How to Improve Spending Habits

In your 20s, it can feel like you have your whole life ahead of you and time to figure out how to improve spending habits. In some ways that’s true, but the real truth is the habits you form now will shape your financial future for years to come. If you establish a strong foundation now, it can help you achieve long-term success and help you meet your financial milestones early. I was able to purchase my first home at just 28 years old because of the financial habits I will talk about here and in future posts.

The key is it’s not about making huge sacrifices because they are often not sustainable in the long run. It’s about making small, consistent actions that will add up and make a big difference down the road.

1. Pay yourself first

One of the key spending strategies I wish I would I would have implemented sooner is the concept of paying myself first. This means that before you spend money on anything else, even bills you need to save at least 10 percent or direct it into your savings or investments.

This is one of the most challenging habits to develop, especially if you’re living paycheck to paycheck, but doing this not only creates discipline, but also it shifts your mindset from spending to saving and investing. You’ll have to adjust to living on what’s left, which allows you to steadily build financial security over time.

The earlier you adopt this practice, ideally in your 20s, the more time your money has to grow through compound interest and smart investments. Just to give you an example of what’s possible, think of this:

if you save and invest $100 a month starting at age 25, with a 7% annual return, you could have roughly $264,000 by age 65. By beginning early, you give your money decades to grow.

You can set up your savings or investment accounts to automatically withdraw that 10 percent at whatever time you get paid. That way it’s as painless as possible and you don’t even notice that money is missing. The earlier you start the habit to work around what’s left, the easier that is as well.

2. Create a realistic budget

This is one of the best ways to improve your spending habits in your 20s, while you’re still making the choices that will impact the rest of your life. The key is here to “live below your means”. The goal here is to not live paycheck to paycheck, but to make financial decisions leading you to have money left over at the end of the month. This allows you to save money for emergencies, retirement or large purchases.

To do this successfully, you’ll need to look at your expenses and see where you’re currently spending the most. Then look at the numbers that likely can’t change like rent, gas, car payments, insurance, utilities, etc. However this a good time to shop around and see if you can get lower rates on car insurance or refinance your car or other loans you might have.

Having a realistic picture of where your money is going will help you see if you’re spending more than you realized in some areas, but it will also help you come up with an honest budget that you can likely stick to. Be honest with yourself about the areas where you know you splurge and leave a little bit ogle room for a treat here and there when possible.

Track your Budget

There are all sorts of budgeting apps you can use to create or track your budget. I simply use the envelope budget method. After I pay my bills online, I look at what’s left, withdraw the cash and have an envelope for groceries, gas, and variable categories and split the money accordingly into the envelope. Once that money is gone for that month, then I will have to go until the next month. I like this method because I can physically see what’s in that envelope for each category and can make choices in the moment of what it will cost.

3. Build and maintain good credit

If you’ve tried to rent an apartment or opened an account you might have already seen the impact of good vs bad credit. But as you get older, you will see that good credit opens doors to better financial opportunities. Commonly lower interest rates will get lower interest rates on car and home loans, as well as credit cards.

Some people do this with credit card, but I don’t recommend that when you’re just starting out in life. The average credit rating for 20 year olds is about 680. Simply opening accounts for utilities, paying bills and rent on time will help build credit and when you’re just starting out and don’t have a lot of negatives on you’re credit. It might be slower but a lot less risky and you can still achieve the same goals by the time you start making bigger financial decisions that involve loans, etc.

If you do get credit cards, always make sure the money is in the budget and you can pay them off every month. Always, always make sure you make the payments on time.

If you develop these three easy and simple habits — paying yourself first, living within your means, and building up your credit rating — you will be creating a solid financial foundation you’ll be really grateful for in 10, 20, or 30 years.

4. Set Realistic Financial Goals in your 20s

If you’ve never budgeted before or even set down to look at your finances, don’t let this process intimidate you. It can be scary to face the issue at first, but it’s the first step in being able adjust and come up with a realistic plan. Financial goals in your 20s will look very different depending on your current situation. It will also look completely different as time goes. Over time you be more mindful of your purchasing decisions which leads to change in your spending habits and growing wealth in your 20s.

Realistic Savings Goals

My 20s were pre-COVID, thank goodness, but for me it was important to start saving for an emergency. My long-term goal even in my teens was to buy a house, but I knew if I didn’t start with something small that would never happen. An emergency fund is emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income. At the time, I started saving $20 a month and I was able to set up an automated bank transfer that happened automatically every month. Every banking app should have this feature, but if you can’t find it, reach out to the bank and they can help set it up.

Prioritize Paying of Debt

Whether it’s from student loans, credit cards, an auto loan, or all of the above, debt is something many people have in our 20s. Credit card debt has high interest rates, so prioritize that first. As you purchase items with a credit card, make sure that purchase is worth it. If it’s just a meal or something temporary that you can say no to, ask yourself if you really want to be paying that off for months or years, when you can pay with cash. Paying off debt will free up even more cash down the road.

Improve your Credit Score

We talked about this earlier, but I think it seems like a realistic financial goal. Reach out to any of the sources debt you have and try to set up payment plans to pay off the debt. If you choose the smallest debt burden first, you can take the payments you were spending and apply it to the next biggest payment you have. As you pay off each debt, you will slowly increase your credit score. Make sure to always make your payments on time, which also help.

In Conclusion

Facing your finances can seem like a daunting task, but while your in your 20s, there is time to build and repair your finances. Now is the perfect time to develop healthy spending habits before life takes control. If you feel like your in over your head, just remember no matter how it looks now, it is fixable through small, realistic actions.

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