It’s not easy to understand the importance of savings for the future when you’re in your early 20s. When you’re in your 20s, you tend to be focused on the present instead of the future. But saving in your 20s is actually very important. Starting early gives you a big edge, and makes it much more likely that you’ll reach your savings goals when you retire. Let’s take a look at everything you need to know about savings in your early 20s.
Start Saving Immediately
There are many reasons why younger workers don’t save as much as they should, and lack of cash flow tends to be the most common reason. When you’re struggling to pay off student loans, trying to fund a 401(k) is the last thing on your mind. It might be difficult, but it’s not impossible. Even if you’re only able to save up a small amount of money each week, even $25, it will still add up over the course of 20 years, when you factor in compound interest.
Sign Up For Your 401(k)
The simple act of signing up for your employer’s 401(k) will encourage you to begin investing your money. Once you’ve got it up and running, you’ll be more motivated to invest money into it. In many plans, the employer will match up to 3% of your salary, which is free money that you should take advantage of.
Once you sign up, the money that you save will automatically be taken out of your check before it’s taxed. This means that a smaller amount of your income will be taxed now, and only when you withdraw it in retirement will you be taxed. Aim to contribute a few percent of your income at first, and if you can increase that to 10% or more, you’ll put yourself in good position later. Your future self will thank you.
Be Aggressive With Your Investments
People in their 20s can be much more aggressive with their investments compared to people who are older. For example, instead of placing 50% of your money in bonds, and 50% of your money in stocks, consider placing up to 90% of your investments in stocks. Why? Because someone in their 20s has a very long life ahead of them, so they can handle the ups and downs of the market better than someone in their 50s. Just make sure to hedge your bets by investing in as many different stocks as you can, such an index funds which tracks a large collection of different stocks.
Make Logical Decisions Regarding Money (Not Emotional Ones)
If you’re going to take these money-saving principles seriously, you need to consciously make logical decisions regarding your money. Younger people often choose to spend now and worry about saving later, but delaying gratification is one of the best things you can do for your future. Learn how to make logical decisions with your money that will help your future self rather than emotional ones which feel good now but will hurt down the road.