Not long after they’ve blown out the candles on their 21st birthday cake most people are expected to deal with regular bills and make long-term financial plans.
But while your twenties might be a crucial time to set yourself up for success, young adults are far less financially literate than older generations, according to a survey by Shepherds Friendly, a mutual society.
In December it quizzed 2,000 people aged 18 and above on their money knowledge. While only 23 per cent across all age groups knew enough to pass the test, this fell to 9 per cent among those aged 18-24 and 12 per cent in the 25-34 age group.
An accompanying survey found that 51 per cent of those aged 25-34 have difficulty managing their finances, with 46 per cent saying they lose sleep over money worries.
This research is a stark reminder of why we’ve launched our Smarter with Money campaign — in a bid to boost financial capability, whatever your age.
Leon Ward from the financial education charity Money Ready said: “To build a financially savvy population, we need to equip people with genuine, deep-rooted knowledge. That’s how confidence becomes capability.”
Here are our top tips to help you on your way to making good financial decisions in your twenties.
Learn how to budget
It’s important to start with the basics. Some 79 per cent of people aged 18-21 have never created a budget, while 76 per cent have never paid a bill, and 77 per cent have not set aside funds for unexpected expenses, according to a survey of 2,000 young adults by Santander last year.
Andrew Hagger from the personal finance site MoneyComms said: “Draw up a budget on paper or on your laptop and stick to it. List your income and all your regular outgoings — including your monthly savings — so you’ll be left with your ‘disposable income’. This is the money you have left over for spending.”
Take care to avoid going over this or it could mean you having to borrow and pay high interest rates.
Hagger added: “Don’t buy stuff you don’t need. And don’t be tempted by ‘get-rich-quick’ schemes, crypto and online gambling.”
Cryptocurrencies such as bitcoin can seem appealing. But they are volatile, unregulated and risky. You should also think twice before turning to “finfluencers” on social media platforms such as TikTok for financial tips.
• What every teenager needs to know about money
Borrow carefully
If you do need to borrow for an unexpected expense or a big purchase, take care to do so wisely. Remember, you’ll need to repay the money at some point.
Make use of a 0 per cent purchase credit card, which lets you spend a set amount of money for a certain period without charging interest. TSB has a credit card that gives you up to 26 months of interest-free spending, while Lloyds and M&S offer up to 25 months.
Always make at least the minimum payment each month, because interest is charged at a steep rate on any missed payments (24.9 per cent on the cards above) and you could end up with a black mark on your credit record. Having blemishes on this financial CV can cause problems further down the line.
Alastair Douglas from TotallyMoney, a credit score site, said: “Miss payments and you might struggle to get a credit card, a mortgage, or even a mobile phone contract in the future.”
Start a savings pot
In your twenties, it’s likely that you are just beginning to build up some savings and keeping an emergency fund in an easy-access account is an essential part of this.
Ian Futcher from the wealth manager Quilter said: “This should ideally cover about six months’ worth of income, and be kept in cash, ready for unexpected situations, such as losing your job.”
The top rate on an easy-access savings account is 4.5 per cent from Chase Bank (although the rate drops after the first 12 months), and many other banks and building societies have accounts paying more than 4 per cent. Easy-access accounts usually come with variable rates, so the interest you earn could change at any time, which can also drop once an introductory bonus wears off or you make a certain number of withdrawals.
For larger balances or long-term savings you could also consider an Isa. You can shelter up to £20,000 in these tax-free accounts each tax year, either in a cash Isa, which works like a regular savings account, or a stocks and shares Isa, where your money is invested. At the moment you can distribute your £20,000 allowance however you wish, but from April 2027 under 65s will only be able to deposit up to £12,000 in a cash Isa.
Basic-rate taxpayers can earn up to £1,000 a year from savings before they have to pay income tax on the interest above the limit, while higher-rate payers can earn up to £500. Additional-rate payers get no allowance.
Cash Isas usually pay a lower rate of interest than normal savings accounts because they come with the bonus of being tax-free. The best rate on an easy-access Isa is 4.4 per cent variable from Trading 212, while MoneyBox pays 4.32 per cent and Plum 4.3 per cent. If you want to lock your money up for a year in return for a guaranteed rate you can get up to 4.15 per cent, with Castle Trust Bank.
Start saving for a deposit
As you settle into working life, this may be the stage when you start to think about saving for a first home. The more you can save the better, because a bigger deposit can unlock better mortgage rates and more borrowing options.
