainment and more.
6. Get to know the library
Just like Arthur said — having fun isn’t hard when you’ve got a library card. If you’re too young (or old) to get that reference, you can still benefit from it right now.
Even though I’m finished school, it’s still important to continue your education by reading and getting informed. I use the library to borrow travel books, cook books, business books, fiction books, DVDs, etc.
Other great free things available from the library are internet access, classes, lectures, talks, city museums tickets, etc.
7. Make your own lunch for work
Instead of spending $10 each day for lunch, take five minutes out of your morning (or evening) to prepare lunch.
Only $10 per day may not seem like much, but it becomes $200 per month and approximately $2,400 per year.
That money could’ve went towards your next vacation instead of being spent on eating out for lunch at work.
Don’t worry about what your co-workers are doing for lunch, focus on your budget and eat healthy. Fast food and restaurant food contains excess sodium, sugar and fat – you can control that by making your own meals.
8. Cut back on Starbucks
If you frequently visit a local coffee shop each day, consider how much it’s costing you. A $2-$5 coffee per day adds up to $480-$1,200 per year.
If your office doesn’t have a spot (or a kitchen) to make coffee, make it at home and bring it to work instead. And don’t worry, if you have a favorite drink that you can’t give up, it’s OK to treat yourself once a week.
Related: How to save money at the coffee shop
9. Don’t feel that you need to be brand-loyal
I admit that for I am brand loyal for some items.
For example, I use a particular brand of skincare products which works for me. However, when it comes to other toiletries or food, I usually buy what’s on sale that week.
If you are brand loyal, buy only when it’s on sale. Stock up when the price is discounted (make sure the product will not expire or go bad before you can use it) and this will help you save money and hedge against inflation.
10. Stop buying just because it’s on sale
One of the worst things you can do is to buy items just because they are on sale. I used to fall for this shopping trick in the past – I would buy clothing, shoes and accessories because I loved the thrill of finding a deal.
But in the end, they would sit in my closet (sometimes with the price tag still attached) and never get worn. It was like I was just throwing money down the drain, what a waste!
It took me awhile to learn, but now I’ve come to my senses and only buy items that I actually need. I am much happier now and feel good about the items I own.
11. Ditch the habit of impulse spending
I wrote a whole post about how to ditch the habit of impulse spending. Marketers are really good at encouraging consumers to make impulse purchases, but there are simple ways to help kick this bad habit.
12. Create a minimal wardrobe
Don’t be one of those people who think that can’t be seen in the same outfit twice. If you are, I suggest selling your clothing if you don’t plan on wearing them again.
Creating a minimal wardrobe means buying classic pieces that are timeless, good quality and versatile. Avoid buying trendy pieces since they’ll only last one season and go out of style quickly.
A minimal wardrobe is a good investment for both your budget and the environment.
13. Pretend you make less than you do
One way to save money and build good spending habits is to pretend that you make less than you actually do. Not only will this help you to spend less money, but you will also have more saved up in the bank.
The easiest way to pretend that you make less than you do is to automatically deduct a percentage of your paycheck each month and put that money into a separate savings account. (Aim for 10% if possible).
Then what you do next is simply forget about it. That money is now your emergency fund, your vacation fund, your graduate school fund, your down payment for a home fund, etc.
Related: 15 frugal habits to live by
14. Paint your own nails
Many girls like to have fake nails or get them done at the salon. This is an expensive and unnecessary habit.
I know it’s nice to get pampered, but a better idea is to learn how to pamper yourself at home. Watch YouTube tutorials and learn how to paint your own nails.
I visited my local Sally’s Beauty Supply, invested in a few nail tools and give myself manicures and pedicures at home. I save so much money by doing my own nails it’s not even funny.
I can’t justify going to the salon anymore unless it’s for a special event.
NOTE: I understand that painting your nails at home won’t save enough money for college or a downpayment on a home. The point is that many people have a habit of spending money on false needs and the media is really good at selling us these false needs. It’s perfectly fine to treat yourself to a manicure or pedicure once in awhile, but it’s not necessary to be part of your regular beauty routine. You could be using that money (and time) towards activities that move you closer to your goals.
15. Get a low maintenance hairstyle
I used to go to the salon every two months to get highlights which cost me $200 each time. Now I only go twice per year for highlights and since my hair is naturally light, I let the sun work its magic during the summer months.
This is currently my low maintenance hairstyle which works for me. I recommend finding something that works for you – this includes haircuts as well – get a hairstyle that doesn’t require frequent touch-ups.
I’ve even had good luck finding deals on Groupon for hair salon services. Always make sure to check reviews for the hair salon before you decide to make a purchase.
If you need to take care of split ends, you can even invest in a pair of good hairdressing scissors and trim your own spit ends between regular hair cuts. (Confession time: I haven’t paid for a professional hair cut since 2008. I cut my own hair at home).
16. Consider affordable transportation options
Do you really need to buy a new car? Do you even need a car?
Consider your transportation options and your needs. I live in the city and use local transit to get around town, but my fiancé commutes to the suburbs for work, which is why a car is the best option for him.
If you live in a major city with decent public transportation, sometimes you can survive easily without a car and just get a Zipcar for grocery runs on the weekend as necessary. Zipcar is an affordable alternative to car rentals and traditional car ownership. You can drive a Zipcar by the hour or day (with gas and insurance included).
If you do require a car, opt for a used car in good condition. You also want to look for one that is fuel efficient, safe and reliable.
17. Don’t miss your annual physical at the doctors
This may not seem like a big money saver right now, but it’s important to invest in your health by eating healthy and getting regular check-ups.
Heaven forbid, but if you develop a disease or cancer, it’s important to catch it when it’s early rather than later as this could help save your life.
Medical bills can be expensive, which is why it’s essential to take care of your body now.
18. Decide if pursuing further education is right for you
Your 20s is the best time to pursue further education if you decide to do so. This could be to get certified or obtain an advanced degree, but it’s important to make sure that you will get an adequate return on your investment before making your final decision.
Consider the field you would like to go into, what education is required, and if that field is growing (hiring) or declining (not hiring).
The last thing you want to do is invest your time and money by going to school only to find that you can’t get the job you want once you graduate.
Sometimes your workplace will offer to help pay for your tuition while you attend school part-time. Consider this option if you would like to stay and grow within the company.
An example would be someone who works in accounting and wants to move up in the company. They can choose to pursue their CPA part-time while still working at the same company.
19. Don’t buy consumer products based on price alone
Don’t be one of those people that gravitate towards the cheapest item on the shelf.
Sometimes you can find affordable products that are well made and last a long time, but for other times — it’s better to spend a little more for something you know that’s built to last.
Instead of buying a cheap winter jacket that barely lasts one season, it’s better to invest in a better quality winter jacket that will last for the next several seasons.
It may be a little more expensive upfront, but you’ll save money in the long run.
20. Remember that your 20s are the best time to start building wealth
Have you ever heard of the term hyperbolic discounting?
If you’re thinking, WTF is hyperbolic discounting, don’t worry – that’s how I reacted when my Psychology professor introduced the term during class one day.
It simply means that people would rather receive $10 right now instead of $20 in a month. People prefer the immediate reward and discount the value of the later reward, by a factor that increases with the length of the delay.
What I’m trying to say is that retirement may seem far away, but it’s crucial to start planning and preparing for it now, rather than later.
Don’t wait until your 30s to start building wealth, your 20s are an important decade to start making important financial decisions.20 ways to be rich in your twenties #successClick To Tweet
Over to you — what are your personal finance tips?
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