Managing Finances in Your Twenties

Many young people begin their adult lives with goals and dreams for their future, often failing to realize that simple steps taken in their twenties can allow them to achieve their goals quickly and as painlessly as possible. Just as good money management should begin as early in a person's life as possible, young adults should begin planning for their future as soon as they can. Proper money management and financial skills developed in a person's twenties can directly impact their quality of life throughout adulthood and into retirement.

Unfortunately, many people in their twenties are presented with larger amounts of money and increasing debts and responsibilities, often without being given the appropriate tools to manage their financial situation. Simple processes like debt management and retirement savings are often overlooked because the concept is difficult to grasp and the consequences are not immediate. Nonetheless, you should begin to plan for these common issues as soon as possible to minimize financial impact and increase your own knowledge.

1. Plan for Retirement. The concept of a company pension died with the introduction of "transferable skills"; for many young people, the idea of working for one company for your entire career has gone the way of the dinosaurs. While the idea of job- and career-hopping throughout your adult life presents many positive aspects (career advancement, flexible work environment, more experience) it also shifts the responsibility of financial planning back on the employee. If a 22-year old puts $100 per pay into a registered retirement savings plan or similar savings account that gives 4% interest, he will save over $2700 a year for his future retirement - meaning over $89,000 for a retirement at 55 or $116,000 for a retirement at 65 years of age. By increasing these payments as salary levels go up, the savings become even more significant.
   
   
2. Pay Off Loans. Most new graduates are faced with high levels of debt accrued in order to obtain their education. While it is easy to ignore this amount, it is very important that a young person aims to be debt-free as quickly as possible to eliminate accumulating interest and improve their savings. Similar to saving for retirement, it is easy for a young person to pay down a significant portion of her debts as she has limited responsibilities (i.e. a family, a mortgage, etc) and an increasing level of income. Consider consolidating loans for one easy (and hopefully smaller, if you choose one with a lower interest rate) payment. Put as much of your expendable income into paying down your loans as quickly as possible.
   
   
3. Save! After loan payments and retirement planning, developing a nice financial cushion is very important to financial management in your twenties. A time will come when this money needs to be used - either a downpayment for a house, the purchase of a new car, payment for a wedding, or a variety of other personal reasons. In putting as much money aside as possible, you are allowing yourself to live life in a way many people cannot - you will escape the concept of paycheque-to-paycheque and will rarely feel the stress of emergency situations which you can barely afford.
   
   
4. Develop a Budget. Because responsibilities are low and income is high, now is a great time for young adults to begin focusing on a budget. Budgeting money allows for financial planning for both short- and long-term goals - whether it involves debt repayment, saving for a house, or simply living a better lifestyle. Make a list of income and a list of expenditures; then simply focus on increasing income and lowering expenditures while balancing any savings and debt payments that need to be taken care of. Starting a budget in your twenties will make money management a breeze when children and house payments enter the picture.
   
   
5. Improve Your Credit. In addition to lowering your debt, you should spend your early adulthood developing and maintaining positive credit ratings as they will impact your life far into the future and a negative score can be difficult to erase. As tempting as they may be, try very hard to avoid credit cards if you have any problems with spending sprees or money management. It is important to create credit, so consider a pre-paid credit card or be very diligent about paying down your monthly balance consistently and completely. Also consider purchasing items on a payment plan, which will help you to improve your credit even if you do have the money up-front and it will cost slightly more to pay with installments.

Financial planning in your twenties boils down to two things - managing priorities and setting yourself up for a strong financial future. It may be worthwhile to attend a financial course or simply speak to older adults you know who have good money management skills. While you may have just left school, education should continue well past your teens and twenties, and financial planning costs very little but yields a high return.

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