Episode #15: How to Manage Money in Your 20's (5 Steps to start NOW)

While I completely agree that being in your 20’s should be fun, there’s a certain amount of prep work, especially financial prep work, that you really should be starting in your 20’s still to make sure you’re setting yourself up for the rest of your life properly.  And don’t skip to the next episode because I’m not going to tell you to stop spending money out with friends, or to settle down and find a real job.  No stress.  Instead I’m going to talk about 5 straightforward steps you can start to take in your 20’s that won’t be taxing on you (pun intended) and that you’ll feel really good about when, like me, you turn 29 and go ‘whoah, where did that time go? Crazy man!’  

In today’s episode I’m completely speaking from experience, because these 5 steps were all things I luckily was taught to put into action in my 20s’, none of them kept me from enjoying and having a good time, and now that I’m looking down the barrel at 30 I can comfortably say that I’m in a good place.  I feel like I have a good handle on my finances, I’ve created a good flow of income from my business, I invested in real estate which was a big goal of mine, I built up a strong emergency fund that saved my butt during the pandemic, and I have a really healthy start to my retirement savings tucked away, invested, and already working for me for the next 70 (hopefully) years of my life. So, today, I thought I would walk you through what these 5 quick and easy lessons are, how to get started, and then point you in the right direction to go and learn more about each point if you want to.  

1. Get good at tracking your spending. 

This is really the number 1 financial skill that I would encourage you to start practicing in your 20’s, because everything else will start to stem from understanding how money flows out of your life, and it’s going to be really hard to start working on any other financial skills and goals without this basic practice.  If you’ve ever wondered why someone who makes a lot of money seems to always be broke still, or wondered where your extra cash goes whenever you get a raise, or a bonus, it’s because it’s so easy when there’s suddenly more money in your life to start to spend it.  It’s so easy to fall into the trap of letting your lifestyle costs increase as your salary increases over time without even realizing it.  

Getting started with this is really easy.  I recommend setting aside an hour or two once a month, to review your receipts and credit card statements.  It’s best to choose this day roughly based on when you need to make important payments, whether it’s rent at the beginning of the month, or visa payments that are due on the 12th.  All you have to do is keep track of your receipts throughout the month, print your credit card statements, and then use a spreadsheet to record your expenses.  Then , look back through your spreadsheet and start to make categories around what you spend.  Groceries, rent, entertainment, phone bill, stuff like that.  Over time, doing this every month, you’ll start to get a really good understanding of where your money goes, your own personal habits, what you like to spend on, and what areas you may need to make a few changes or reign it in a bit if you’re going over budget all the time.  

After doing this for years, I’ve found I naturally have an understanding of how much I spend in different areas, and if I’m at risk of overspending on anything or any one area of my life.  It’s super useful, helps me feel confident and not guilty whenever I go to spend money, and I’ve never had to use a strict budgeting system because spending tracking helps me make sure I’m staying on course every month, and make minor adjustments as necessary.  Now, if you’re feeling lost already, I recommend joining the free 7 day money mini course available through the How To Adult School website.  

2. Learn how to make a personal budget.

This finance skill goes hand in hand with lesson #1, tracking your spending, but should come after you’ve already started the habit of spending tracking, and have a reasonable idea of how and where you spend your money.  Now, sticking to what you’re probably envisioning as a traditional strict budget is not always necessary, so don’t get scared off by this point.  The idea of ‘budgeting’ boiled down, is simply being mindful of how you spend your money, understanding how much of your income goes towards necessary living expenses, and how much discretionary income you have left after that.  Now stricter budgeting may be more important when you have less discretionary income to buffer with, you’ll have to be more mindful about how you spend, but I recommend trying out different budgeting systems and finding the one that’s right for you.  

Starting this learning process early, when you’re young, and finding what works for you is definitely way better than starting to implement it later in life, when all of a sudden there’s a lot more responsibility on the line, and there are more and more payments that you have to make.  So, whatever budgeting looks like to you, start when you’re young, start right away and just get the hang of it.  It doesn’t have to mean limiting yourself and not having any fun in your 20’s, it’s just a skill to learn early, and that really will still allow you to spend your money, and have fun, just without all the guilt and buyers remorse, and credit card debt that a lot of other young people experience these days.  

3. Create a fully funded emergency savings account, aka the F* You Fund.  

Now if you’ve listened to any of these episodes so far, you’ll know that I’m really passionate about this.  I’m sure you’ve all heard the statistics about how many people, in Canada or the United States, live paycheck to paycheck, and how many people are one unexpected car repair away from absolute financial disaster, and I really want to change this.  Having an emergency savings account is, no questions asked, the FIRST thing you should work on creating for yourself as soon as you start earning a paycheck.  Before you do anything else, before you start saving for the future, before you start traveling, before you try to pay off all your debt, you need to create an emergency savings account so that you can be financially safe, and sleep well at night.  