If you’re looking to buy in the near future, this is a good time to start swatting up on mortgages. Use a mortgage calculator to work out what your repayments might be, and how they might change if you had a bigger deposit. Consider the length of term you might want to take out — longer mortgages will have lower monthly repayments, but you will pay more overall because there will be more time for interest to accrue.
If you’re under 40, you can open a Lifetime Isa to save for a deposit. You can pay in up to £4,000 a year and benefit from a 25 per cent government bonus, worth up to £1,000 annually. You can use the money to buy a first home worth up to £450,000 or after you turn 60. But if you withdraw it for any other reason, or less than 12 months after you opened the account, you have to pay a penalty that wipes out all of the bonus and some of your own money too.
The Lifetime Isa is expected to be redesigned in April 2028. It is thought that the new product will focus solely on helping first-time buyers, removing its role in retirement saving.
Think more about investing
As you get further into your twenties, it’s a great time to consider the stock market.
Alice Haine from the wealth manager Evelyn Partners said: “Investments, particularly equities, have historically delivered higher returns after inflation than cash over longer periods, albeit with some volatility in the short term.”
Typically, you need to be able to invest your money for at least five years to ride out any ups and downs in the stock market.
According to Evelyn Partners if you had invested £10,000 in global shares ten years ago via a fund that tracks the MSCI All Country World index, you would have £36,065 today (total return, including dividends). By contrast, if you’d deposited that same £10,000 in the average cash savings accounts, it would be worth £11,940.60.
Haine said: “Relying too heavily on cash over the long term risks missing out on the inflation-beating returns that well-diversified investments can deliver.”
Don’t make the mistake of thinking investors can only be people with private yachts or thousands of pounds in the bank. Investing little and often can really add up, said Laura Suter from the investment platform AJ Bell.
“If you put away just £25 a month — less than £1 a day — you could build up a tidy pot after a few years. Assuming 6 per cent a year investment growth after fees, you would have nearly £1,800 after five years and nearly £4,200 after ten.”
Keep up the trend for 15 years, and you could have more than £7,400 in your investment pot and about £11,700 after 20.
Set up a pension — and get contributing
Most people will have been signed up to their workplace scheme automatically, unless you’re under 22 or earn below the £10,000-a-year threshold for auto-enrolment. If that’s you, or you’re self-employed, it’s time to either opt in or open a pension yourself. They’re a great way to build up a retirement pot, thanks to the tax relief. For example, if you’re a basic-rate taxpayer and pay £80 into your pension, the government adds £20 in tax relief, so £100 goes into your pension pot.
In workplace schemes what you pay in is enhanced by your employer. The minimum employee contribution is 5 per cent of you salary and 3 per cent for employers. But many companies are more generous and will match your contributions up to a certain limit, so look at whether you can afford to contribute more.
Someone who started contributing to their pension at age 25 earning £30,000, could expect to have a pot of about £240,000 by the time they reach 57 (when they will be able access 25 per cent of it tax-free), according to Quilter. This would rise to about £480,000 if they got their state pension aged 68.
This assumes an annual pension contribution of 8 per cent, annual wage growth of 3 per cent, investment fees of 0.7 per cent and growth of 5 per cent.
Futcher said: “For many people, their first job in their twenties marks the start of their pension savings, and this is a significant chance to grow long-term wealth in a way that saving in cash simply cannot match.”
Repaying your student loan
Another consideration for many people in their twenties is paying back their student loans — particularly in light of the recent announcement about freezing the Plan 2 repayment threshold for three years until 2030.
Plan 2 loans were issued to students who started university between September 2012 and July 2023.
The salary threshold at which these graduates repay their loan is £28,470 a year, rising to £29,385 from April, but after that, it will be frozen until 2030. Graduates repay 9 per cent of their income above this threshold.
The freeze means they will now repay more as their salary rises than they would have if the thresholds were not frozen — a process called fiscal drag.
• Three ways to end the student debt injustice
But making extra repayments to clear your loan sooner may not always be a good idea.
Futcher said: “Many lower or average earners will repay only modest amounts before the remaining balance is eventually written off after 30 years.”
Higher earners on the other hand, whose repayments are much larger and who are more likely to clear the loan during their career, may find the interest added over time significantly increases the total amount they repay.
Futcher said: “For many people, the loan effectively functions more like an income-linked tax than a traditional debt, meaning the money you may consider using to pay it off could often work harder elsewhere, such as building savings, contributing to a pension, or investing for the future.”
The right approach for you will depend on your circumstances — and needs to be considered very carefully.