If you’re in your 20’s, what you do with your money now could have a lasting impact on your financial future. Hopefully you’ve already accepted and come to terms with the money truths, so it’s time to start getting serious about managing your money.
It might seem intimidating at first, but trust me, managing your money isn’t that difficult. Short term goals can easily be attainable, while long term goals may require a little more work, getting there will be easy as long as you have a plan.
How to manage your money and save
Spend less than you make – This is one of the most basic principles of personal finance, yet it’s so easy to get in over our heads when we’re in our 20’s. I hate to generalize but millennials seem to expect only the best as soon as they land their first job; a nice car, designer clothes, eating at all the trendiest restaurants, and yearly vacations are so much fun. Well those things cost money and if you’re spending more than you make, you’ve got a problem.
The easiest way to keep your spending in check is to track your spending– all of it. Literally write down everything you’re spending money on for a month or two. With this information handy you should easily be able to make adjustments and free up your cash flow.
Make a realistic budget – Part of the reason why people struggle to spend less they make is because they don’t have a realistic budget. Well now that you’ve tracked your spending it should be easy to put together a budget. Take a look at how much you’re making a month and then subtract all your expenses; don’t forget to include any savings, but more importantly make sure your budget is realistic. Spending $600+ a month on entertainment might be “affordable” but it won’t help you reach your long term goals.
Pay yourself first – This applies to both short and long term savings; I’m talking about vacations, a down payment for a home and of course retirement savings. By paying yourself first, your guaranteeing your savings goals are always being met. Money in your 20’s can be difficult to manage so don’t fall into the trap of spending first and then saving if you have something left over.
Take free money – Free money doesn’t come around often so if it’s ever presented to you take it! Now don’t go do something illegal, the free money I’m talking about is from employer pensions, company stock plans, or any of government grant. Pensions are becoming increasingly rare so if you’re employer offers one, sign up right away. Stock options can be highly lucrative so maximize your contributions. Government grants apply only in certain situations e.g. the child education savings grant, but anyone can take advantage of their TFSA and RESP.
Educate yourself – By now you’ve probably realized that the education system has done a terrible job at teaching you anything related to financial literacy, but don’t worry, managing your money is simple once you educate yourself. Start by reading a book about personal fiance, there’s a lot out there so try one of my recommendations. If you read just one book, you’ll probably know more about money than 70% of the population, that’s a good start.
Reduce debt – Managing your money can be near impossible if you’re constantly making debt repayments, but hopefully at this age, the only debt you have is student debt. Even if you have consumer debt, just set up a debt repayment plan so you can get on track. When you finally do clear your debts, don’t be afraid to celebrate, being debt free is quite the accomplishment.
Avoid Fees – When people start investing they usually begin with mutual funds. This is a good way to start, but aware of the management expense ratio (MER) that’s associated with your fund. The average MER is between 2.5-3%, this might not sound like a lot, but when you compound that over the rest of your investing life, that could be 10’s if not 100’s of thousands of dollars.
Some mutual funds also carry a deferred sales charges (DSC) which can last anywhere from 5-10 years. This fee is a percentage of the value of the shares that you plan on selling and it’s at its highest in the first year before gradually decreases until it hits zero. Try to avoid any mutual fund that has a high MER and a DSC.
Build your emergency fund – Building your emergency fund can be tough in your 20’s since your pay is usually crap, but don’t underestimate the importance of saving for one. Shit happens, you could get laid off, you might need medical attention, or your car might need repairs; unexpected things happen so make your emergency fund part of your budget.
Learn more skills – After getting a post secondary education and landing a job, you would think that you’re on a path to success but the reality is, there’s a lot of competition out there. The scary thing is, our economy is crap so you always want to pick up more skills to make yourself more valuable. If you’re smart some of these skills will help you bring in some freelance income. Having a side hustle is never a bad thing.
If you haven’t figured it out by now, managing your money is tough in your 20’s. One thing to note, don’t concern yourself over how your peers are doing. Just because they have a new car, and a big house doesn’t mean they know what they’re doing with their finances; for all you know, they’re highly leveraged. Concentrate on your own situation and you’ll be just fine.