Those early years right after graduation are an incredibly exhilarating period.
You’ve completed school, you’re planning to leave your parents’ home, and you’ve begun a career with a paycheck. Maybe it’s not as large as you hoped, and perhaps not as much as some peers earn, but you’re finally seeing money come in.
You’re at the outset of your adult life, and you’re at last taking charge of your finances.
How to Handle Your Money in Your 20s
It’s often said that “a beginning is a very delicate time,” and the beginning of your financial journey is no exception: the financial choices you make right after college will largely shape your net worth in your 30s and 40s.
The pressure is on to make decisions that will safeguard your future stability and independence.
Keep reading to learn how to build a base for financial autonomy, how your social life impacts your savings, and how you might enter your thirties with meaningful assets and equity.
Stay at Home If You Can and Build Savings
Of all the monthly obligations you’ll face, housing will likely take the largest chunk of your income — the typical person allocates about a third of their earnings to housing.
So how can you turn housing costs to your advantage? The smartest move is often to live with your parents for a while.
After the freedom of college and the independence of on-campus or shared housing, the prospect of moving back in with Mom and Dad can feel… kind of awful.
Yet aside from camping out or squatting, you’ll seldom be in a better deal as a renter: parents might request a modest monthly contribution, but that typically comes with a furnished home, utilities covered and a stocked kitchen.
Parents can be challenging roommates, but in a few months you could stash away a few thousand dollars and prepare for your own place… right?
Choose (Good) Roommates
Good thought on saving, but not necessarily on getting your own place!
Paying full price for housing can drain your paycheck. A one-bedroom in a major city is expensive — usually starting near $1,000 a month — and that’s tough for someone fresh out of school.
On a $40,000–$50,000 salary, that rent could be nearly half your take-home pay. Privacy is appealing; financial breathing room is better.
If you’re relocating where you know people, call around and see if friends are searching for housing.
If you’re in a new city, check Craigslist and start screening — but be very selective. It’s wiser to wait a couple months to find the right roommate than to sign a year-long lease with a nightmare. If you’re an early-to-bed person, living with a bandmate might be miserable.
For neighborhood choices, here’s a favorite tactic for finding affordable rents: stay away from the trendy districts. If each block has chic eateries, galleries, and real estate agents, the area has likely moved beyond your budget.
Instead, search for signs of neighborhoods on the rise: a growing artist scene (artists often know how to stretch money and find bargains); a few new but highly rated restaurants (under two years old) getting local buzz; and discount stores on the main strip (these often indicate family presence and reasonable safety).
If you spot those three indicators, you may have found a future hotspot where you can find an affordable, charming apartment.
Lastly, beyond saving, consider the social perks of having roommates. Creators of the sitcom “Friends,” Marta Kauffman and David Crane, captured it well: your 20s are about “sex, love, relationships, careers, a time in your life when everything’s possible. And it’s about friendship, because when you’re single and in the city, your friends are your family.”
Control Your Entertainment Spending
When people try to tighten their budgets to save more, they typically examine line items — housing, auto payments, groceries, entertainment — and try to cut costs in those categories.
What many overlook is that those line items are symptoms, not the root cause. To change yourspending behavior, you must understand what’s driving that spending.
For many in their twenties, the runaway category is entertainment. Social spending can be surprisingly large for this age group, and attempts to economize often sound like: “Last month I spent $450 on concerts, dinners and trips; this month I’ll try to cut it in half.”
The instinct is correct — find the expensive categories and trim them — but execution often falters because people don’t examine why they spend so much on fun: in your 20s, your social schedule is often dictated by others.
Sound familiar? “We just scored tickets to [everyone’s favorite band]. $100 each. Jim, Ted and the whole gang are going. You in?” Who wouldn’t want to go?
Or, “Kristin got a promotion and we’re planning a girls’ weekend in Vegas. You in?” Sounds epic — of course you’re in!
So how do you take control of entertainment costs? One simple approach: be the one who sets plans for your friend group and pick budget-friendly options.
Instead of hitting a bar where buying rounds will cost at least $50, host a house party and have guests bring a six-pack or a bottle.
Instead of trying the hottest new restaurant, organize a park BBQ and ask everyone to contribute a dish.
Instead of following a pricey vacation plan, make a habit of checking Priceline, Travelocity, Orbitz or Hotwire for affordable deals.
In short, plan your social life so it doesn’t hijack your finances.
It’ll take some effort to schedule activities ahead of time, but the benefit is you’ll always have plans that won’t wreck your budget.
There will always be expensive, special events you’ll want to attend — weddings, destination celebrations, or pricey group trips.
But you can budget for those occasions, and they’ll be manageable if most of your social calendar is cost-conscious.
Buy (Don’t Lease) a Dependable Car
If you’ve just completed a four-year degree, you have every reason to be proud. You’ve invested thousands of hours studying (and cramming), navigated demanding professors and group projects, and finished a major life milestone.
Many new grads want to mark the occasion with a reward.
For a lot of people, that reward is a car. Unfortunately, many graduates make poor choices with their first vehicle and opt to lease rather than purchase.
The choice makes sense in context: this first post-college car purchase is often the first big independent financial decision, conducted in a celebratory mood and with limited clarity about actual needs. Car salespeople count on that mix.
If you’re buying your first car in your 20s, here’s how to approach it:
If your parents have offered to buy a car as a graduation gift, do your research andseek a used carwhose prior owner maintained it meticulously. Check Craigslist, ask family and friends, and browse MSN Autos.
