Anyone currently in their 20s can attest to the demanding and often confusing nature of the first phase of adulthood.

At 20, you're still in college, balancing your studies with a very active social life. But by 30, you're expected to have your life together, including a stable career and a certain degree of financial freedom. By then, some of your friends will likely be talking about having kids and buying houses in the suburbs—if they haven't already.

If the financial side of this phase in life feels daunting, you're not alone. While it's prime time to start setting goals and strategize your personal finances, you certainly aren't too late if you haven't gotten started.

Developing a Budget

Effective financial planning always starts with creating a budget. Building granular spreadsheets that document your spending and sticking to strict limits may not be fun—but it's the necessary foundation for financial growth.

Not sure where to get started with budgeting? First, you need to calculate your income after taxes. How much can you expect to take home each month?

With that number in mind, you can start planning your core necessities like food, housing, and transportation. Be sure to differentiate between fixed payments (like minimum student debt payments and monthly insurance costs) and estimated expenses (think groceries, gas, and utilities).

After you've accounted for all of your immediate needs, set goals for building your savings, paying off debt, and contributing to your retirement fund. It can help to set up automatic payments or deposits to keep on track with these goals.

With your needs and long-term financial goals accounted for, you can finally set limits for your wants, such as entertainment, tech, and dining out.

Building an Emergency Fund

Establishing an emergency fund is a critical aspect of budgeting that deserves extra attention.

It's essential to build up an emergency fund for an unforeseen event and to start allocating some of your savings to this fund as early as possible. An emergency fund will provide a buffer should unfortunate circumstances occur, such as a job loss or a costly car accident.

Most experts recommend setting aside three months' worth of living expenses, though six months is preferable if possible. However, it may take you a while to save up three months' expenses.

It may be prudent to start small with a high-interest savings account and slowly build up the emergency account. One way to calculate how to build up an emergency account is to use our emergency fund calculator.

While establishing and growing an emergency fund is the ideal, it's not a reality for many Americans. A 2019 Federal Reserve conducted a survey and discovered that 37 percent of respondents would have difficulty paying for an unexpected $400 expense such as a car repair or medical bill—and that was before the COVID-19 pandemic and resulting economic crisis.

If you find yourself in a financial emergency that requires quick access to funds, it's important to remember that you always have options. In some cases, contacting your credit card company directly to explain to them your situation can be immensely helpful. By working with them, you may be able to extend your credit line and even potentially suspend your APR for a predetermined amount of time.

However, if you find yourself in an emergency situation that requires immediate access to cash, it's important to remember that you always have options. While we recommend exhausting every other option first, a payday loan can help you to get through a tough time—but it should be reserved for the most dire of circumstances.

Having an emergency fund should be a financial priority, but you shouldn't feel ashamed if circumstances necessitate more short-term solutions.

Establishing Credit  

If you are a recent college graduate with no or poor credit history, you will need to build up credit before applying for credit cards, apartments, car loans, etc. Otherwise, you may be denied, and the more lines of credit you have to apply for, the more hard inquiries you'll need, which further damages your credit score.

You can begin to establish credit with a few different methods, including obtaining a secured credit card—a type of credit card for people with limited or marred credit. The card obliges the owner to set aside a refundable security deposit, which the card issuer keeps as collateral until the account is closed.

Another possibility is asking a family member to allow you to become an authorized user on their card. You can also apply for a standard credit card and ask a family member to co-sign.

Once you have your first credit card, it's crucial to improve your credit score, as building credit is the best way to indicate to lenders that you're trustworthy of a loan. The easiest way to bump up your credit score is to pay bills on time with your card and make at least the minimum card payment on time every month.

Paying Back Student Loans

According to the U.S. Department of Education, borrowers aged 25-34 owe roughly $500 trillion in federal student loan debt. And the numbers don't look any better for those just entering their 20s, as the average student loan debt has steadily increased every year since 2010.

