A 10-step guide to financial freedom in your 20s.

What comes to mind when you hear the words financial freedom as a young adult in your 20s?

Perhaps you have just graduated from college and secured a new job. Congratulations. Or maybe you chose a different path: you’re self-employed, work in the entertainment industry, or earn a living through another field. Regardless of your background, let us assume you are in your 20s and have a source of income, whether fixed or variable.

If that is your case, one question you must ask yourself is: “I am earning income, but am I building wealth?”

Although this is a critical question that every young adult should be asking, few ever truly do. As teenagers, many of us were not adequately educated by our elders about one of the most essential aspects of adult life: personal finance.

The role of personal finance in one’s life could fill an entire book, but for the purposes of this article, we will focus on one simple truth: the way you approach establishing and managing your personal finances is highly likely to shape every other stage of your life.

For that reason, this is something you should take seriously. Contrary to what one might think, it is not an excessively difficult task; it merely requires knowledge and discipline. All you need is a simple guide to help you get started and a consistent approach to continue managing your finances. Hopefully, this guide will serve as that starting point.

1)     Establish a budget and start saving

The first thing you need to understand is that you must start saving money. This is always the foundation of financial stability. Regardless of your lifestyle, you must find a way to save a portion of what you earn. Ideally, you should aim to save about 10 percent of your income, but you can always adjust that target based on your personal circumstances.

To save money consistently, you need a budget that allows you to allocate your income among your needs, wants, and expenses while maintaining control over what your earnings are truly accomplishing. Only then will you be able to consistently manage how much you spend and how much you save.

The money you save may not seem significant at first, but you would be surprised at how much consistent saving can accumulate over the long run.

2)     Set up emergency funds

The next important step is to set aside money for unexpected events or difficult times. Whether we like it or not, life is full of surprises, and they are not always pleasant. You may have the support of family and friends during tough moments, but it is wise to build your own safety net for situations that catch you off guard.

Your emergency savings can be stored in several different ways:

·        High-Yield Savings Account (Best Option): This is the simplest and safest place to keep your emergency fund. It remains accessible, is FDIC insured up to $250,000, and earns interest. This option provides liquidity, low risk, and typically yields more than a standard savings account.

·        Money Market Account: A money market account functions similarly to a savings account but often offers slightly higher returns. It is FDIC insured and may provide limited check-writing or debit card access.

·        Short-Term Certificates of Deposit (CDs): This option works well if you do not need immediate access to your entire fund. It helps you earn a higher interest rate on money you are less likely to use right away.

·        Treasury Bills (T-Bills): These are short-term securities backed by the U.S. government, typically maturing in four to thirteen weeks. They can be purchased through TreasuryDirect.gov or a brokerage account. They are extremely safe and usually offer slightly higher yields than traditional savings, although they are not as instantly accessible.

A good starting point is to maintain an emergency fund equal to at least three to six months of living expenses. This will allow you to endure periods of unemployment or unexpected income disruption without financial distress.

3)     Start planning your retirement.

It might seem a bit odd to start thinking about retirement at such a young age, especially when you have just begun your career and have an entire life ahead of you. In reality, now is the ideal time to begin preparing for retirement. Those who fail to start saving early often end up regretting it later in life.

The main reason you should begin planning for retirement is that it helps reduce your tax burden, allowing you to keep more of what you earn. Most retirement plans offer tax deduction benefits that lower your tax bill while allowing your money to grow without being taxed immediately. Over the long term, the compounding effect of investment growth is one of the greatest advantages of saving money in retirement accounts.

Another reason to start early is that it gives you a greater chance of building a substantial retirement income while making the process less demanding. You will stop working at some point in time and may no longer be able or willing to continue. When that time comes, you will not know exactly how many years you will spend in retirement, and you should aim to ensure that your savings last throughout that period. Saving early increases your chances of accumulating enough wealth to avoid running out of money later in life.