An emergency savings account is a sum of money you’ve decided to tuck away into an easily accessible High yield savings account (that part’s important!), that you can draw on if things go sideways in your life for a while. How much to save depends on what your necessary life expenses are, and how much time you want to buy yourself.  Personally, I always kept what felt like an extravagant emergency fund, I had a full year’s worth of savings tucked away because I’ve always been self employed, but it made me feel more secure, but then the pandemic happened, my main business (a wedding photography company) was locked down, and that fund saved my butt.  

After that experience I’ve gone from thinking that everybody having an emergency fund is important, to thinking it’s an absolute necessity, and making it my personal mission to help everyone create their own fund so that they have financial safety and security, because life happens, and a fund like this can help keep you from being the person who loses everything in a disaster.  To learn more about emergency savings accounts, start by listening to episode 6, and make it your personal mission over the upcoming months to set aside money in a high yield savings account, and make sure you’re taking care of yourself financially first. Before any other damn thing you need to do this. 

4. Take care of Debt.

Now this can go one of two ways, either working hard to pay off existing debt, or working hard to make sure you don’t fall into the trap of consumer debt.  Now I know the topic of debit is big, and scary, and we don’t really like to talk about it that much, but it is so important to take care of this right away for two reasons.  First, debt carries interest, and the longer you leave it the more it will cost you.  Second, it’s best to work on paying off debt when you’re young because you likely won’t have as many other financial responsibilities yet.  Work on paying off debt before you’re on the hook for mortgage payments, and childcare costs, and saving aggressively for retirement.  Even though your salary when you’re young probably won’t be as high as you can expect it to be later in life, don’t wait for that higher salary with more discretionary income to tackle paying off that debt, because the longer you leave it to go do fun things instead, the harder it will get.  Just start chipping away at it if you already have debt, OR if you’re lucky enough to not have existing debt like student loans, don’t fall into the consumer trap of spending more money than you make and using your  credit card to finance your lifestyle, aka creating consumer debt, because that is expensive to pay off.  

5. Start saving for your future.  

Yes, I’m talking about saving for your retirement, which I know, feels like lifetimes away at this point in time.  It’s really important to start saving like this when you’re young, even if it doesn’t feel like anybody else your age is doing it yet, and I’m going to tell you why.  By starting to save and invest your money when you’re young, you get to maximize the effect of something called compound interest.  The magic of compound interest happens when you invest money and you earn interest, and then you earn interest on your interest, and then your interests’ interest earns interest, and so it continues on.  You’ll always be earning interest on the interest that’s been added to your principal amount, which over time and at a high enough percentage, can start to add up really quickly.  This is also how credit cards charge interest, just in reverse, so you owe more and more money over time, which is how people end up getting into so much trouble with credit card debt because it gets larger and harder to pay off over time.  

I’m going to do entire future episodes on compound interest and investing, breaking it down, showing how and why it works to your advantage etc, but the most important thing to understand for today’s lesson is that compounding interest is most effective over time.  The earlier you start to save money and invest, the more time you’ll have to take advantage of compound interest, and the more money you’ll have saved for the future.  The mistake that a lot of people make is deciding when they’re young that they’re going to use all their discretionary income for fun things and plan to start investing later, but you have to contribute much more money much more aggressively later to make up for the lost time of starting to do this when you’re young.  

Now it’s never too late to start saving and investing, the goal is always to start now if you’re able to, not tomorrow, not next year, not when you’re decades older.  Starting now will serve you better than starting later when it comes to compound interest.  Make note though, even if you’re excited to start saving and investing, it’s important to take care of some of the earlier lessons we talked about here first, namely making sure that you have a fully funded emergency fund first, before anything else, and then tackling paying off debt, especially if it has high interest rates like credit card debt.  After that though, when you have extra money, or your cut back on your expenses to save extra money (which is usually how this has to work), start to save for your future as early as possible.  Your mind will be blown when you look back and realize how much extra money you earned by starting early.

If you can get started on even some of these 5 money skills while you’re in your 20’s awesome, you’re doing great.  If you can manage to start getting a handle on all of them, you will absolutely blow your own mind with how much more confident, in control, and safe you feel about your money as you continue to grow and move toward other life goals.  Help future you out but getting started laying a good foundation now, so you’re not held back by feeling like you’re starting from zero later in life when you want to do things like buy a house, invest in your own start up idea, move somewhere else in the world, or retire early.  

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