If you're a recent graduate or young millennial with student debt, you'll want to consider the following payment strategies:

1. Sign Up for Automatic Payments From Your Checking Account

This arrangement ensures that you pay the monthly bill on time every time. When you sign up for autopay, the federal loan servicer may trim your interest rate by a quarter of a percentage point. Some private services may even cut it by half a percentage point.

Automating the payments has other benefits, such as guaranteeing that you make the payments on time and avoid late fees, which can negatively impact your credit score.

2. If Possible, Pay Extra Each Month

Pretend you have $39,351 in student loans with 6 percent interest rate—the national average, according to Educationdata.org. To pay off your loans in 10 years, you would have to pay $437 a month. However, if you up your monthly payments to $575, you could do it in seven years.

We also recommend applying “extra” money such as an annual bonus, a salary raise, or tax refund towards the loan to reduce your balance.

3. Refinance Your Loans

College grads with excellent credit and several private loans may consider refinancing. Refinancing combines a few student loans with a single private loan, hopefully at a reduced interest rate. Also, selecting a new loan term lower than what is remaining on your current loans will help you pay it off faster.

Opening a 401(k) or IRA

As Investopedia explains, "A 401(k) is a qualified retirement plan, which means it is eligible for special tax benefits." Moreover, it's the most popular option for employer-sponsored retirement plans in the country.

How does a 401(k) work? Put simply, the government agrees not to tax the money you invest into your account during your working years as it's accumulating interest and other earnings. According to a 2019 report by Vanguard, more than 100 million U.S. workers participate in defined contribution plans, another term for a 401(k), with assets topping $7.5 trillion.

Many companies will also match your contribution up to a limit specified by the IRS, so it is crucial to know the minimum percentage you need to contribute to your 401(k) each paycheck to receive those matching dollars.

For 2021, $19,500 is the maximum employees can contribute to their 401(k) plans, not counting the employer's match, as set by the IRS. That is quite a bit, but that is the maximum, and you can start at any amount that works for you.

When you sign up for your employer's plan, you will have a choice of several investments. You select the ones you want and figure out how to divvy up your money among your picks.

Many plans have a selection of about 20 investment choices such as shares of your company's stock, equity index funds, actively managed equity mutual funds, fixed-income funds, international equity funds and money market funds.

If your company does not offer a 401(k) or you work for yourself, you can fund your own retirement by opening an individual retirement account (IRA).

You have two choices: a traditional IRA or a Roth IRA. The main difference between a traditional and Roth IRA is when the money is taxed.

You receive an upfront tax break for the money you contribute into a traditional IRA. For example, if you earn $50,000 and contribute the full $6,000 maximum contribution allowed, you pay tax as if you only earned $44,000. The money grows tax-free, and you can begin to withdraw funds at age 59 and a half. However, when you withdraw the funds will have to pay federal, state and local taxes.

With the Roth IRA, you do not receive an upfront tax break on your contributions. But, when you withdraw the money, you will not have to pay taxes.

Investing

"No one is born knowing how to save or invest. Every successful investor starts with the basics," is how the U.S. Securities and Exchange Commission (SEC) guide, Saving and Investing, begins. The guide cautions that for most people, the way "to attain financial security is to save and invest over a long period of time."

The first step to investing is adding investments as a line item in your budget. It's best to automate the process and have a comfortable amount transferred to a savings or brokerage account each paycheck. Even a small amount can accumulate over time.

Before you make your first investment, it is essential to remember that investing does entail risk, and the SEC cautions that investing is riskier than saving in Federal Deposit Insurance Corporation (FDIC) insured accounts.

Money placed in securities, mutual funds, and other similar investments is usually not federally insured. As a result, you may lose your principal—the amount you have invested. Over time, you have the opportunity to reap returns from stocks and mutual funds, but you must know the risks.

Looking to get up to speed on investing in a hurry? Our friends at Personal Finance Club offer an accelerated course covering everything you need to know about building wealth by investing in index funds. The videos are easy to follow and will walk you through each step of setting yourself up for financial independence.

Common Investment Options

When you do decide to invest, you'll have various options, including stocks, mutual funds, bonds, and real estate, to name a few.

