Your 20’s can be the most exciting years of your life with so many new experiences and first-time life events. What many people fail to realize until it is too late is that your 20’s are the most important years in determining what type of financial success you will have in your future. A few smart financial moves can play a massive role in how comfortable your finances are throughout the rest of your life, while a few poor financial moves can impose a difficult financial hurdle that many people struggle to get over. Follow these simple money management tips right out of college to learn how to become financially stable in your 20’s and set yourself up for a life of financial success.
#1 – Buy Rather Than Rent
One of the first and most important financial setbacks young people encounter when they make it into the real world is that they decide to rent rather than buy when it comes to housing. While renting an apartment, you might be paying $15,000+ a year and end up with nothing but a receipt at the end of it. Renting throughout your 20’s before buying a house might seem like a good idea because it is less of a commitment, and you most likely don’t have your whole life, family, and career situation all set in stone. After all, what happens if you want to take a job opportunity or move in with someone you have been dating? These are valid concerns, but the good news is there is a way to plan for this.
Buy a house or apartment that is in an appealing location for potential renters. Think about where you would want to rent an apartment and buy property there. When looking for a good place to buy that will be easy to rent out if you want to move, make sure your monthly payments will be less than how much similar properties are being rented for. When the time comes to move, simply rent out your property for slightly more than your mortgage. Even if the rent just covers the mortgage, you are still building equity in real estate. That money your renters are paying is going towards a property you own, and rather than forking out $50,000+ on rent during your 20’s you could be spend your time building home equity.
#2 – Do Not Buy A New Car
The second most common financial mistake I see young people making is that they make a little money at their new job and decide to spend it on a new car. Buying a new car is a terrible investment because before you lose that new car smell you have already lost a substantial amount of money due to your car depreciating in value. While buying a house/apartment is a good idea because the value of your property increases, buying a car is a bad investment because the value decreases. The bad news is that in order to work and get around, you most likely need a car. Fortunately, there are ways to be smart about what type of transportation you are investing in.
The advice of smart money managers is to buy a used car rather than a new one. It isn’t as flashy as getting a new set of wheels, but it is way smarter financially. Buying a used car coming off of a lease is usually a smart investment because the price has already depreciated a substantial amount within the 2+ years it has been used, and it is now available at a reasonable price. The depreciation after the first two years is less substantial and you will be losing much less on this investment than you would if you bought it brand new. Buying used has an advantage over leasing as well because just like renting a house, at the end of a lease, you do not own anything and cannot salvage any money out of your investment. Even with an old used car, you can still manage to get something in return when the time comes to get a new car.
#3 Live Below Your Means And Save Money
After graduating from college and getting your first “adult” job, it can be incredibly tempting to spend all of your money on a number of things you couldn’t afford during your broke college years. Resisting this urge can payoff big time down the road due to the power of compound interest. This is an important money management tip seeing as the money you earn in your 20’s has the biggest potential return when invested, and as you get older time starts to work against you and your ability to turn your savings into more money.
For this reason, working as hard as you can to get raises, promotions, or higher paying jobs and combining it with living below your means can allow you to stack a substantial amount of savings. For those without kids yet, this is also one of the best times to save because as you get older, expenses tend to get bigger. Once you start saving money every paycheck, consider opening a free account with Robinhood or E-Trade and start dumping your savings into an index fund. It doesn’t take investing knowledge to set up and you don’t need to know a lot about stocks to maintain it. This tends to payoff much better over long periods of time than traditional savings accounts do.
#4 – Get A Credit Card
Slightly less of a factor in your overall financial well-being yet still a good piece of advice is to get a credit card and use it responsibly. Getting a credit card (or multiple credit cards) at a young age will help you improve your credit score and can save you money down the road by securing lower interest rates on loans. This isn’t as important as the first three tips, but it is definitely still worth mentioning. On top of building credit, getting a good cashback credit card can put hundreds of dollars back into your pockets every year just by using it for everyday spending instead of a debit card. As long as you follow rule #3 and live below your means, a credit card (or multiple credit cards) is a smart move during your 20’s.
#5 – Build A Side Hustle (Passive Income)
My last piece of advice and potentially one of the most rewarding when looking at long-term financial success is to start building multiple streams of income. Almost every self-made millionaire who retires before age 40 will tell you that multiple income streams and passive income are crucial pieces of financial freedom. The reason I list this as something to do in your 20’s is because a large majority of the time, building passive income streams takes time and energy which happens to be two things you have a lot more of at a young age. Whether you save up money and put it into some rental properties, or decide to start your own side business, finding ways outside of your full-time job can be very rewarding and lucrative down the road. Check out our article on how to make some extra money online if you are looking for ideas on how to start making some extra cash.
Follow these 5 personal money management tips in your 20’s and I guarantee you will be putting yourself in a much better position to succeed financially throughout the rest of your life. Remember, don’t wait until its too late to start making these important financial moves, the earlier you start the more you stand to benefit from it!