When you’re in your 20s, it can seem like you have plenty of time ahead of you to think about the future. You’re probably just beginning to earn real money and may be living on your own. It can be easy to get caught up in the cycle of living for today when it comes to money. However, if you master these key money skills in your 20s, you’ll be better prepared for whatever life throws your way as you get older and your needs change.

1. Budgeting

Learning how to create and live within a household budget is one of the most important skills you can develop in your 20s. The younger you are when you master this skill, the better it is for your financial reality and economic future.

Begin by figuring out your monthly income. Then, add up all your monthly expenses. This doesn’t include things that are automatically deducted from your paycheck but involves expenses you pay every month, such as:

• Rent
• Utilities
• Loan payments
• Credit card payments
• Insurance
• Cell phone
• Student loan payments
• Childcare or education (if applicable)

Subtract the total for these expenses from your take-home income, and that’s what you have to work with for the remainder of your budget.

From the remaining amount, you need to set aside money for essentials, such as food, medications, fuel and clothing. Be realistic when setting this budget, understanding that you can’t live on ramen noodles and macaroni and cheese alone.

Once you subtract those numbers, it’s time to create a budget for all your other expenses (entertainment, dining out, luxury items, etc.). A wise plan is to divide the remaining funds by three and allocate one-third of those funds to each of the following:

1. Money to spend — on entertainment, dining out or special occasions
2. Money to save — toward long-term financial goals or major purchases
3. Money to invest — in a 401(k) or other retirement plan, stocks or bonds

Another approach is the 50-30-20 budgeting method:

• 50% toward rent, utilities, groceries and other essentials
• 30% toward eating out, entertainment expenses, travel and other flexible lifestyle items
• 20% toward achieving your designated financial goals

Whichever method you choose, stick with it.

2. Saving

It’s difficult in your 20s to think beyond current events. However, the story of the grasshopper and the ant rings true today in a way that it may have never resonated before. While you’re in your 20s, you want to be the ant, who stored away food for the winter, not the grasshopper, who didn’t plan ahead.

Emergencies, natural disasters and even global pandemics happen. When they do, they create a lot of financial uncertainty. The general rule of thumb in the past was to have six months of essential expenses saved as an emergency fund. At the bare minimum, you want to have three months of expenses available. 

The COVID-19 pandemic let the entire nation know six months’ worth of funds may not be sufficient. It may be better, if feasible, to continue investing in your emergency fund until you have a full year of living expenses in the fund.

Don’t try to save a year’s worth of expenses all at once, though. Start small, putting away a little bit from each paycheck. In this way, you can develop a nest egg that prevents you from having to rely on high-interest credit cards in case of emergency.

3. Investing

Saving money for a distant day in the future may not be top of mind in your 20s. However, setting aside even small sums of money at a young age can have a significant impact on how comfortably you retire later in life.

The money you invest early in your professional life has more time to percolate and grow than the money you invest later in life. Time and the power of compound interest are on your side in your 20s. Compound interest helps your retirement savings grow fast because you earn interest on top of interest.

If you begin investing in your 20s in a manner that collects compound interest over time, that money will be worth substantially more by the time you reach retirement age — and your dollars in retirement will go even further.

Here’s an example of how compound interest works to your benefit:

• Scenario 1: You begin investing $100 per month at age 22 and enjoy an 8% return per year. At the age of 65, you will have accumulated $450,000.
• Scenario 2: You begin investing $100 per month at age 32 and enjoy an 8% return per year. At the age of 65, you will have accumulated $195,000.

Although 10 years may not seem like a lot, it can make a world of a difference when it comes to compounding interest. Start saving today to take advantage of this powerful asset.

If you're eligible to participate in an employer-sponsored retirement plan such as a 401(k), you’d be wise to do so. Some employers will even match your contribution to encourage participation. When you sign up, the money you save will be automatically deposited into the plan prior to the money being taxed. As a result, less of your income will be taxed, which means Uncle Sam is offering you a tax break today to save for your retirement.

In addition, you'll gain another strategic advantage. Participating in an employer-sponsored plan will allow your savings to grow without being taxed until you make withdrawals when you're retired. This bonus feature means your money will compound at a much faster rate, and you’ll only pay taxes when you withdraw funds.

