Mastering Money in your 20s
The Importance of Financial Rules of Thumb for Young Adults
Starting your financial journey in your 20s can be daunting, but adhering to simple rules of thumb can provide a solid foundation. There are three key rules of thumb that can help you get started: the 4% rule, the 50-30-20 rule, and the "Pay Yourself First" strategy. The 4% rule is a guideline for retirement planning, suggesting that if you withdraw 4% of your savings annually will last you the remainder of your lifetime. This can help you figure out a financial independence number by taking your annual spending an multiplying it by 25.
The 50-30-20 rule offers a practical budgeting framework: allocate 50% of your income to needs, 30% to wants, and 20% to savings. This rule helps set realistic expectations and ensures that saving becomes a priority. The "Pay Yourself First" strategy is particularly vital; by setting aside a portion of your income for savings and investments before paying any other bills, you ensure that saving is a consistent and non-negotiable habit. Greg underscores that this approach is crucial for achieving long-term financial health.
Paying yourself first can be very beneficial. Especially when you automate it. Many people have direct deposit through their work. But by taking the simple step to automate part of your paycheck to go to a seperate saving account, you can unlock a whole new level of ease when it comes to saving money. Just like your 401k savings, if you don’t see the money your lifestyle will adjust and be just fine in the long run. Actually, it will be even better in the long run with a stable savings habit!
Leveraging Automation for Financial Success
Speaking of automation, it can significantly simplify financial management and set you up for success. In the episode, Greg highlights the importance of using technology to automate savings, bill payments, and investments. By setting up automatic transfers to savings accounts and retirement funds, you can ensure consistency and remove the temptation to spend money that should be saved.
Automating bill payments helps avoid late fees and maintain a good credit score, while financial apps can track expenses and investments, providing valuable insights. Greg insists that utilizing all available tools can enhance financial stability and growth, making automation a crucial component of effective financial management.
I have covered automation in detail with Adam Cost clear back in episode 85. You can listen to that episode on YouTube or wherever you find your podcasts. Simply click the button below to be taken to that episode. You can also read more about how automation can help on my blog - Automating Your Finances: Automatically Change Your Life
Essential Financial Knowledge for Young Adults
Building a solid financial foundation requires understanding key concepts. Greg advises young adults to focus on budgeting, basic investment knowledge, and the importance of open financial discussions. A well-structured budget helps keep spending in check and prioritizes saving and investing. Learning about different investment options, such as stocks, bonds, and mutual funds, empowers you to make informed decisions.
Discussing finances with friends, family, or mentors can provide new perspectives and valuable advice. Greg encourages starting money talks by sharing topics of interest and seeking guidance. Additionally, regularly reviewing and managing automated expenses can free up funds for more important goals by canceling unused subscriptions and reallocating those resources.
Starting a conversation with those around you can be a great way to do better with money. I love to talk about money and bringing it up with those around me is a great way to learn from others. Everyone has different experiences with money, so when we take the chance to talk about it we are able to put together a lot of knowledge to help us make better decisions. You can get started fairly easy. First, identify something simple in your financial life that you have a question about. Then take that question to a friend to see what they have to say. I suggest taking something simple so that it’s easier for you to break the money talking ice. Because if you use a challenging topic as your first money talk, it can be difficult or uncomfortable for people. So start simple!
Avoiding Common Financial Mistakes in Your 20s
It's natural to make mistakes when learning to manage finances, but recognizing and correcting them early can make a significant difference. Greg points out common pitfalls, such as buying a brand new car and confusing needs with wants. Understanding the potential growth from early investments and prioritizing long-term gains over short-term gratification is crucial.
Accept that mistakes will happen and focus on correcting them rather than dwelling on past decisions. Greg advises a mindset shift towards making better choices moving forward and understanding the long-term impact of financial decisions. Embracing this approach can help young adults avoid common financial traps and build a more secure future.
I would even suggest avoiding buying a car all together if possible. While it may not be possible for you to not get a car and it isn’t a mistake to always buy a car. Not buying a car can save you a ton of money. I have been biking to work for years and my wallet and my health have never been better. So beyond just saving money, looking for alternate forms of transportation can benefit your physical and mental health. I have talked about this before on my podcast in episode 67 - The Benefits of Not Driving a Car. Check it out on YouTube or on your podcast app.
Using Credit Cards Wisely
Credit cards can be a useful financial tool if used responsibly, but they also come with risks. Greg Davis advises never carrying a balance, as interest charges can accumulate quickly and lead to debt. By paying off the full balance each month, you avoid interest charges and demonstrate financial responsibility to lenders, which helps build a good credit score.
Understanding how credit card companies make money allows you to use this knowledge to your advantage. Being disciplined and strategic with credit card use can help manage finances effectively and build a strong credit history without falling into debt.
As I mentioned in the podcast episode, I have a brand new credit card coming out on June 18th! So make sure to subscribe wherever you listen and consider providing your email at the bottom of this page to learn more about how to use credit cards!
Additional Financial Tips for Young Adults
Greg Davis shares further financial wisdom in his book "Checkmate," dedicating three chapters to finance. Key takeaways include the importance of planning, using time to your advantage, and the power of consistent savings. He suggests that saving $100 per week can significantly grow your portfolio over time. The BED4SO framework—Budget, Emergency Fund, Debt Paydown, 401k, and Significant Other—offers a financial framework.
Regular financial meetings with a significant other can ensure you’re both aligned and working towards shared goals. Greg's advice emphasizes teamwork and communication as essential components of financial success.