Financial checklist for your 20s
Editorial staff, J.P. Morgan Wealth Management
- A lot of people in their 20s don’t have their “dream job” yet, but it’s not a bad idea to envision a career path to figure out how to get there.
- In terms of personal finance, budgeting is one of the most crucial steps in responsible money management.
- Renting a first apartment and paying off student loans are common financial obligations in your 20s.
- And it can’t be stressed enough: Investing when you’re young can be beneficial for your retirement.
Although the age of legal adulthood in the U.S. is 18, being in your 20s is often the time when substantial financial responsibilities settle in. For many people, graduating college is a big milestone in personal financial management – for the first time, you may be searching for a full-time job, an apartment or a car. Everyone has different paths. In your 20s, you may also be interested in starting a family or having a pet.
Whatever the case, these milestones come with price tags, and they’re often hard to juggle as a young adult.
It’s normal for people in their 20s to make budgeting compromises. This might mean dealing with roommates, working a side hustle or living at your parents’ house for a bit, if that’s an option. Or, if you’re financially fortunate, it could just mean creating a practical plan for your money.
Here are some key financial points to keep in mind as you advance in your life and career.
Career check: Are you on the right track?
Everyone’s career journey looks different. You may have what you describe as a “job” and not a career. You may not know what career you want. This is common in your 20s. In fact, it’s pretty normal at any age to question your career path – most people don’t stay on the same one forever.
What you should focus on is determining what you most want to gain from your career. Some people subscribe to the idea that if you love what you do, you’ll never work a day in your life, and therefore prioritize enjoying work over striving for the biggest paycheck. Other people prioritize money over passion. Neither approach is wrong. Of course, some people manage to score the winning combo: passion and a plentiful paycheck. But either way, if you’re honest with yourself about where your priorities lie, it could lead you to the field that best suits you.
Your 20s are also the time to try new things to figure out what you like. Work multiple jobs – in succession or at once. Volunteer. Find outside-of-work activities you’re passionate about. All of these can serve as learning opportunities for you to see what you do and don’t enjoy professionally.
It’s important not to get swept up in comparison culture or feeling like you’re behind your peers. Try to remember that someone else’s success doesn’t define yours. Finding your place professionally is a deeply personal journey and one that you will accomplish on your own timeline.
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Create a budget
Income plus expenses equals the need for a budget. It’s wise to accustom yourself to following a budget – that is, designating certain amounts of your income to needs, wants and other categories like savings and investments.
Your budget can look however you like, as long as it works for you. You may follow a more traditional budgeting method such as the 50/30/20 rule. This dictates that 50% of your income goes toward necessities like rent and food, 30% goes toward wants and 20% goes toward savings. Or you may adjust these numbers to your satisfaction. The most crucial aspect, of course, is that your necessities are covered – but it’s important to invest in your future self, meaning it’s always advisable to save and invest what you can.
Financial tips for your first apartment
Moving into your own place for the first time is often an exciting milestone. Even if you’ve lived in a college dorm, signing the lease to your first apartment is financially substantial but also fun – it can feel like ascending another rung on the ladder to being a “real adult.”
But not everyone moves out when they might expect to. High rent and stagnant wages, particularly in times when the economy is struggling, make it hard to afford a solo apartment in most U.S. cities, at least for one person.
If you are determined to sign a lease – by yourself or with roommates – here are some things to keep in mind:
- Your credit score. A landlord will run a credit check on you, which is their system of determining how trustworthy they view you financially. With a low credit score, renting on your own may be challenging. Things that help build good credit include opening lines of credit (such as a car loan), using a credit card and making payments consistently and on time. If your credit score could use some improvement, you’ll need to sign with a roommate who has high credit or co-sign the lease with someone who may be willing to serve as a guarantor.
- Your income. A landlord doesn’t only require good credit. Most often, they require proof of steady income – in the form of paystubs, tax returns or bank statements – and a certain amount of income, too. Most commonly, your gross income (income before taxes) must equal over two times the monthly rent. This is often too high a mark to hit for young adults, which is where a roommate or two might come in handy. Otherwise, you can try finding a private landlord (in other words, not a property management company) who may rent to you with looser income requirements.
- Your move-in costs. When you move into an apartment, you will generally have to pay the first and last month’s rent as well as a security deposit. The security deposit will be an upfront cost that you’ll get back after you move out (as long as you don’t damage the property). Something to keep in mind is that young people are often charged higher security deposits because they represent a higher risk for the landlord. This is especially true if you have no prior rental history for the landlord to verify. Before you apply for an apartment, you should ask about move-in costs and see if you have the money to bankroll your move.
Graduating? You can try to get ahead on your student loan payments
If you’re graduating soon or have already graduated, it’s important to think about your student loan payments, if you took out loans. Paying this loan money back sooner will likely cost you less than if you pay it back later due to the interest you are responsible to pay in addition to the principal loan.
There are many different methods to pay off debt, but two of the most popular are known as the snowball method and the avalanche method.
- The snowball method dictates tackling the smallest loans first and working your way up to the largest. This works if you have multiple loans and if you’re a person who’s motivated by little wins. The idea is that paying off that first (albeit small) loan will give you the momentum and psychological push to pay off the next loan, and the next and so on.
- The avalanche method, on the other hand, means tackling the largest loan first. This can seem like quite the undertaking, but jumping right in and aggressively paying down a large sum of debt is what some borrowers need to finally put their student debt to bed. Then they can move on to the smaller loans, which would feel more manageable in comparison.
Even before choosing your method, it’s important assess the interest rates of your loans. If a loan itself, for example, is relatively small but has a high interest rate, it may make sense to pay it off first.
That’s because paying down debt, regardless of method, is much easier without interest continually adding to your debt burden. But if you do find yourself in this position, you’ll need to budget a student loan payment higher than the minimum payment. This ensures that you’re paying off the principal, too, and not just the interest.
Consider opening a retirement account
Although you’re likely decades away from retirement, this may be a good time to open a retirement account. Any money you invest now will have a much longer time to compound and potentially become a larger sum upon retirement.
This information is easy to digest logically and not as easy to execute on. After all, in your 20s, you’re often balancing high rent costs and lower income, not to mention student debt and other financial considerations.
But if you can afford to set aside an amount, even a small one, you’ll likely thank yourself later for doing it. It’s made easier if your job offers a 401(k) and, better yet, 401(k) matching. You should consider contributing at least enough to get the match. Nowadays, even some part-time employees qualify for 401(k)s.
If your company doesn’t offer a 401(k), you may be able to open a Roth IRA or traditional IRA. This is the type of investing that’s best done with a “set it and forget it” attitude – the whole idea is to let your nest egg accumulate until age 59½ or later, and then reap the benefits of your early planning. You may even be able to automate your IRA contributions with your bank so that every time you’re paid, a certain amount goes to your IRA first.
The bottom line
Your 20s often come with financial considerations you’ve never encountered before, including career choice, living independently, student loans, budgeting – even retirement planning (though retirement can seem a long way off). Juggling so many new responsibilities can be difficult, but remember that this time in your life is about learning what works for you, not being perfect.
As you navigate your new adult life and finances, it can also be smart to know when to reach out for support. This can come from trusted friends, family members or mentors. If you’d like advice from a professional, you can connect with a J.P. Morgan advisor to talk about what you envision for your financial future and how to get there.
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Editorial staff, J.P. Morgan Wealth Management
