How to manage finances in your 20s

Demystifying the financial world can be a challenge at any age. However, the earlier you grasp the basics, the more opportunity you have to reap the rewards of good habits.

| 7 min read

The years between 20-29 are known as the Foundation stage, because this is when you are likely to begin further education, start a career, and become more financially independent.

Even though finances might not seem like a priority at this time, it’s worthwhile to get in the habit early of being proactive rather than reactive - so you can control your finances rather than them controlling you. With that, here are five top tips to help you manage finances in your 20s.

How to be smart with your money in your 20s

1. Learn how to budget

The first place to start is establishing your budget. A good rule of thumb is not to save what is left after spending, but to spend what is left after saving. This can be the hardest life stage at which to budget because circumstances frequently change and your salary is probably not as high as it will be in the future.

Changing jobs and salaries naturally influences your financial future but altering living arrangements and locations will affect your monthly budget too. The starting place, however, should always be the same; taking your net monthly salary and deducting the price per month for the roof over your head, household bills and commuting costs. Physically removing these costs from your account, via a standing order into a separate account to go out the day after you get paid, is good way to feel like you never had the money in the first place. You can use the same approach for building an emergency fund, and then to start saving and investing for the future.

2. Build an emergency fund

Ideally, an emergency fund should cover about three to six months of basic living expenses. These are funds to fall back if you find yourself in a situation where you are not earning regularly but expenses remain largely the same, be it because of illness, loss of employment or other unplanned reasons.

So, how do you build this emergency fund? First, set your target amount. What do you want to achieve with your money and what are your future goals? Second, understand what you can realistically afford to put aside each month. Some quick maths will then give you the time frame of when the goal will be reached. Make sure the money is easy to access. You can earn a decent interest on this balance in a savings account by shopping around, but don’t be tempted by a fixed-term interest rate as money locked away for a year is of limited use in an emergency.

It can feel like an unexciting way to use your money, and it can take a while to reach your target. However, making regular contributions, no matter how small initially, goes someway to mitigating the financial risk should an emergency occur. It also gets you used to the habit of putting away money each month before you have the chance to spend it.

However, your bank may not be the best solution. Even with the recent increases in interest rates, its deposit rates might not be the best available. Smaller banks and building societies and “digital” banks compete for savers’ cash by offering better rates. If you don’t want the hassle of hunting around for competitive deals, an online savings platform can do the hard work for you. Depending on your near-term plans a mix of easy-access, fixed-term, and notice accounts can provide both flexibility and better returns.

See what savings rates you could get with Charles Stanley Direct Cash Savings.

3. Manage your debt

You should pay off expensive debt and have a plan for managing other debts. Not only will you save on interest repayments, but you will also help to build a good credit rating which can mean lower interest rates when you come to take out a mortgage.

Not all debt is bad. Good debt is debt that ultimately improves your financial position, even though you have to repay it over time. This can include:

  • a low-cost mortgage, taken out on favourable terms
  • investing in yourself through a student loan
  • borrowing to build a successful business

Bad debt on the other hand is a drain on your personal cash flow, with no financial benefit. These kinds of debt usually have a high interest rate, so you should repay them as soon as possible and certainly before starting to invest (though pensions where an employer contributes are a possible exception). This might include:

  • expensive personal loans (such as payday loans)
  • overdrafts
  • credit cards

4. Set yourself some savings goals

You are more likely to reach you goals if you have a plan. Once you have sorted out your debt and emergency fund, you can think about some longer-term goals such as buying a home, and saving for retirement, either via your employer or independently. You will have a very long time for your money to grow, and this is the right time to start as the more you do now the easier it will be later. Ensuring you are paying into any pension plan at work should be a priority as you’ll benefit from valuable contributions from your employer.

Investing in stocks and shares can help you make money in your 20s but it may be right for goals which are still some years away, while saving cash allows you easy access to your money. Another way to save is in a pension, though this money will only be accessible when you are at retirement.

Start your investment journey

5. Consider working with a financial coach

A cost-effective way to ensure you are putting the right plans in place and to give yourself peace of mind, is to speak to a financial coach. Traditionally, Financial Planners work on an ongoing basis and charge annual fees to manage your money, but for many people this service and the associated costs are often beyond the scope of what is required.

This is where financial coaches come in, and at Charles Stanley we can tailor coaching sessions to your needs and answer the financial questions you have personally. Financial coach pricing is generally much more cost-friendly than formal financial advice or planning. For example, at Charles Stanley, we offer a free 15-minute consultation to have an open discussion about your finances and answer any questions - jargon free. Alternatively, book in for an hour-long financial coaching session (at the cost of £150) for an in-depth conversation and analysis, helping you establish goals and create a plan to help you achieve them.

OneStep Financial Coaching

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Do you have a tricky financial question?

Speak to a real-life financial planner, who can help you gain clarity around your money situation and take the next steps with confidence.

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