A few years ago, this piece from Elite Daily went viral and almost made my head pop off. With the cheeky title “If You Have Savings in Your 20s, You’re Doing Something Wrong,” I read it hoping that it was a sarcastic take on how millennials should really buck up and start paying attention to their money. But it wasn’t. It was chock-full of YOLO without any repercussions, and to this day it still bothers me.
Why does it still bother me? Because it’s still up on Elite Daily’s site, and I fear a slew of 20 year-olds will read it and walk away feeling reassured that they can blow their paycheques and all will be fine.
But you see…it won’t be fine. And I would know. I’m no longer a member of the 20-something club, I’m officially 31, and I thank my lucky stars every day that I didn’t neglect my finances throughout my 20s.
What Being a Lame, Frugal 20-Something Can Afford You
Instead of YOLOing my money away, I chose to do some super uncool things like budgeting, saving, living frugally and investing a portion of my paycheque regularly. Super boring and not sexy, and you bet I got some questionable looks from my peers. But doing all of this allowed me to do a heck of a lot in the end.
For instance, if I wasn’t diligent with my money in my 20s, there’s no way I’d be able to afford the following without going into heaps of debt:
- Travel to Gambia, Mexico, Thailand, Portland, Las Vegas & California
- Move to Toronto with no job, connections or any real prospects
- Go back to school 4 times (ya, I like school)
- Buy a townhouse in Toronto
- Quit my 9 to 5 job to work for myself
That ain’t nothing to sniff at, am I right? Sure, it took me from the age of 15 to 30 to afford all of these things, but patience is key when it comes to being a personal finance pro. It’s not all about instant gratification. It’s about putting the time and work into it, and only then will you get an amazing reward at the end of it all.
What It Means to Be Smart with Your Money in Your 20s
Let me break things down for you right here. Personal finance is not complicated or hard. There are a ton of people that may say otherwise, but they’re wrong. You don’t need to be a Certified Financial Planner to be good with your money. Heck, you don’t even need to work with one to make a solid financial plan for yourself. Is your mind blown yet?
Okay, let’s start by breaking down what a financial plan means and how you can make one for yourself.
Assess Your Current Financial Situation
How much money do you have right now? How much are all of your assets worth? And how much do you owe? Figuring out where you are financially is exactly where you need to start to get your stuff together in your 20s. To do this, I highly recommend downloading my Net Worth Spreadsheet or signing up to my resource library to get access to all of the helpful freebies I’ve created.
My Net Worth Spreadsheet will guide you through figuring out what your assets and liabilities are so you know where you’re starting from. To learn more about determining your net worth, check out this helpful blog post all about it.
Make a Budget
You’ve probably heard the term budget a million times, but all it really means is some sort of document that outlines where you’re money should go (a.k.a. a spending plan). There’s no right or wrong type of budget, and you can easily make one from scratch or download my budget spreadsheet as a template.
On top of making a budget, it’s key to track your spending. By tracking your spending, you can monitor your cash flow (how much money is coming in vs. how much is going out). Obviously, you want your cash flow to look like more money is coming in than out, but if you see the reverse, then you know you’ve got to cut back on your spending to make it work.
Save Up for Emergencies
Ever heard of an emergency fund? It’ll save the day when things happen beyond your control. Like when you lose your job, your car dies or some other emergency. Instead of relying on your credit card or a line of credit to bail you out, save up 3 to 6 months worth of your living expenses in a savings account. You’ll thank yourself later.
Pay Down Your Debt
If you don’t have any debt, you rock, move on to the next step. If you do have debt, like a student loan or credit card debt…stay with me. Debt sucks. I absolutely hate debt. But sometimes it is the only way to pay for school, a car or a home to live in. But that still doesn’t mean it isn’t the devil. Debt has the power to ruin lives.
That’s why you need to be extra careful when using credit. And when you do have debts to pay off, make it your top priority to get rid of it. Not only that, the longer you take to pay off your debt, the more you’ll end up paying in the long run thanks to it’s equally evil sidekick interest.
