When you’re young and in your 20s, saving your money is the last thing on your mind. For many people, this is the first time they’ve ever had a professional job and are earning “real money” from something other than a part-time summer job. Their first impulse might be to spend it on something fun or to make a large purchase such as a new vehicle or house.
But the irony in this situation is that the younger you start saving and investing your income for the future, the better off you’ll be. This is not just true for big-picture goals like retirement but also for other important financial goals like owning a house or building an emergency fund.
With 2022 shaping up to be a turbulent year for the economy, lots of people from Generation Z will be challenged to stretch their paychecks and make ends meet. You might be tempted to cut your corners by contributing less to your savings. But that’s a move that might cause more harm than good.
Here’s how much you should be saving in your 20s and why it’s so important.
How Much Should I Be Saving in My 20s?
Generally speaking, it’s a little difficult for any person at any age to say how much they should be saving. Just like no one diet is perfect for every person’s eating habits, your finances are just as unique. The true answer will depend on hundreds of different criteria, most notably your goals and what your budget can afford.
A General Savings Target
In the absence of all other information, it’s generally recommended that people in their 20s should be saving at least 20 percent of their income. This comes from the 50/20/30 budget rule from the book All Your Worth: The Ultimate Lifetime Money Plan by Senator Elizabeth Warren.
In summary, the rule works like this:
- 50 percent on needs
- 30 percent on wants
- 20 percent to savings
A good way to break this 20 percent figure down is as follows:
- 10 percent into some kind of long-term, tax-advantaged retirement savings account like a 401k or IRA.
- 10 percent towards a short-term emergency fund or paying beyond the minimum debt payment for expenses like your credit cards or student loans
The Minimum: 401k Employer Matching
Does your employer offer a 401k employer match? This is when the company you work for offers to go dollar for dollar (or some other ratio) with every contribution you make to your retirement plan.
401k matching is the easiest money you’ll ever earn in your life. If your employer offers it, then at a minimum you should do everything in your power to get the full match.
For example, if your employer matches your contributions up to 6 percent of your salary, then never contribute less than 6 percent. Doing so would just be like leaving free money on the table. Depending on how you invest it, over the years those savings could compound into hundreds of thousands of dollars, and so it’s important to get every one of them that you can while they’re being offered.
Why Saving More is Better
I can remember being in my 20s. There were so many things that I couldn’t wait to buy and finally enjoy the means that I had worked so hard to achieve. But as I got older, I realized that those younger years were exactly the time when saving up your money made the most sense. Here’s why.
Your Contributions Will Build Up Faster
It’s no secret that the earlier you start saving your money, the quicker you’ll build up your savings. Someone who starts stashing money away for retirement at 25 is going to have a much easier time reaching their goals than someone who starts at age 35. However, something I didn’t know was how much of a relief that would be in later years. When you’re older and money gets tight for one reason or another (such as a recession or job loss), you can take a break from contributing without breaking a sweat because you’ve already got such a major head start.
Your Investments Will Compound Greater
Another reason to save as much as possible is because that’s what fuels your investments. No matter what your investment style is like (risky, conservative, etc.), the more money you contribute, the more there will be to compound.
For instance, someone who puts away $500 per month and invests it in the S&P 500 stock market index will potentially be a millionaire after 30 years. However, someone else who puts away $1,000 per month will see their efforts grow to $2 million.
And the best part – this is something that’s within your control. While other people try to game the markets and chase after unrealistic returns, you can take the easy route and contribute as much as possible to a simple stock market index. You decide how much.
You’ll Practice Living Below Your Means
Something else that’s interesting about saving more is how your lifestyle adjusts to accommodate this missing income.
For example, I’ve had coworkers who earn $5,000 per month and say they can’t bear to contribute any more than 5 percent ($250) because it will cut too much into their lifestyle. Yet, I’ve systematically and slowly increased my contributions to 10, 15, and even 20 percent.
And you know what? It didn’t change a thing. This is because when you make small adjustments to your lifestyle, your budget will shift, and you’ll figure out how to get along without that money.
But there is a danger in waiting too long. People who get too caught up in debt or enjoying big-ticket purchases will eventually become so dependent on their income that they won’t be as able to make these adjustments. So again, the earlier you start, the better off you’ll be.
How to Save More Money in Your 20s
If you’d like to start saving more money while you’re in your 20s, then you’re already off to a good start. Making a mental commitment to improving your spending habits is the first step.
The second is to budget your money. Although there are many ways to create a budget, one of the easiest ways to do so is to use a helpful app like Buxfer. Buxfer lets you set spending limits for each of the major categories within your expense. As you make purchases, those transactions will automatically be imported from your bank accounts and credit cards, and then consolidated into a real-time report. This will let you always know how you’re doing, if you’re on track, and if any work needs to be done.
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