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This video covers what major money milestones you should aim to accomplish in your 20s. The idea for this video came after a friend of mine, Kayla, who is 25 years old, wanted to know what else she needed to get done in her 20s to achieve financial freedom. I’m 34 right now, and I learned a great deal about personal finance, budgeting, and investing in my 20s. I was even a financial advisor for Bank of America Merrill Lynch when I was 25, and I attribute a lot of my investment knowledge to that experience. When you’re starting off at 20, the college and education system here just doesn’t really teach you that much

when it comes to managing the adult world of finance, so this video is meant to be a one stop shop for all of your financial needs to get a solid financial foundation going. I hope you share this video with a friend who might need it, and that it becomes a resource you can reference at any point in time. This video covers what it takes to build a financial foundation in chronological order, starting with the first milestone: paying off debt.

1. Pay Off Debt

Chances are if you graduate college you’re likely going to have some student loans, and you might even have some credit card debt. The average student loan debt in America is reportedly around $39,000, and oftentimes if you’re going to a four year institution, or even a two year institution after transferring from community college, you’ll likely take on some student loan debt. One of your first major milestones in your 20s is to figure out a plan to pay off this debt. Usually federal student loan interest rates are between four and six percent, and you’re going to have many of your friends probably tell you that you can get an average of eight percent on your money by being invested in the market. So they’re going to say things like why are you paying off your debt when you can just invest it and get a higher return.

While you can earn that in the market, many people often forget that you can also lose that money if the market doesn’t do as well. When it comes to paying off student loan debt, try to prioritize it over investing, because at least you know it’s essentially a guaranteed four to six percent return on your money, and the sooner you get rid of student loan debt the quicker that weight is going to be lifted off your shoulders, and you can afford to take on more risk in life. The point of paying off debt is more so that you can afford to take these risks in your 20s uninhibited.

2. Get Income

You want to try out as many jobs as possible and earn income at the same time. One of the things that you should strive for before the age of 30 is that you’ve hopefully found a career that you love and that you can work in for a while, because the highest earning potential usually comes from being in the same industry for a long time.

Think of it this way, would you rather hire a plumber that has one day of job experience or someone who’s seen thousands of clogged toilets over the span of 30 years. You’ll probably want that second plumber because he knows exactly how to fix your pipes in a fraction of the time. The people who can demand the most amount of money in the market typically have been in their jobs for a long time, so in our 20s we want to figure out what that is, or at least hone in on exactly what that’s going to be.

Now if you don’t find your job for life in your 20s that’s no sweat either, this milestone is more about getting experience. Having experience is one of the most valuable things you can gain, because it also teaches you how important and how hard it is to make money. I used to think in high school that a hundred thousand dollars a year was going to be so easy to make until I actually started in the workforce and realized this job was going to take me at least five years of working really hard. At the time I was being paid 40k, and it was going to be a long time before I hit a hundred thousand dollars a year.

3. The Trifecta: No Credit Card Debt, Building Credit, Delayed Gratification

It consists of the following: number one, staying out of credit card debt, number two, building your credit wisely, and number three, delayed gratification. Let’s break this down. Typically in your 20s is when you’ll get your first credit card. Credit cards are not evil per se, but they can really help you build your wealth in your 20s, especially if you use them correctly. That means you want to pay off your credit card in full so that you don’t fall into the recurring cycle of owing money on it. Credit card interest rates are on average around 18 percent, so these can really hurt your financial foundation if you aren’t responsible with your spending. If you are able to stay responsible with your card, you’re going to be able to build some solid credit.

Building Credit Wisely

The biggest benefit of having a great credit score is getting a lower interest rate on loans and financing for homes and cars. A good credit score can also help you get approved for rentals faster. A lower interest rate might sound like a boring benefit, but on a mortgage, for example, the difference of just half a percent can add up fast. On a loan amount of four hundred thousand dollars, with a good credit rating you might qualify for a rate of five percent, which amounts to roughly $373,000 in interest over 30 years. Now pretend you have a slightly worse credit score, and that means you qualify for a five and a half percent rate.

Over the course of 30 years, that same loan could cost you around $417,000 in interest, a difference of about $44,000 over the life of the loan. Getting a good credit score isn’t that hard as long as you pay your bills on time and stay out of too much debt. Here’s the thing though, you really can’t afford to miss payments. To illustrate how important this is, if you make 99 percent of your payments on time you basically get a B. With a credit score, missing even a few payments can set you back, which is why it’s smart to keep autopay on when you can. The last part of this trifecta milestone is delayed gratification.

Delayed Gratification

If you can delay your impulse purchases in your 20s, you’re going to have an easier time compounding your wealth for the future, simply because a dollar today is worth more than a dollar in the future. The more capital you can accumulate when you’re young, the bigger the base you’ll have when it comes to investing and compounding your wealth. Let’s say we have person A and person B. They both don’t invest from age 20 to 30, but they do save money. Person A saves $500 a month, so by 30 they have $60,000 ready to invest.

Person B saves $750 a month, so they have $90,000 by 30. Now say at 30 they both start investing and get an average eight percent return until they retire, doing the exact same thing from there. By 65, person A ends up with about $887,000, while person B ends up with over $1.33 million, a difference of $443,000 just because person B was able to save a few hundred dollars more per month between 20 and 30. So the next time you’re eyeing those expensive designer shoes, think twice, because delaying that purchase might let you afford something even nicer later on. The next big milestone in your 20s is having a savings goal.

