SAVING MONEY IN YOUR 20s 101
In your 20s, saving money might not be at the front of your mind. You finally have a grown-up paycheck, and you are excited to finally be able to afford things that you may have never gotten to purchase before. You may be thinking - “Hey, I have 35 more years until I retire, I’ve got time, so let me blow all my money and save nothing”.
This is a very dangerous way of thinking that will set you up for failure down the line. It’s extremely hard to begin saving once you’ve become used to living off that income. Plus, is retirement the only thing you want to be saving for?
Do you want to buy a home one day? Do you want to buy a car? Or what happens when you get in an accident and begin drowning in medical bills?
These are all reasons why it is so important to start saving money as early as possible. Keep reading to learn 5 ways you can start saving in your 20s to keep yourself out of debt and give yourself more opportunities in the future.
Automate Savings
After starting your first grown-up job it can be exciting to see that first paycheck hit your bank account. It’s tempting to buy fancy and unnecessary things with the new extra cash you have lying around, instead of setting aside that money for the future.
Remove the temptation of spending all your money by setting up an automatic transfer from your bank account into your savings or investments. An automatic transfer keeps you from ever seeing that money in your checking account, and therefore you won’t get used to living on that portion of your income. You will mindlessly grow your savings account while being able to spend the leftover money in your checking account guilt-free.
You are able to set up an automatic transfer through most employers, or even through your bank if that works better for you. Whether it’s $20 or $200, automating a portion of each paycheck into a savings or investment account is a very smart way to ensure you are saving money.
2. Open a High-Yield Savings Account
One of the most important, yet least talked about things you can do to set yourself up for financial success is to switch from a standard savings account to a high-yield savings account. This is a simple and cost-free switch that offers a significantly better return on your investment.
On average, standard savings accounts offer an annual interest rate of .25%, while high-yield savings accounts range from 3-5%. This difference in interest rates is astronomical in the long run.
For example, say you had $5,000 in your savings account in January. Without adding any additional money, that $5,000 will grow by $255 in a high-yield savings account with an interest rate of 5%. In a standard savings account with an interest rate of .25%, that $5,000 would only grow by $12. I think that speaks for itself - switch to a high-yield savings account!
3. Build an Emergency Fund
In your 20s, building an emergency fund is one of the first things you should be saving towards. If an unexpected medical event occurs, or you lose your job, your emergency fund serves as a cushion to keep you from going into debt that you cannot pay off.
An emergency fund should cover three to six months of your expenses, which can take a decent amount of time to save up, so it’s smart to start saving as soon as possible. This fund should grow as you get older, as your expenses become more complex as a homeowner or parent.
Where should you build your emergency fund? Let’s say it all together: a high-yield savings account! A high-yield savings account is the quickest and least risky location to let this money grow.
4. Limit Expenses
After starting your first grown-up job, it can be exciting to finally be able to make purchases you were never able to make before. Like buying the clothes you want or going out to eat without your parent’s permission. You have total control over your money now, so make sure you are spending it in a way that enables you to reach your goals.
Now I’m not saying you need to cut out everything that brings you joy, just make sure you are making meaningful purchases that align with your goals. Is the premium Netflix subscription extremely important to you, or will the basic plan suffice? Do you want a brand-new car bad enough to pay a $600 car payment each month, or will the old Ford Focus you’ve had since high school work for a couple more years?
Being aware of and limiting your expenses gives you the opportunity to save more of your income today and which leads to more possibilities in the future.
5. Start Investing
It’s never too early to start investing! Whether it’s a 401k through your employer, an IRA (Individual Retirement Account), or a brokerage account on your own, you need to be investing your money.
Investing can seem overwhelming, especially when you are right out of college, but it’s so important to start. Even if it’s just a small amount, allowing that money and interest to compound for decades will bring you passive income to help achieve your long-term goals.
There are many investing apps using online brokers that are intuitive and great for beginning your investing journey. The top 5 investing apps of 2023 are:
M1 Finance
Fidelity
Robinhood
Webull
Public
Investing your money is THE way to build wealth. Saving money in a standard savings account does not allow your money to grow and generate passive income for you. Even investing just a little money at a time can set you up to achieve all your financial goals.
