Your 20s are the exciting years — full of change and opportunity. Maybe you’ve just finished school and you’re looking for your first job. Or perhaps you’ve been working for a while and you’re ready to start setting financial goals. Either way, if you make the right financial decisions now, you’ll get a head start on the road to prosperity. The most important thing to remember is that time is on your side. “Every dollar you save now is worth more than saving it in any other decade because of the miracle of compound interest,” says Jim Otar, a fee-for-service financial adviser who specializes in retirement planning in Thornhill, Ont. “It’s easy. It just requires a bit of discipline.” Here are some smart things you should do in your 20s to get you on your way to riches:
Spend less than you earn
If you can master this simple rule in your 20s, everything else will come easily. “The 20s are all about developing good habits around saving, spending and debt,” says Warren MacKenzie, president of Weigh House Investor Services in Toronto, a firm that specializes in fee-only financial planning. “The earlier you do it, the quicker you’ll get richer.”
Start by trying to get good value for your money. Evaluate every purchase and make sure that spending the money on that couch or big-screen TV is really worth the expense. “If you don’t waste the money you spend, then the savings will take care of themselves,” says Malcolm Hamilton, an actuary at Mercer Human Resource Consulting in Toronto. “If you have zero savings at the end of the year but you can say you got great value and didn’t increase your debt load, then that’s okay. Things will work out.”
Invest in yourself
There is one area where you should spend freely, and that’s your education. Yes, tuition looks impossibly expensive now, but it’s an investment that will pay dividends for the rest of your life. “If you see credentials and skills that you can acquire that will better position you for future earnings, do it — even if it means going into debt,” says Hamilton. “It will pay off exponentially in your 30s, 40s and 50s with increased salaries and good raises.”
Avoid the debt trap
If you have only one financial goal in your 20s, it should be to leave this decade with no debt beyond perhaps a few lingering student loans. To succeed in taming debt, you need to keep it simple. “Pay off your highest interest rate debt first,” advises Mary Prime, a fee-for-service planner in Toronto. “And pay off credit card balances every month. If you can’t do that, then don’t buy on the cards. It’s as simple as that.”
Even student loans should be paid off as quickly as possible. “Don’t let them drag on forever,” says Prime. “Have a schedule and a goal on how soon you will pay them off. Aim for a five- to seven-year goal to have them paid off completely. Anything more than that will interfere with your financial goals of starting a family or owning a home when you enter your 30s.”
No one cares more about your finances than you. So become financially aware. Now’s the time to learn both some book smarts and some street smarts.
For book smarts, we recommend reading The Wealthy Barber by David Chilton, The Only Investing Guide You’ll Ever Need by Andrew Tobias, and How to Pay Less and Save More for Yourself by Rob Carrick. You should also do some research into your particular credit cards and bank accounts to see what fees you’re paying and whether there are better options out there.
To gain some street smarts, you might want to do a bit of experimenting in the markets. Are you an aggressive investor? Risk-averse? Try a few approaches to investing to find out. You may find that you’re more comfortable with mutual funds to start, but feel free to dabble in index funds and stock picking to see what works for you. It’s better to find out now, when the amounts you invest are small, and you have plenty of time to recover from those inevitable mistakes.
The top financial lessons from our 20s — Rishi and Fion Madan
Fion and I met at the University of Toronto where I was studying computer science and she was doing an MBA. All through our 20s we lived below our means by sharing apartments with several roommates. I chose a co-op program that allowed me to earn several thousand dollars one year, while Fion made sure to apply for any bursaries and scholarships that she qualified for. We tried not to carry any debt unless absolutely necessary: we graduated from university with just $15,000 in debt between us.
After graduating, we set ourselves the goal of paying off all of our debt as quickly as possible. We both took on part-time jobs along with our full-time jobs and used any extra money after living expenses to pay down our debt. Although it was expensive, Fion was glad she decided to get an MBA. We can’t believe the difference it makes in her earnings.
Maybe the best thing we did in our 20s was to keep reading and educating ourselves about money. We’ve both read Rich Dad, Poor Dad by Robert Kiyosaki and Sharon Lechter, and The Wealthy Barber by David Chilton. We also hung around friends who liked to save, invest and live within their means like we did. It made all the difference.
Now we’re in our 30s, and we feel confident about our finances. We both have jobs we love — Fion is a web developer and I’m a computer systems analyst. The amazing thing is that between us we make more than we ever dreamed we would — close to $300,000 a year. We live in a condominium we bought in 2006 and plan to move to a bigger home and start a family in the next year or two. The higher education and good savings habits have really paid off.