Starting early also makes saving less burdensome. The closer you get to retirement without sufficient savings, the more of your income you will have to redirect toward retirement accounts to make up for lost time. Beginning early allows time to work in your favor, which means you can contribute smaller amounts and still build significant savings over the years.

There are many different ways to approach retirement planning, but they will not be discussed in this article.

4)     Invest

This is another essential part of your financial journey. Investing is inevitable if you want to grow your money and, by extension, your net worth. It is also what allows you to protect the purchasing power of your money so that inflation does not erode its value over time. Although there is often a lot of discussion around investing that makes it seem complicated, it is fairly simple if you approach it from a practical, non-technical perspective.

The first step is to understand some basic concepts: passive and active investing, asset classes, diversification, asset allocation, rebalancing, and investment funds.

Passive investing is a hands-off strategy in which you invest in index funds or ETFs that track the overall market, with the goal of matching its performance rather than outperforming it. Active investing, on the other hand, involves buying and selling securities more frequently in an attempt to outperform the market through research, analysis, or timing. For most individuals, passive investing is the best option because it requires less effort, is more tax-efficient, and is statistically more likely to provide higher returns over the long term.

Asset classes are categories of investments that behave in similar ways. The main ones include stocks, bonds, cash, and alternative assets such as real estate or commodities. Diversification means spreading your investments across different asset classes and sectors to reduce risk; it is the foundation of a resilient portfolio.

Asset allocation refers to how you divide your money among these asset classes based on your goals, time horizon, and risk tolerance. Over time, your portfolio may drift from its original target mix, so rebalancing is the process of readjusting it to maintain your desired balance.

Finally, investment funds such as mutual funds, ETFs, and index funds allow you to pool your money with other investors, giving you instant diversification and professional management in a single investment vehicle.

This is essentially all you need to understand to build an investment strategy that is both effective and easy to maintain. Beyond this, opening a brokerage or retirement account to implement these investments is a straightforward process.

5)     Protect yourself and your assets

Just as it is good practice to set up emergency funds for difficult situations, it is equally important to protect yourself against liability and unforeseen life events. You can do this by securing insurance coverage, whether for life, car, health, home, or disability. Conducting your own research when purchasing insurance is essential so that you do not overpay due to high-commission sales tactics.

You never know when health issues may arise or when a catastrophe might affect your home, car, or ability to work. Insurance ensures that you are financially prepared for these unpredictable events. Although you would prefer never to use your insurance, having it is essential during good times, and not having it can become a major regret when misfortune occurs.

When it comes to life insurance, it is most relevant for those who are the primary earners in their households, have dependents such as children, or hold significant debts such as a mortgage that would need to be covered after their death. If these circumstances do not apply to you, life insurance may not be an immediate priority.

6)     Reduce your tax burden

Most people overlook their taxes until spring, when it is time to file a return. Although receiving a check from the government can feel rewarding, this is not how taxes should ideally be managed. A tax refund is essentially money you loaned to the IRS for free, without earning interest. That money could have been invested elsewhere to earn returns and increase your net worth.

This is why it is important to ensure that you always pay as little tax as legally possible and avoid making unnecessary tax payments.

One of the most efficient and rewarding ways to save on taxes is through retirement savings. There are significant tax advantages associated with contributing to retirement accounts. As mentioned earlier, these contributions are often tax-deductible in the year they are made, and the money can grow tax-deferred for years until retirement, when withdrawals are typically taxed at a lower rate. Overall, retirement planning can save you thousands of dollars in taxes throughout your lifetime.

Another effective way to reduce your tax burden is through deductions. Many individuals overlook the deductions they qualify for or are simply unaware of them. These can include deductions for expenses related to self-employment, charitable donations, equity donations, or even vehicle registration fees. Familiarizing yourself with these opportunities is essential.

Additionally, setting aside money for health expenses through accounts such as HSAs (Health Savings Accounts) or for education through 529 plans are tax-advantaged practices that further reduce your taxable income.

