Things You Should Know About Saving Money in Your 20's
Saving money in your 20s should be a top priority for young people — but it’s not. A staggering 44% of young millennials ages 18 to 24 have $0 in their savings accounts, or they don’t have a savings account at all, found a GOBankingRates survey. And among all Americans, 62% of them have less than $1,000 in savings.
No matter your age, you should have some type of savings plan so you can one day buy a house, go on a luxurious vacation or even retire when you want.
Saving Money Is a Habit You Have To Practice
Even if you start with saving just $1 more a week, it’s important to establish a savings habit while you’re young. Start saving small, painless amounts and watch your savings account balance grow. You’ll be building your discipline to save money — and it’ll motivate you to find ways to stop wasting money. Have you ever heard the financial advice “pay yourself first”? That means you should be putting a bit of each paycheck into your savings account before bills and expenses even get close to your money. Save as little or as much as you can.
You Have To Live Below Your Means To Save Money
Make sure you have more money coming in than going out. Overspending is the biggest financial problem for many, but you can control your spending by creating a budget, living a lifestyle that’s realistic for your income and working toward healthy spending habits. For others, a low income might be the problem. If you’re in this boat, get proactive and look for professional opportunities that can increase your paycheck, like promotions, networking, vocational training or more education.
Saving Money in Your 20s Is Key To Having the Life You Want
You probably have many plans, dreams and goals, from traveling and earning a degree to buying a home and getting married. Whatever you envision for your life, more often than not you’ll need money to make it happen. But money to cover those expenses doesn’t just materialize — you have to save it up. Turn your dreams into realities by setting concrete savings goals.
An Emergency Fund Is a Must
Saving an emergency fund will protect you and help keep your finances on track. Even when life hits you with unexpected or big expenses, an emergency fund will act as a financial buffer. So instead of spending the money you saved for other goals — like paying for college — you can use your emergency fund to cover the unexpected expense.
Start With an Emergency Fund of At Least $1,000
But how much should you save for an emergency fund? Personal finance expert Dave Ramsey advises you should start out with a $1,000 emergency fund, while other personal finance experts suggest saving a few months’ worth of expenses. Once you have that baseline started, work your way up to having three to six months’ worth of expenses saved to cover bigger financial troubles, like unemployment or emergency medical bills.
Successful Savers Set Short- and Long-Term Savings Goals
Those who have great savings habits set goals and work hard to achieve them. After setting your goals — like paying for a trip or buying a home in five years — break them into smaller steps. Savers know how much they have to save each month to achieve long- and short-term savings goals, from this year all the way to retirement. And, they use those goals as motivation to stay on track and avoid unnecessary expenses.
They Also Have a System To Track and Manage Funds for Different Goals
Setting a savings goal is an exercise in futility if you don’t figure out a system for saving money that works for you. Stay organized, be able to quickly and easily track your progress, and make adjustments as needed. Some people track savings for different goals using a spreadsheet, while others might actually create different savings accounts or sub-savings accounts to easily keep track of funds slated for different purposes.
Shoot To Save 10% of Your Income
While personal finance experts will have varying opinions on the appropriate amount to save, the advice to save 10% of your income is a good starting point. Other guidelines suggest saving as much as 20% of your income, like the 50-30-20 rule that says 50% of income should cover needs — like rent, groceries and transportation — 30% should cover wants — dining out, vacations or donations — and 20% should go to savings or debts. Ultimately, what you can or should save will be decided by your income, expenses, debts, goals and even your location. Depending on the cost of living in your city, you might want to move to a city that’s better for your budget.
Savings Have To Be Balanced With Other Financial Goals
While saving money will always be an important part of your financial health, it’s not the answer to every money question. At times, your financial situation might call for you to put more of your funds toward other goals, like paying down debt, covering education or medical costs, investing or even covering day-to-day expenses when money gets tight. Once you have an emergency fund saved up, funds might be better allocated to other goals.
Start Saving For Retirement Now
Start saving for retirement in your 20s, and you’ll have to put away less money every month. The money you save in your 20s will be worth more in retirement than the money you’ll save in your 30s or 40s. For example, a 25-year-old who saves $600 every year will have $24,000 saved up for retirement by the time they reach 65 — and that’s not even including any interest earned on the balance. Meanwhile, a 35-year-old who saves at the same rate will only have only $18,000 saved up. In order to reach $24,000 by age 65, the 35-year-old would have to immediately start saving $800 a year.
Employer Matching for Retirement Savings Is Free Money
If your employer offers a 401(k) match, you should absolutely take advantage of this benefit. While it will make your paychecks a tiny bit smaller, claiming that contribution will also mean you’re automatically upping your yearly compensation. Skipping out on these 401(k) contributions, however, means you’re walking away from free money — possibly thousands of dollars a year. It’s an easy and nearly painless way to start saving for retirement in your 20s that will pay off big later.
Compound Interest Will Grow Your Money Faster Than Simple Interest
Rumor has it Albert Einstein named compound interest as the most powerful force in the universe — and he might have a point. There are two main types of interest: simple interest and compounding interest. Simple interest, which is sometimes called nominal interest, pays you only on your balance and not on the interest earned. When interest is compounded, however, the interest earned is added to your balance, and future interest is calculated on the balance just boosted by the added interest. Nearly all modern savings accounts offer compound interest, though some will compound daily while others compound only semi-annually. That’s the magical force that makes it so advantageous to start saving money in your 20s, as it will give your money a longer time to earn interest — and then earn interest on that interest.
Saving Is Even Easier When You Automate It
While saving money is a habit you can cultivate, you can also have your bank do the work for you. Many banks provide an automatic transfer option that allows you to schedule transfers from one account to another at a predetermined time. For example, you can automate $250 to your savings account on the first of every month. Alternately, you might be able to set up direct deposit through your employer to automatically funnel a portion of each paycheck into your savings account.
Saving Money: There’s an App for That
As every millennial knows, your phone can be the best tool you have in your pocket. That’s even true when it comes to saving money in your 20s. If you need to create a budget that matches your financial reality, try the Level Money app. For tracking daily spending and savings progress, try Mint. And if you have a hard time finding the extra funds in your budget for saving, try money-saving app Digit, which tracks your finances and adjusts savings accordingly, funneling money into your savings account in such a way that you never miss it. Many banks also offer their own versions of spending and budget trackers. Check with your financial institution to see which mobile savings tools are available.