4. Managing financial documentation

Once you’re in your 20s, you need to manage financial documentation. This includes bank statements, income statements, tax records and more. Taxes are an important part of that, and you don’t get a free pass for mistakes.

To ensure you avoid penalties and fees for including inaccurate information when filing your taxes, keep all of your financial documentation in appropriately labeled file folders. Manage these file folders and documents on a monthly basis so that nothing gets misplaced, eaten by your dog or thrown away by mistake.

5. Establishing credit

We live in a world where your credit score affects nearly everything about your life — from your ability to rent a home or apartment in your 20s to your ability to buy a home when that time comes, and all financial milestones in between. In some industries, you can’t even get a job without a sufficient credit score.

In other words, your credit score is perhaps the single most important number in your financial life at any age. This is the time when it’s up to you to nurture that number and make it grow. You can do this in a few ways:

• Make sound financial choices.
• Keep your debt relatively low compared to your income.
• Avoid high credit card balances.
• Pay your credit cards off each month.
• Be on guard for signs of credit card fraud or identity theft.

Fortunately, you can obtain an annual report from each of the three major credit reporting bureaus at AnnualCreditReport.com.

6. Borrowing wisely

When you’re getting started on your financial journey, you may need some help. If that’s the case, it’s important to borrow wisely. That means only borrowing what you need. For example, if you’re getting a student loan and have the option to get enough to cover tuition, fees, housing and transportation but don’t plan to live on campus, only borrow enough to cover tuition and fees.

You want to borrow with the idea of paying it back. The more you borrow, the more you have to repay, and the more interest is likely to accrue — adding to the amount you owe.

Use that same mindset with credit cards. Only charge what you can pay back at the end of the month.

7. Making on-time payments

One of the best skills you can master in your 20s is paying your bills on time each month. You’d be surprised how much this can save you in interest and late fees. And, this practice can go a long way toward boosting your credit score, which is essential for large future payments, such as a house or car.

One way to ensure you never miss a payment is to set up automatic payments to be deducted directly from your checking account a day or two before the due date.

8. Balancing and reconciling accounts

It’s important to balance and reconcile your accounts every month. This can help you stay on top of your financial situation, avoid costly mistakes or missed payments, and detect early signs of fraudulent activities on your accounts.

You want to make sure nothing is being charged to your accounts that you didn’t purchase. The best way to do that is to go through your receipts and balances monthly, if not weekly or daily.

If you begin this habit in your 20s, it will be easier to add new accounts to reconcile each month as you increase your retirement savings and expand your credit portfolio. You’ll even find it easier to manage funds and essential paperwork for larger investments such as buying a home in the future.

9. Setting financial goals

One of the most difficult things for people in their 20s to learn to do is to create and achieve financial goals. There’s a system involved in establishing solid personal and financial goals, called the SMART technique. This means the goals need to be all of the following in order to be effective:

• S — specific
• M — measurable
• A — achievable
• R — realistic
• T — time-bound

It isn’t enough to say you want to save money over the next year. That doesn’t flow within the SMART philosophy and will often have you spinning your wheels. A SMART goal looks something like this: “I will save $600 in one year by setting up an automated transfer of $25 per paycheck into my savings account.”

For most people, a $25 transfer per paycheck won’t cause earth-shattering calamity to their financial situation. Having that additional money in savings can help you accomplish quite a few small goals, such as building up Christmas shopping funds, purchasing a new TV or even rewarding yourself with a trip to see family or friends.

A financial planner can help you realize your financial goals. Once upon a time, you needed to have major assets for a financial planner to spend any time with you. Today, there are organizations dedicated to working with younger individuals and couples to position you for greater financial success and provide you with a solid financial education and foundation.

10. Maximizing your money

Another money skill you need to master in your 20s is how to spend your money. Although you likely have no problem spending money, learning to spend it wisely is another matter altogether. It might sound like a drag to clip coupons and search for bargains online. However, learning to do this now will enable you to stretch your dollars further.

The less you spend on essentials, such as grooming supplies, food and clothing, the more money you’ll have to invest in luxury items, splurges and escapes. Think of it as paying yourself for a little extra time and effort by saving money on necessary items.

Whether you’re living on your own in beautiful Washington state or setting the stage for greater financial success when you are out on your own, these practical money skills will serve you well — especially if you master them while you’re still in your 20s.