5-Money-Lessons

Cashflow & Budgeting,Personal Finance,Tips & Tricks

5 Important Money Lessons In Your 20s [Action Points]

3 Aug , 2015  

Schuman Zhang

Schuman Zhang

Business Specialist at Proadviser.com.au
Schuman is an avid reader, writer and curator in personal finance, investment and entrepreneurial communities. He joined the Proadviser team to help grow the professional advisers marketplace and help consumers get the right advice. To get started simply click on “Ask An Adviser”
Schuman Zhang

Your 20s may be a time of freedom. You just moved out of home, got a good job and enjoying all that life has to offer. The future is bright and optimistic and the joys of being fully independent can be exhilarating and daunting at the same time.

Your 20s is the perfect time to build a solid foundation for your financial future. You have plenty of time to build wealth and an early start can easily guarantee a comfortable and wealthy life. However, most 20-somethings fail to strike a balance between the things they want to do now and the things they need to do to ensure a comfortable life later on.

Many people see their 20s as a bit of a ‘throwaway’ decade, but it’s definitely unwise to see it that way.

After all, this is the time when you might be planning for a wedding, thinking about starting a family, getting promoted for your job and some of you may already be thinking of ways to retire early and travel the world!

Well, the truth is, the earlier you develop a financial plan for yourself, the more likely you will uncover financial opportunities and make your dreams come true. In this article, we explore the most important financial lessons you must learn in your 20s so you can get ahead.

Build An Emergency Fund

An emergency fund or rainy day fund (as some like to call it) is money put aside to cover the cost of an unfortunate event. Building an emergency fund is one of the most important saving lessons you should learn in your 20s.

Every young adult feels invincible, like the can take on the world. They neglect putting aside money for emergencies and it comes back to bite them. You should aim to save 3-6 months worth of pay for an emergency fund. The bare minimum that might be able to cover the costs of an emergency would be $1000, but that is really cutting it close.

In order to build a healthy emergency fund specific to your circumstances, simply follow the steps below:

  • Start small! Rome wasn’t built in a day. Your initial savings target can be small. To start with, aim for a couple of hundred dollars. Set aside a little bit of your weekly/monthly pay and you should be able to reach that goal in no time.

Action point 1: save $25 a week for ten consecutive weeks. This is the challenge I’m setting you, feel free to let me know when you’ve achieved with this goal

  • Find extra room to save. If you think creatively, there are plenty of ways to come up with extra money without having to get a pay rise. You can get a rate reduction on your credit cards, save more money on insurance, and learn to prepare home cooked meals instead of going out for an expensive dinner

Action point 2: After you’re finished reading this article, do a complete audit of your insurance payments. That means visit insurance websites, get quotes and start saving on your premiums!

  • Automation is the key! Set up a new bank account specifically for saving money. That means shop for a high interest savings account, and set up a plan to sweep money weekly into that account

Action point 3: How often do you check you bank accounts and take note of the bank fees and interest rates? Take some time to do some research and set up an account specifically for saving money

  • Keep milestones. Set achievable goals. You’ll feel good when you achieve your first milestone. That’s exactly how to build momentum for you savings plan

Take Advantage Of Free And Cheap Deals

People in their 20s are looking to explore and experience. However, it can be incredibly expensive to venture out and try out all these new places and experiences. By taking advantage of services such as Groupon you can try out a variety of local Australian businesses at a discounted price.

Also, you can use social media and other means to keep track of any special deals that may pop up at a place that you would like to explore. Many trendy businesses host special events such as a “Happy Hour” to attract more customers. If you stay alert and look for these opportunities then you can explore and experience without having to bust your wallet.

There’s an over-abundance of website that can help in this department. Besides from group buying websites like Groupon, you can sign up to loyalty programs from your favorite retailers. If you are a regular coffee drinker, ask for a loyalty card from that Cafe or restaurant. Want to go on a holiday, make sure you do your homework and compare all your travel options.

Don’t Overspend

too-much

Everyone buys things that they don’t really need, the worst offenders are usually people in their 20s. It can be liberating and exciting to go on a spending spree, but you should control yourself or risk getting yourself in debt.

Overspending is also a really bad habit to develop. It’ll work against you when you attempt to achieve your financial goals. The majority of the things you spend money on will also have no return value, so it is essentially wasted money. That’s not to say you shouldn’t spend any money, but make sure you are careful with how much money you spend.

