Making smart financial choices in your 20s can help set you up for long-term success. That includes creating a plan to pay off student loans, avoiding credit card debt, building an emergency fund and working toward hitting bigger goals, like having enough money for a down payment on a house. Taking control of your finances at a young age — even if you feel cash-strapped in an entry-level job — will make it easier for you to achieve your goals in your 30s and beyond.
CNBC Select offers six smart money moves you should make in your 20s to set yourself up for future financial success.
6 money moves to make in your 20s
- Create a budget and stick to it
- Build a good credit score
- Set up an emergency fund
- Start saving for retirement
- Pay off debt
- Develop good money habits
1. Create a budget and stick to it
Creating a budget is an important financial step that can help you get your finances in order and track how much money comes in and out of your bank account every month. While it may seem like a lot of work to create a budget, there are numerous online resources and apps that can help you. Plus, once you have one, the majority of the work is done, and you can tweak it as your spending habits or income change.
After you create a budget, it’s important to stick to it. Regularly check-in with your budgeting goals so you don’t spend more than you can afford to repay. And if you share expenses with someone else, make sure you both have access to the budget and hold each other accountable.
2. Build a good credit score
Establishing a good credit score is key to qualifying for the best financial products, like credit cards and loans. Plus, the higher your credit score, the better terms you’ll receive, which can save you thousands of dollars in interest in the long-run (we always recommend you pay your balance on time and in full each month).
One of the catches of building credit is you need to have some credit history in order to qualify for a credit card, but it’s hard to qualify for a card without any credit history. One option is to become an authorized useron a family member or friend’s credit card. You could also consider applying for a secured card, which works the same as a regular credit card, but you’re required to put down a deposit (typically $200).
There are also a few services that can help you raise your credit score without a credit card, like Experian Boost. This is a free service that lets you link positive payment history for monthly utility, phone and Netflix bills, potentially boosting your credit score.
Once you have a credit card, the easiest way to improve your credit score is to regularly use the card, be mindful to spend within your means, make sure you pay at least the minimum on time every month and pay in full whenever possible.
3. Set up an emergency fund
One of the best steps you can take in your 20s is to establish an emergency fund to cover any unexpected expenses that may arise, such as medical bills or car repairs. The money in your emergency fund can help you avoid taking out a loan or carrying a balance on a credit card, which can save you money on interest charges.
When you set up an emergency fund, consider keeping the money in a high-yield savings account, like Marcus by Goldman Sachs High Yield Online Savings or Ally Online Savings Account. These online accounts only allow you withdraw money up to six times a month without penalty, which might help reduce the temptation to withdraw money for non-emergencies.
Experts generally recommend putting three to six months of expenses into an emergency fund, but amid the coronavirus pandemic and high unemployment rates, some financial experts are offering more realistic advice about how much people should try to save. Instead, you should focus on saving as much as you can afford, after covering necessary bills.
It’s OK to start with a smaller goal. Saving $20 a week (roughly $3 a day) adds up to $1,000 in a year, which is a good cushion to get you started.
4. Start saving for retirement
It’s never too soon to start saving for retirement, and the earlier you start putting money toward your future, the more it can grow. When you get your first full-time job, your employer may offer a retirement account, such as 401(k), that you can open and deposit a percentage of every paycheck into each pay period.
Many employers also match your contributions up to a certain percentage, which is a great way to maximize savings. As a general rule of thumb, opt to save at least a percentage that is equal to your employer’s match. So if they match up to 6% of your contribution each paycheck, choose to transfer 6% or more to your 401(k) every pay period.
While employer-sponsored retirement accounts are helpful, you don’t have to wait until you have a full-time job to start saving for retirement. Roth IRAs are a great alternative to a 401(k), and you can set up recurring transfers from every paycheck so you never have a chance to miss the money.
5. Pay off debt
If you have student loan or credit card debt, you should make paying it off a priority in your 20s. Owing money to a lender has the potential to hurt your credit by increasing your utilization rate (the percentage of credit you use), which can result in a lower credit score. Lenders may also consider you a high-risk borrower if you have a large amount of debt, which may reduce your chances of qualifying for other financial products. And beyond affecting your credit score and qualification chances, you’ll wind up paying a lot of money in interest charges the longer you carry debt.
Take the time to make a clear debt repayment plan and stick to it. After you create a budget, consider how much money you can put toward your debt every month. Some experts recommend that 20% of your take-home pay should be earmarked for debt repayment and savings. If you want to pay your debt down faster, you might divert more of your income toward that goal.
You can also consider debt consolidation if you have balances spread across numerous cards. Debt consolidation can help you minimize the number of accounts you need to pay each month and sometimes offer lower interest charges than a credit card.
6. Develop good money habits
While you’re in your 20s, consider ways you can build good money habits and be proactive with your finances. Get into the habit of regularly checking your different account balances. Avoid paying unnecessary monthly fees by switching to a no-fee checking account, like the Capital One 360 Checking® Account, or earning a competitive interest rate with a high-yield savings account like Marcus by Goldman Sachs High Yield Online Savings. Make sure to spend within your means and avoid racking up unnecessary credit card debt and paying high interest charges.
You can also consider optimizing the credit card(s) you use and opening a card that has rewards tailored to your spending habits. There are hundreds of cards offering bonus rewards on groceries, gas, dining out, travel and more. You may also want to consider a simple flat-rate cash-back card that earns you the same amount of rewards on every purchase, such as the Citi® Double Cash Card (2% cash back: 1% on all eligible purchases and an additional 1% after you pay your credit card bill).
In addition to saving money and earning rewards, you should be proactive and monitor any changes to your credit history. Spotting fraud early can save you time and money in the long run, but it’s not easy to do on your own. Signing up for a credit monitoring service can provide you with an early notice of potential fraud, so you can take steps to protect your personal information.
There are a lot of services to choose from, so CNBC Select ranked the best free and paid credit monitoring services, so you can make an informed decision before you sign up. IdentityForce® UltraSecure and UltraSecure+Credit services rank as our top picks if you plan on paying for a service, providing alerts for changes to your credit reports from all three credit bureaus, as well as up to $1 million in identity theft insurance.
Bottom line
Making smart money decisions in your 20s has long-term benefits that can help you achieve future financial success. If you follow the six tips listed above, you can work toward a good credit score, being debt-free and saving money for retirement and major life milestones.