7)     Manage your debts

Debt is, to some extent, inevitable. Whether it involves student loans you needed to attend college, medical expenses, or credit card balances, you will likely face debt at some point in your adult life. The key is not simply whether you have debt, but how you manage it when it arises. The best way to manage certain debts, of course, is to avoid creating them in the first place.

Good debt is debt that helps you build long-term value or increase your earning potential, such as student loans, a mortgage, or a business loan. It is considered “good” because it can generate future benefits greater than its cost. Bad debt, on the other hand, is used to purchase things that lose value or do not produce income, such as high-interest credit card debt, personal loans for nonessential items, or payday loans. Bad debt drains your finances instead of helping them grow.

Here is the essential truth about debt: whether good or bad, it almost always carries interest. The longer your debt remains unpaid, the more interest it accumulates, and that interest itself also compounds over time. This is why allowing debt to spiral out of control can quickly lead to stress and anxiety, making it difficult to see a path forward. Excessive debt can completely undermine your ability to achieve financial freedom.

Be smart about how you handle debt. Only take on what you truly need, and incorporate an effective repayment plan into your budget to manage it. You will be surprised how much faster you move toward financial independence when your money goes into savings and investments that earn you interest instead of paying interest to large financial institutions.

A few other terms you might need to familiarize yourself with are consumer and non-consumer debt.

Consumer debt refers to debt used for personal or household spending, such as credit cards, car loans, or store financing. Non-consumer debt is associated with investments or productive assets, such as business loans, mortgages on rental property, or student loans. This type of debt is typically used to build wealth rather than to fund consumption.

8)     Plan ahead for your goals

You have goals. If you are not yet married or do not have children, perhaps you plan to in the future. Maybe you hope to buy a home, purchase a new car, take a vacation, or start a small business. Everyone sets goals for their future, and having them is a positive thing if you wish to live a fulfilling life. However, goals become truly meaningful when they are planned carefully so that achieving them brings real value rather than creating financial strain.

That is why proper planning is always essential when setting goals. Your plan should include defining a time horizon, creating a budget, and developing a saving strategy to fund your objective. When planning for a goal, make sure it aligns with your overall financial plan and does not disrupt the steady balance you have established.

If reaching a goal requires draining your emergency fund, using your retirement savings, or taking on bad debt, it may not be the right time to pursue it. In such cases, it is better to reconsider or postpone the goal until your financial position improves.

Goal planning takes time and should be approached with care, but doing it thoughtfully ensures that your accomplishments enhance your financial well-being instead of undermining it.

9)     Avoid bad money practices

Beyond creating a financial plan, one of your main responsibilities is to develop discipline. Discipline is not about restriction; it is about building the habit of sticking to the plan you set for yourself and allowing delayed gratification to guide you away from impulsive decisions.

Do not buy things you cannot afford or take on bad debt to finance them. Avoid using your hard-earned money to gamble on the stock market. Do not take out payday loans against your income. Resist the temptation to use money meant for debt payments to cover other expenses. Missing a debt payment can have serious and lasting negative consequences for your financial health.

10) Cultivate Good Money Practices

There are also positive money habits you can cultivate, and they are directly connected to avoiding bad ones. Your money takes care of you when you take care of it. The better you manage your finances, the more peaceful and fulfilling your life becomes. While money itself does not buy happiness, freeing yourself from financial stress creates room for more positive emotions and stability.

Pay your debts on time, and whenever possible, make extra payments above the minimum due. These additional payments go directly toward the principal, helping you pay off your loan faster and reducing the total interest you will pay over time.

Keep track of certain expenses throughout the year that could qualify as tax deductions, as they may prove valuable during tax season.

Monitor your credit regularly, since it plays a major role in your overall financial health and can greatly impact your ability to achieve future goals. Make sure the information in your credit report is accurate and promptly correct any errors you find.

Finally, take care of yourself. Money is not only meant to be saved or used for bills and debt payments. It should also serve to enhance your quality of life. Treat yourself occasionally, but do so responsibly. You never know what tomorrow may bring, and it is important to enjoy your present while still preparing for the future.

Remember: “It’s never too late, never too early to be financially free.”