Saving Money and Building Credit in Your 20s
When you enter your 20s, the weight of adult responsibilities — especially finances — can seem overwhelming at first. Try to think of this early phase of your life as an exciting opportunity; you have the chance to set yourself up for success in the years to come.
The financial habits that you create now are the launchpad for your future. Right now, time is your greatest asset. Leveraging it can begin a snowball effect that is impossible to replicate later in life. Below, we’ve laid out five key financial moves to make in your 20s that will help you save money and reach milestones.
Our Top 5 Success Pillars
1. Harness Compound Interest Immediately
Automating your retirement savings can help take the stress out of remembering to consistently contribute. You can set up automatic contributions to your 401(k) through your employer’s payroll system. Ideally, this should be around 15% of your income. Additionally, you can contribute to your IRA by linking your bank account to your brokerage and setting up recurring electronic funds transfers.
Starting to invest early, even if it’s a smaller amount, can outperform investing more later in life due to compounding interest over time. Assuming an average ~7% annual return, a person who invests $200/month starting at age 22 will end up with more money than someone who invests $500/month starting at age 32. Even more surprisingly, they’ll actually end up investing less, but making more, resulting in roughly 655k after about 40 years. This is due to that snowball effect mentioned above — and remember, it’s impossible to replicate if you start too late.
2. Master the ‘Pay Yourself First’ Rule
Instead of saving whatever you have left over after monthly expenditures, do the reverse. Whatever you contribute monthly to savings should be invested before you spend on personal purchases. Save first, then spend what’s left.
Treat your savings account like another monthly bill. By treating your savings like a fixed expense, similar to rent or utilities, you’ll build a habit of paying it on time, every time.
3. Strategically Build Credit for the Future
Your credit score is a key element of your financial health. The better your score, the more likely you are to secure loans — and the less of a risk you seem to lenders. Keeping track of what you owe is a good starting place to begin your debt management and credit plan. Use our Debt Calculator to determine how much you owe and how long it will take to pay off. A high credit score can be beneficial for lower mortgage rates and insurance premiums.
One of the best ways to build your credit effectively is to use your credit card for fixed expenses (like gas) and pay it off immediately. By thinking of your credit card like a debit card, you’ll only spend the money you already have.
4. Construct an Emergency Savings
Having an emergency savings account is another way to take the next step in your adult financial journey. By putting aside a set fund that isn’t to be touched except for emergencies (like car repairs or a health-related incident), you move from just surviving paycheck to paycheck to building a secure foundation for your future. You should aim to always have 3-6 months of expenses, to ensure a job loss or emergency never results in debt. Our Emergency Savings Calculator can help you determine how much you should have put away.
5. Practice ‘Value-Based Spending’
Practicing ‘value-based spending’ means taking a long, hard look at your spending habits and making necessary reductions. When you cut back on superfluous spending, you can save money for the things that matter most to you, like travel, hobbies, or investing.
To guide your value-based spending, you can use the 50/30/20 rule. In basic terms, 50% of your income should go toward things you need to buy/pay for (like rent, groceries, gas), 30% toward things you want to buy (like entertainment, dining out, travel), and the remaining 20% should go toward your financial goals (like a savings account or emergency fund). Think of this as a roadmap, not a restriction. Use it to make informed decisions about where your money goes each month.
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Financial success in your 20s isn't about being a millionaire tomorrow; it's about building the system that makes becoming financially successful inevitable. Peach State Bank is here to make sure you succeed. Contact us today to get started on your financial journey.