Spending money is fine, but like most things in life — it should be done in moderation. According to research, we commonly overpay on all of these things:

  • Pseudo health and wellness products. This is a big one, when was the last time you munched on a protein bar, or a drank a low-fat shake? The truth is most of these products are sold at a premium but adds no obvious benefit
  • Bottled water. I can already feel the guilty looks. I know bottled water might taste pretty good, but they also cost you quite a bit. On top of that, tap water is free and is good for your teeth. If you’re really picky, put a filter on it!
  • Prepackaged food. Very popular amongst young people. You might feel lazy or you might be super busy. But think about this, most prepackaged foods like sandwiches are easy to make, cheap ingredients and if you make them yourself, you can give yourself larger servings!
  • Late fees. Get organized and don’t pay your fees and bills late. These things all add up even though you may not notice them
  • Non-bank ATM fees. Be organized and make sure if you have enough cash. Many bank apps these days allow you to withdraw money with your phone so there’s no excuses
  • Gambling. This includes sports betting and pokies. You will not strike it rich from these activities. Take your gambling money and invest them wisely instead, you’ll only thank yourself later

Action point 4: Go through the list above and see if any of those things apply to you. Make a commitment to cut those expenses in the coming week. They’ll will help reach your financial goals and milestones faster.

Avoid Bad Credit

Bad credit stays with you forever. Also, bad credit accumulated at an early age (such as your 20s) looks especially bad because it is an uncommon occurrence. You should aim to develop good credit which helps convince lenders and banks that you can manage your finances. Developing good credit can also help you get lower rates on credit cards and loans in the future.
Paying all your bills on time and not maxing the limit on your credit card all contribute to a good credit score. Even if you regularly max out your credit card but are able to pay the bills, it still doesn’t reflect well on your credit score. My advice is to use your credit card sparingly and develop good credit habits. You’ll thank yourself for being wise with your credit card when you obtain a brand new shiny one with a super low-interest rate.

When it comes to personal debt, young Australian consumers are notoriously reckless. Some things you can do to avoid a bad credit rating:

  • Inform your credit card provider of any change in address or contact details
  • Call your creditor to discuss in a timely manner if you have issues making payments
  • Talk to your creditor to draft up a payment plan if you know the debt cannot be paid right away. Negotiation is key in life
  • Don’t apply for credit that is too big to handle. If you do, you might default, which will significantly and negatively impact on your credit rating

Action point 5: Your credit rating is a telltale sign of your financial health. I’m sure you go for a health check up on a regular basis. There’s every reason for you to go for a financial health check up as well. Click here to check your credit rating.

Start Investing Wisely

Start investing

The most important saving lesson you should learn in your 20s is how to be financially savvy. Things such as moving out on your own, not relying on your parents and paying your own bills are skills that you will keep with you for the rest of your life. It will also teach you how to budget and live within your means.

As you become more experienced in being financially independent, saving money will naturally become easier. You’ll quickly learn what things are necessities and how much you are able to spend without getting yourself into financial trouble.

Becoming financially independent is the absolute starting point for you to start your first step towards investing. They say you should ‘let your money work for you’ and that is exactly what your hard earnt money must learn to do. In your 20s, you can start thinking about building an investment portfolio, buying your first home and in Australia, property investment is also a very popular vehicle for building wealth.

Some of the things a young investor should be thinking about before dipping they dip their toes into investing include:

  • Managing and reducing debt. Car loans and credit card debts should be eliminated zealously while you’re in your 20s
  • Managing pay rises and bonus payments. I hope you are a star performer at your job. You’ll soon be experience bonus payments and pay rises. Know how to manage them!
  • Maximize your super. Your super is your foremost retirement and investment vehicle. Make sure it is properly equipped to serve you!
  • Protecting your lifestyle and assets. The unexpected always happen in life. Make sure you are properly protected against the vicissitudes of life

The earlier you start investing, the longer your time horizon and the more powerful the law of compounding becomes. Investing is not a get-rich-quick scheme, it requires a strong commitment over a long period of time.

The most powerful thing available to an investor is knowledge. Whether you are interested in shares, bonds, or property. Having the right type of knowledge will help you build a successful investment portfolio. But beware, having the wrong knowledge or having blind spots can sabotage your efforts.

I’ve compiled a list of things topics you should read in order for you to start investing:

  • Start reading about how to invest in shares. The Australian share market has provided very good returns to investors over time
  • Read about managed funds and ETFs and get a sense of how diversification and pooled investments work
  • Do your homework on Australian property, take note of where the growth areas are and where potential opportunities might appear
  • Go to YouTube and watch some videos by Investopedia or simply search ‘Warren Buffett’, this man is gold!

Action point 6: Get a comprehensive financial plan that will set you up for financial success. Formulating a plan for your savings and expenses, your debts, investment goals when you’re in your 20s will set you up for life.

Oh and one last important thing! Since you are young and most likely tech savvy. We’d like to show you some money management apps that will help you achieve your financial goals.

  • Try Pocketbook. A money management app that tracks your income and expenses
  • Try Boomeringo. Another flavour of app that track your finances
  • Try Acorns. A smart app that takes your change and builds an automated investment portfolio

Learning to save and invest your money in your 20s is an ongoing lesson. The 20s are the most exciting time for most people and it is easy to neglect your financial future. But, if you want to set yourself up for financial success in the future it all starts during your 20s.

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One Response

  1. Andaleeb Akhand says:

    Very wise and easy to follow advice for young people taking their first steps to financial independence.

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