When people begin to invest in their 20s, they often ask which form of investment best suits their financial situation.

The answer depends on several factors, such as when you will need the money, your goals, and if you won't lose sleep if you place a significant amount of money into a risky investment.

For instance, if you are saving for retirement and you have 40 years or more before retirement, it may make sense to place most of your 401(k) funds into equity funds. However, if you are saving for a short-term goal (within five years or less) such as a car, house, or wedding, stocks may not be the best option because you may experience a loss when you sell the shares.

Buying a House

How do you know when you're ready to buy a home? In truth, it's a complicated decision you need to weigh carefully. But, even if you decide not to take the leap in your 20s, now's the time to start planning and saving.

When you eventually get to the point where you're certain you can and should buy a house, you'll need to understand each of the associated costs and how home loan repayment works.

Mortgages

Chances are, you can't write a check for $250,000 and buy a home right on the spot. That is where the mortgage comes in.

A mortgage (also known as a mortgage loan) is a kind of loan used to purchase or refinance a home. Taking out a mortgage allows you to buy a house without putting up all the cash upfront.

To get approved for a mortgage with favorable terms, you'll have to prove to the lender that loaning you the money is a risk worth taking. Mortgage loan lenders consider credit score and debt to income ratio, among other factors, when considering applicants.

Down Payments

The minimum payment you can put down on a house depends on the type of loan you qualify for. Government-sponsored or government-backed loans, such as Federal Housing Administration (FHA), typically allow applicants to pay a lower percent down payment than private lenders.

You've likely heard of the "20 percent rule," a common theory that suggests you shouldn't buy a certain house if you can't put 20 percent down. However, this isn't a rule and hasn't been for decades. With foresight and savvy financial planning, you can put down less than 20 percent at the time of purchase and still meet your monthly mortgage payments until you own the home outright.

Closing Costs

In addition to the down payment, the typical home buyer must pay 2 percent to 5 percent in closing costs. These include fees for inspections, appraisals, title insurance, credit checks, land surveys and legal services. Also, some lenders may ask purchases to have at least two to three months' worth of mortgage payments set aside in reserve.

Avoiding Common "Debt Traps"

In your 20s, you're supposed to have fun, be spontaneous, and take advantage of your youth and freedom—right?

While everyone deserves to splurge in the name of self-care every now and then, it's all too easy to take the "treat yo self" mentality too far.

If you want to avoid undoing the progress you make following the steps described above, be wary of the common "debt traps" that set back many people in their 20s.

• Buying Into Pseudo Affluence– Celebrities, influencers, and "ordinary" people alike love to show off the most glamourous aspects of their life. Scrolling through Instagram, it may seem like everyone wines and dines, takes lavish vacations, drives luxury cars, and wears expensive athleisure every day.

But this idealized lifestyle often isn't real, or isn't realistic for anyone whose last name isn't Kardashian or Jenner. Don't let the pseudo affluence lead you down a path of splurging on things you don't need.

• An Extravagant Wedding– Your wedding should be a day to remember, but at a price you can afford. While the average wedding costs $33,931, this figure shouldn't be your benchmark. Rather, you should set a wedding budget (and your expectations) based on your current financial standing.
• Luxury Cars– Of course, owning a luxury vehicle sounds and looks amazing. But is it a smart investment in your 20s? Probably not. As MotorBiscuit explains, luxury cars depreciate quickly, cost more to repair, and carry more financial risk should you get into an accident.

The Rewards of Financial Planning Early

People in their 20s often deal with many financial challenges simultaneously, such as establishing a career, paying off student loans, and deciding to either continue renting or purchase their first home. Many are also thinking about settling down and getting married.

All these decisions are major life decisions and require quite a bit of planning and budgeting. Moreover, recent graduates carry significantly more student debt than previous generations. It's crucial to learn techniques to deal with the debt and pay it off to accomplish other goals.

Practicing healthy financial habits such as establishing credit, building an emergency fund, and saving for retirement from the start of your career will increase your odds of financial stability through your career and retirement. By starting financial planning early, you'll be able to reap the many rewards down the road.