How to Manage Money in Your 20s

Big life decisions await you in your 20s. Should you get married? Change jobs? Start a family? Buy a home? Travel the world?

No matter what path you choose — and when — building healthy habits around money management now will help you meet your goals later.

In this guide, we'll cover these four healthy financial habits to start practicing.

1. Control spending

Responsible spending is the foundation for financial health. To get a sense of how much to spend on what, plug your income in the calculator below. NerdWallet suggests spending 50% of your income on necessities and 30% on wants, allocating the remaining 20% to savings. You may also decide to “pay yourself first” by setting aside a portion of your earnings to go directly toward savings and debt repayment.

Tracking your purchases can help you see where you stand, too. You might discover that you’re spending too much on groceries, entertainment or dining out and need to cut back in one — or all — of those areas.

To curb day-to-day spending, change your perspective on individual purchases, says Jason Kirsch, a financial advisor in Portland, Oregon. Instead of considering that $30 dinner from Grubhub a one-off expense, think about what your habit of ordering out will cost over one, two or even five years.

You can also manage spending by waiting 72 hours to make any impulse buys. This gives you time to think about how the purchase would fit into your overall budget and the value it might add to your life — and it could be helpful for folks who are motivated to spend by emotion. A NerdWallet survey of more than 2,000 adults conducted by The Harris Poll, found that 65% of Americans believe social media has increased overspending, potentially leading to guilt and remorse.

2. Save regularly

Determining how to save money can be a challenge with so many necessities and wants competing for your cash. To simplify the process, have part of your paycheck deposited directly into a savings account.

Your first savings priority should be establishing an emergency fund large enough to cover three to six months’ worth of living expenses. You don’t have to build that fund overnight. Start by setting smaller, more attainable savings goals, like $500, and grow it from there.

Don’t be discouraged if unexpected expenses force you to tap the fund. It’s meant to be used and replenished. And, much like a budget, the goal amount shouldn’t be static. It’ll rise or fall as your circumstances change.

3. Build credit

School might be over, but you should still keep your eyes on one grade: your credit score. Great credit is a powerful tool. A high score can help you qualify for loans with low interest rates, which is crucial if you plan to buy a house or a car. Even if you intend to rent for the rest of your life, many landlords use credit checks to assess prospective tenants.

If you don’t have a credit score because you don’t have a credit history, start building your record by opening a secured credit card or credit-builder loan.

The average FICO score is 690 for millennials and 680 for Generation Z, those born from the late-1990s to early 2000s, according to a 2023 report from Experian. That’s barely in the range for “fair” or “average” credit.

If you need to raise your score, focus on spending within your means, keeping your level of revolving debt — such as credit card debt — as low as possible, and paying bills on time. Automating payments will help. You might even be rewarded for it: Many student loan servicers offer a 0.25 percentage point rate reduction for borrowers who use auto-debit.

4. Save for retirement

Saving for retirement might not seem urgent when it’s decades away. But the long runway to retirement is exactly why you should start saving for it now. Thanks to compounding — the process by which you earn interest on both the money you've saved and on the interest those savings have already earned — an early start can give you a big advantage.

Say you saved $100 per month for five years, starting on your 20th birthday. By age 67, assuming a 7% annual rate of return, your money would have grown to more than $118,000 — after you had contributed only $6,000.

In comparison, if you saved $100 per month starting at 35 and ending at 67, you would have about $132,000. That's just $14,000 more than in the first example, even though you would have saved for 32 years and contributed over $38,000.

Learn how to invest in your 20s

If your company offers a 401(k) match, meaning it'll match your contributions up to a certain percentage, max it out. It’s free money. If you don’t have access to a 401(k) through your employer, consider setting up direct deposits from your checking account into an individual retirement account. If you never see that money, you’ll never be tempted to spend it.

5. Reduce your tax burden

Most people, regardless of age, naturally want to pay less in taxes. The strategies to do so are basically the same.

One option is to contribute to a deductible IRA. However, a Roth IRA may offer longer-term tax benefits without the upfront deduction, so talk to a tax advisor to help determine which is right for you.

Beyond a regular or Roth IRA, a health savings account is another tax-advantaged option.

"The money going into your HSA account is not taxable. And then, when you pull it out to pay for qualified medical expenses, it's not taxable, but the earnings in there also aren't taxable," Niang said. "So it's a really good way to reduce your tax burden and have that health care emergency account that you can use if things were to go sideways."

Your health plan has to have a high deductible in order to use an HSA, so that’s another good topic to address with an advisor.

This may sound like a lot of work, but establishing these financial habits now sets you up for success later — even if you’re not sure what “later” will look like.