4. Savings Goal

That could be a goal for a house, a wedding, a dream vacation, or taking a risk like starting a new business. Having a savings goal forces you to create a budget, so you can work backwards from the goal itself. A big part of your 20s is navigating the fact that you’ll be earning income, and your job is to not spend all of it. If you can live below your means, it’s almost always a good idea, because it ties back to the idea of delayed gratification. By living below your means, as your income grows you’ll be able to save for big goals like a down payment on a home, a wedding you’ve always wanted, or an engagement ring.

Living Below Your Means

I’ve been spending roughly the same amount of money every month since 2014, because I track it in my expense tracker app. Starting out I was spending about $1,500 a month on discretionary expenses, and I wasn’t making much money at the time, around $45,000 to $50,000 a year, so my income relative to my expenses wasn’t great. In fact, I was barely saving any money after taxes. But as my income grew, my expenses stayed roughly the same, and I’ve been living like I make $50,000 a year this whole time. As a result,

The thing with upgrading your lifestyle, buying new clothes or new shoes, is that it makes you happy for a temporary amount of time, but once the honeymoon period ends your happiness level goes right back to where it started. So in your 20s, try to focus on things that make you happy that aren’t tied to spending more money, it’ll go a long way. But now you’re probably wondering what the right amount to save actually is.

5. Build a Budget

The next milestone is building a budget. Many financial experts recommend the 50/30/20 rule, which helps you distribute your income. First, go into your bank statements and credit card statements and comb through them, categorizing each expense as a need or a want. An expense like rent, utilities, car insurance, or health insurance is a need. Discretionary spending like Jamba Juice, Waffle House, or Netflix falls into the want category.

The 50/30/20 rule states that your income should be split fifty percent into needs, thirty percent into wants, and twenty percent into savings. So if you’re making about $5,000 a month, $2,500 would go toward needs like rent and utilities, $1,500 toward discretionary spending, and $1,000 toward saving for future investments. Assuming most of you have your debt mostly out of the way, a working budget, an income, and at least an emergency fund, this is where you want to start investing for the future.

6. Investing

You can do this starting with retirement accounts. In America there are two types of retirement accounts most people will want to open. The first is the Roth IRA, an individual retirement account, and the second is a 401k, an employer sponsored account. Both of these accounts have a Roth and a traditional version. The main advantage of a Roth IRA is that your earnings and profits grow tax free, meaning when you retire and withdraw your earnings, you won’t pay any taxes on them. That’s what the “Roth” in Roth IRA denotes,

it’s tax free when you retire, but you’re taxed on the money you put in. This benefit is good enough that the government limits how much you can contribute. At the time of this recording, if you’re under 50 you could only contribute $6,000 a year into a Roth IRA, and if you’re 50 or older you could contribute $7,000 a year, an extra thousand as a catch-up. Contribution limits like these are adjusted periodically, so it’s worth checking the current figures.

Roth IRA

You need to contribute to a Roth IRA with after tax dollars. In a traditional IRA, money going in is pre-tax, but you’re taxed when it comes out. In a Roth IRA it’s the opposite, money going in is already taxed, so it’s not taxed when you withdraw it. To contribute to a Roth IRA you need “earned income,” meaning income from working for someone else, yourself, or a business you own. You can open a Roth IRA at any brokerage like Fidelity, Schwab, Vanguard, Wealthfront, or Acorns, and these brokerages generally make it easy to sign up. Once you do, you transfer money from your normal bank account to your Roth account, then purchase some investments in the account.

401k

The 401k, in either its traditional or Roth version, is an employer sponsored account, meaning you can only open one if your employer offers it as a benefit. Many companies offer this type of retirement account. You contribute a portion of your paycheck into it, and it has a much higher contribution limit, $20,500 a year in 2022. Anything you contribute to a traditional 401k is pre-tax, meaning you get taxed later, essentially deferring your taxes. For many people, income (and therefore tax rate) is lower at retirement, so they end up paying a smaller amount of tax on that money down the line. Because it’s a retirement account, you’ll face penalties for withdrawing funds before age 59 and a half; after that, you can withdraw penalty free. One of the biggest advantages of a 401k is an employer match, which is essentially free money.

A lot of employers offer a 401k match, and often if you contribute five percent of your paycheck, they’ll match your entire contribution up to a certain amount. If your employer offers this, it’s pretty much a no brainer, you’ll definitely want to take advantage of it since it’s essentially free money for your future. You can have a 401k and a Roth IRA at the same time. Once you have either or both, you need to figure out where to invest the money. For most people, investing in an index fund or ETF is all you need to do.

Index Funds

An index fund is basically a pooled investment that buys into many other investments. For example, if you buy an S&P 500 index fund, by owning that one fund you own a small percentage of every stock in the S&P 500, tracking the entire index. That gives you automatic diversification, since your investment is spread across the top 500 companies in the US, and it’s also way cheaper than buying into each of those 500 companies individually. Index funds tend to be safer bets in a retirement account, since based on the average over roughly the past 80 years, index funds have reportedly returned about eight percent a year. Some years are higher than others, but on average you can expect your money to grow and compound over time.

The index fund I like is ticker symbol VOO, Vanguard’s S&P 500 ETF. This isn’t financial advice, I personally invest in that one, but you can invest in what you like. If VOO or a similar ETF isn’t available in your 401k, look for another index fund that invests broadly across US companies, and you should be in decent shape. For those buying index funds, try to hold them for the long term, since making big changes every time the market fluctuates might mean missing out on gains.

Hump Days

That covers the major financial milestones worth hitting in your 20s. If you want more money and business insights like this on a regular basis, I do have a free newsletter you can check out, we publish business news and tech news on Wednesdays and Sundays, and it’s aptly named Hump Days.