As Mr. Money Mustache advises, you want “a meticulous-sounding, wealthy person who has babied their used car and kept up maintenance, yet is selling it cheaply because they don’t need the cash.”
It may take time, and you might feel pressured seeing friends with new cars, but patience pays off when you drive a paid-off vehicle that should last for years.
If you can’t afford to buy outright, save for a healthy down payment and then follow the same search process: Craigslist, family leads, and MSN Autos.
Decide what matters — cargo space, fuel economy, mileage. Determine a monthly budget and remember insurance, fuel, tolls and maintenance.
If buying outright isn’t feasible, go to a trustworthy used car dealer and finance — but avoid leasing.
Why finance rather than lease? When you finance, after payments end you own an asset outright. It’s yours and likely the first major purchase you fully possess.
More importantly, owning a car eventually eliminates that monthly payment, boosting your take-home pay — similar to receiving a raise.
When you lease, at the lease’s end you’re back to monthly payments if you continue driving a leased vehicle.
Even if you earn a raise in your mid-20s, resist the urge to spend it on something that worsens your budget; instead, choose purchases that help you financially.
Make Extra Student Loan Payments
If you graduated within the past five to eight years, you probably carry substantial student debt. Without deliberate action, you could be repaying for much longer than you expect. Here’s why:
Most student loans come with a 10-year repayment schedule and monthly obligations. Theaverage graduate debtis approaching $30,000, and monthly bills often range from $350 to $500 depending on interest. Those amounts can feel burdensome, so lenders let borrowers extend terms to 20 or 25 years, reducing monthly payments to roughly $200.
For someone in their twenties, that can seem like a relief. The smaller payment makes it easier to stay within budget.
The downside is the longer you pay, the more interest accumulates. So what should you do?
First, if you can, choose the 10-year repayment plan. It may hurt short-term, but getting out of debt sooner is always beneficial.
Second, structure your budget so you can make an extra payment each month toward your loan’s principal (the original borrowed sum). It doesn’t need to be large — maybe $50 some months, $10 others — but consistently sending extra reduces your principal and can shave years off your repayment schedule.
Most important: ensure extra payments are applied to the principal. Lenders calculate your principal and the total interest due over the loan’s life.
Some lenders might apply extra amounts to future interest rather than the principal — a costly mistake I learned firsthand. Whenever you make extra payments, call and confirm they’re being credited to the principal, not just upcoming interest.
Begin Saving for Retirement
Saving for retirement in your 20s — when retirement feels ages away — can seem unnecessary. You’ve got decades to build savings. Why start now when money is tight?
Paradoxically, the most impactful time to fund retirement is between about 22 and 30 — when earnings are typically lower. Saving in your twenties gives your contributions decades to compound.
Albert Einstein called compound interest “the eighth wonder of the world,” and he was right — steady saving early could mean the difference between hundreds of thousands and multi-million-dollar balances by retirement. So start saving now. How soon?
It might sound odd, but start thinking about your career’s last day on your very first workday.
In your first week, visit HR and learn about offered programs. What does the 401(k) plan look like? Will your employer match contributions? Many do. Is there a pension, and what’s required to become fully vested? Often companies require five to ten years of service. Take the time to understand your options.
If you follow nothing else, follow this: start funding your retirement ASAP. Time is the most powerful investment tool. In your twenties you may be short on cash, but you’re rich in time — use it well.
Grow Your Financial Knowledge
Some people get lucky: a parent or family friend teaches them how to make the most of each dollar.
Or their high school or college offered personal finance classes. Those folks are fortunate.
The rest of us often feel overwhelmed early in our careers and must learn on the fly.
So get to work. Recognizing that time equals money and you’re in your twenties (and thus have time), start building a financial knowledge base to maximize your resources. Learn the major topics like:
- How to invest and grow wealth through stocks, mutual funds, index funds and bonds
- How to set and maintain a budget: tracking last month’s spending and planning next month’s allocations
- How to live frugally and cut individual expenses
You’ll also want to learn finer points, such as:
- How to plan cost-effective vacationsby finding affordable lodging and package deals
- How to use credit card rewards and frequent-flier programsso even everyday purchases can yield benefits
- How to save for big life events like weddings, birthdays and holidays
It may seem daunting and like a lot of work. But the more time and energy you invest, the greater the financial payoff.
Think About Buying a Home
While not everyone agrees, many financial advisors recommend purchasing a home as a key goal for those in their twenties.
Whether you dream of a single-story suburban ranch, a downtown condo, or a country home, you’ll need to start saving and set out on the path to homeownership.
Why buy a house? There are many reasons (tax benefits, appreciation, equity, borrowing capacity), but the most compelling for many is the stability of owning a home.
With a mortgage you effectively lock in a consistent housing payment for decades, while renters may face rising housing costs. After your mortgage is paid off, housing payments can fall dramatically! (Note: your housing payments may fall, but your housing costs will still include insurance, repairs, landscaping and upkeep.)
For more on the rent vs. buy decision, see this Time Magazine piece.
Final Thoughts
Your twenties are an exhilarating period: you create career momentum, form relationships and take on new financial duties.
The earlier you get a handle on those responsibilities, the sooner you edge toward financial freedom. Follow these recommendations and watch your net worth grow!
Your Turn: If you’re in your 20s, what’s your top financial concern? If you’re older, what financial advice would you share with today’s twenty-somethings?
Marcus Lane is a career counselor and social services professional who’s glad he began saving early. In his spare time he mountain bikes, crafts birdhouses, and runs a site that helps people choose abarber schooland launch their own barber businesses.
