In your 20s, it’s essential to develop good money habits. If you manage your money well at this age, you can really set yourself up for life financially. With that in mind, here are five of my top money tips for those in their 20s.
Save money by paying yourself first
Many people in their 20s struggle to save money. The reason? There’s no money left to save at the end of the month. Once they’ve paid their rent, bills, and transport, bought some new clothes and enjoyed a few nights out, there’s nothing left over.
The solution to this problem? Get into the habit of paying yourself first – it makes saving much easier. As soon as you receive your salary, redirect a proportion of it (aim for 10%+) into another account. Then, you can spend the rest guilt-free. The chances are, you won’t even miss that 10% but your savings will grow substantially over time.
Build an emergency fund
Once you’ve begun saving, focus on building up an ‘emergency fund’. This is a stash of money that provides financial security and will protect you against financial shocks such as losing your job or being hit with a large unexpected dentist bill. In terms of how much to save here, most experts agree that your emergency fund should be large enough to cover at least three months’ worth of expenses.
Open a tax-efficient account
If you’re saving for long-term goals, it can be a smart idea to open a tax-efficient account. This way, you’ll protect your gains from the taxman. One good option is the Stocks & Shares ISA. With this account, you can invest up to £20,000 per year and access your money whenever you want. Another account to consider is the Lifetime ISA. This one, which has an annual allowance of £4,000, comes with 25% bonuses from the government, however, you can’t touch the money until you turn 60 or buy your first home.
Think about retirement saving now
Your 20s is also a good time to start thinking about saving for retirement, believe it or not. Retirement may still be 40 years off, however, if you start saving a little bit now, by the time you retire, that money will have grown significantly due to the power of compounding (earning interest on your interest). If you leave retirement saving late, as most people do, you’ll have to save a huge amount later in life to be able to live comfortably in retirement.
Build your wealth by buying assets
Finally, your 20s is a great time to start accumulating assets in order to build your wealth. Assets are things that make you wealthier over time. For example, a stock that pays you a regular cash dividend is an asset. Every time you receive a dividend, you’re a little bit wealthier. Similarly, an investment fund like Fundsmith is an asset.
By contrast, liabilities reduce your wealth. A good example is a sports car. To keep that car running, you’ll need to pay for fuel, insurance, and regular servicing. Over time, that car will make you poorer.
If you can grasp this concept early on, and you focus on buying assets such as stocks and funds instead of liabilities, it will make a huge difference to your wealth over time.
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Edward Sheldon has a position in Fundsmith Equity fund. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.