Smart Money Decisions in your 20’s

Your 20’s, the first full decade of officially being an ADULT when it comes to money!

For a lot of us, this means getting started in life, including a career or trying a lot of things in search of one. It is the decade where we are learning about responsibility and this whole money management thing and where there will be no shortage of other people telling you all about the endless choices you will choose, and what you decide in your 20s will “set you up” for life. Saving, financial planning and even planning for retirement, yes, we are talking about pensions in your 20’s! It can all seem a bit much.

In reality, your 20’s is the ideal time to make some important decisions in your life that may cost very little now but can have a very big impact financially later in life. Ultimately the goal, for you, is to manage your money in such a way that it delivers the best financial outcome at the least cost to you.

That’s a lot, so where do you start?

Budgeting is the best way to keep on top of your finances, but creating a personal budget probably isn’t most people’s idea of fun, especially in your 20s when you may have extra costs like a work wardrobe, a car, and saving a deposit for a home or paying rent. The 50/30/20 budgeting rule outlined below can be used as a guideline to help you direct your money more purposefully towards your goals. First, you’re going to want to make a list of all your income sources so that you have a good idea of what’s coming in. Then you can divide your expenses up like this:

• 50% of your take home income for needs (essential items, roof over your head, food on the table, transport etc.)
• 30% of your take home income for wants (holidays, socialising, fashion)
• 20% of your take home income for savings (short, medium and long terms savings which includes retirement).

You may need to push past 50% on the “needs”. If you can, try to take the difference from the 30% in the “wants”. Keep an eye on that full 20% for savings, and push for it as hard as you can, it will help you get to your goals faster. Start with whatever you can today and try to boost it up a percent or two a couple times a year. Pay rises, bonuses, and tax refunds are great for this. Remember, there will be many reasons to save; a trip, a home and maybe, if you can, consider putting a little extra into a pension. Every few months, you should take a little time to go back through your income and expenses to see if your spending habits are still in line with the 50/30/20 rule you set. Then you can tweak as needed. Here is a budgeting sheet to support you and your financial budgeting: Budgeting Sheet - Financial Wellbeing

Unless you’re incredibly lucky, it’s not really a question of if you’ll find yourself in need of an emergency fund, but when. Things often happen when you least expect them and can knock your finances. An emergency (rainy day) fund can help cover the kind of large unexpected bills like these. Saving up somewhere between three to six months’ worth of take-home pay is what experts recommend to cover essential expenses. By essentials, the experts mean, mortgage/rent, food, utility bills, transport, medical bills etc. Check back on your budget planner and see how much you spend on essentials each month. If all your bills add up to €2,000 a month then, ideally, you could need a rainy day fund of €6,000 to €12,000. That might seem like a lot if you have no savings. The key to successful saving is to start. You can begin with a modest amount and build it up gradually. Also, you could make those savings automatic by setting up a direct debit or standing order to transfer money to a separate account as soon as you get paid. But, if all this sounds like an impossible ask, then look to start small.

Life can present many challenges so it’s good to be prepared. In your place of employment, confirm if you receive any protection benefits. Some employers offer benefits such as sick pay, health insurance and in some cases life insurance. You should find out what benefits are available from your employer and also those available from the state. What you need to carefully consider is how you would cope in the event of an accident or illness. You insure your car, your holidays, sometimes even your phone, but have you factored in the financial consequences of losing your income over the short or longer term if you were to become sick or even die prematurely? Having to cover medical expenses at a time that you may not be earning due to illness or an accident can put your lifestyle in jeopardy. How would you continue to pay rent or a mortgage, bills etc.?  

For your financial wellbeing, you may want to make sure you’re protected.

Next, you should find out from your employer if you have access to a company pension. Some employers make certain contributions to employee pension plans that you can access when you retire. This means you could have the benefit of three factors to your pension plan – you, your employer and tax relief. Different employers have different rules and benefits in place and you may want to consider saving your own money too. However, it is a great way of saving money for retirement. If you have this option and you're not actively participating, you may want to consider this. It might be a small percentage of your monthly salary, but if you don’t, you are losing out on your payments growing tax free. It's an easy way to get started with a pension.

If you have no pension option in work, it is still possible to save for your retirement and receive generous tax relief on your pension contributions. Since you are still in your 20s for every €100 you put into your pension depending on how much you earn – it could cost you either €60* or €80**. Plus any investment growth earned within your pension fund is also tax-free.

*Income tax rate of 40%

**Income tax rate of 20%