What kind of money should you make in your 20s?

Dear Christine,

What are some things you should do in your 20s to set yourself up financially for success? For some context, since I started working after college and living at home, I set my 401(k) contribution to the maximum percentage. This helped me grow my account exponentially with the goal of getting a loan and buying my first home in a few years.

Fast forward, after COVID and unemployment, I'm finally stable enough to buy, but I've realized that I wish I had spread more of my savings between different accounts instead of putting it in my 401(k). I'm still working on buying my first home with a small personal deposit, I've learned my lesson and want to start yesterday with easy ways to increase my savings.

I know how to get into stocks, mutual funds, diversification, but I don't know how to start or where to look – it's so intimidating. My next financial goal is to pay off this 401(k) home loan and save for a family home in five to eight years. Any tips on how to do this?

Sincerely,

Worry Saver

Dear Anxious,

I love this question, so I'm going to give you all the information I wish I had when I was 20, hoping someone else can avoid making the same mistakes I did.

What you should do in your 20s is not much different than what you should do at any other age. But there are things that many people don't start early enough, and that means that starting earlier loses its advantage. The first thing I would suggest is to learn how to make one. Use it to create and give every dollar you earn a “job” – whether it's used for savings or going out.

You've already hit the next tip: save for retirement. Due to its power, the sooner you start, the better. And it's never too early to start saving for retirement. In fact, it might even let you.

But a retirement account isn't the only type of investment you should make. I would recommend that you use every 20 not just for retirement, but to build your wealth, help buy a house, pay for a wedding, or move on to your family. These should be thought of as investments you make for the long term (more than a year), but you may want to access penalty-free before you retire with the money.

You've also told me you want to save more cash, and that's another piece of advice I'd give other 20-somethings. Enjoy the fact that most people your age are also just starting out financially, and if you have the money, resist the urge to spend it recklessly. Instead, put that money into savings (preferably a) so it can help you buy a house or car. But in addition to that savings, you'll also need to start building up your living expenses, usually three to six months. That way, you won't have to tap into your savings to cover you in an emergency.

There are some things no Do it in your 20s too. Try to use things like credit cards and pay all your debts on time each month. This will help keep your credit score nice and strong in later years when you'll need it more for purchases like a car or home.

You asked how you can pay off your loan and start saving for your home. Now that you know you've overfunded your 401(k), you may want to withdraw some of your investments and put those funds toward your savings or paying down debt. Use your budget to help you get there.

The last piece of advice I'd give is for people to set up separate “funds” for big life goals they might want to achieve, even if it doesn't seem like it's going to happen anytime soon. You may not have a partner yet, but that shouldn't stop you. Even if you currently have five roommates, you can still get started.

– Christine

If you have any questions about money, Christine is here to help. and he may respond in a future column.