Set Your Financial Goals
We’ve all got hopes and dreams, but they mean nothing if we don’t do something about them. Want to retire early? Want to quit your job to travel for a year? Want to be debt-free before you hit 30?
These are all types of financial goals that you absolutely can achieve if you write them down (a vision board perhaps?), configure your budget to achieve them, and do the hard work of not overspending and saving your money.
Invest for Your Future
I was terrified of investing in my 20s because I didn’t think I was doing it right. I thought you had to use a professional to be a wise investor, or spend hours per day monitoring stocks on the market. Guess what, that’s not how investing is at all!
You can absolutely invest on your own if you want to, and you don’t have to be a rocket science to figure it out. To break things down a bit more, at a high-level these are the types of things you can invest in:
- Guaranteed Investment Certificates (GICs)
- Mutual Funds
- Index Funds
- Exchange Traded Funds (ETFs)
Okay, that’s helpful, but how do you choose what to invest in? It’s all about your risk tolerance. How much psychological pain are you willing to suffer from your investments (seriously)? If you hate the idea of losing money from investing, then you’ve got a fairly conservative risk tolerance. But, the thing with risk is the riskier the investments, the better potential pay-off. Then again, riskier investments can also mean you lose everything. Similarly, the more conservative your investments, generally speaking your returns will be lower than riskier investments.
So what you need to do first is figure out what your risk tolerance is, then choose investments that match that tolerance.
For me personally, I’m a big fan of index fund and ETF investing. If you want to learn more about those types of investments, you should definitely check out Millionaire Teacher by Andrew Hallam.
Make Sure You’re Properly Insured
Here comes the fun stuff, insurance! Insurance is way to safeguard yourself against potential financial loss, and there are a ton of different types of insurance to look into, such as:
- Rental insurance
- Home insurance
- Life insurance
- Travel insurance
- Auto insurance
- Pet insurance
- Health insurance
- Dental insurance
You may not need all of these now, but the key ones to look into are rental/home insurance, auto insurance (if you plan on getting a car), and life insurance if you have any dependents and are underinsured by your employer.
Build & Maintain Good Credit
Even though I just told you how much I despise debt, it’s sometimes necessary, especially if you need to borrow to buy a car or need a mortgage for a home. The thing is, if you do need to borrow money, you need to be smart about it. And that means making sure you get the best interest rate possible so you don’t pay more than you need to when paying back your loan.
How you make sure you get a good rate is by having good credit. And to build and maintain good credit, you just need to follow these steps:
- Pay off your credit cards in full before they’re due (never just pay the minimum)
- Always pay the minimum (if not more) on any other outstanding loans
- Pay all of your bills on time
- Never go over your credit card limit or max it out every month (consider raising your credit limit if necessary)
- Always keep your oldest credit card (don’t cancel it, even if you don’t use it)
- Don’t open too many credit cards (stick to 1-3)
- Check your credit report with Equifax Canada and TransUnion once per year to make sure all of the information is correct
- Check your credit score with Equifax Canada or TransUnion if you want to know what your score is before applying for a loan
Do Your Estate Planning
This may be too early for you if you don’t have that many assets and don’t have any dependents, but once you do, it’s time to start thinking about making a plan for your estate once you’ve YOLOed for the last time. For instance, to have a nice and organized estate plan, you should:
- Get a will
- Set up a trust for any beneficiaries to limit estate taxes
- Name an executor for your will
- Name a power of attorney
- Name your beneficiaries for all of your assets
- Outline your funeral wishes
You can learn a bit more about estate planning thanks to my favourite go-to website Investopedia.
So, how do you do all this? By finding a wills & estates lawyer and getting them to draw it all up for you. It’s not hard, it doesn’t take that much time, but beware it can be costly. It set my husband and I back around $1,000, and you’ll have to pay additional fees whenever you want to update anything. But still, it’s so worth it.
Need Some More Guidance?
Good, because I made something just for you. I call it my Get Your Financial Life Right Challenge and it’s a free 10-day email course. Every day you’ll get a new email telling you what you need to do to get your act together.
Did you YOLO your money away in your 20s, or were you a money nerd like yours truly?