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How to save money in your 20s

Young millennials talking in kitchen
Hoxton/Tom Merton/Getty Images
Young millennials talking in kitchen
Hoxton/Tom Merton/Getty Images
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For 20-somethings, there are numerous setbacks to saving, but it’s crucial to try to save as much as possible during this transitional period in life.

A 2021 Bankrate survey found that millennials  — many of whom are in their mid-to-late 20s — had much less in savings than older generations, with 57 percent of millennials having either no emergency savings or not enough to cover three months of expenses.  There are a number of strains causing younger generations to face more financial pressure than previous generations. Younger people are more burdened by student loan debt, are increasingly overwhelmed by work and were impacted hardest financially by the coronavirus pandemic.

With these challenges considered, it’s important for younger workers to develop saving habits to prevent falling into greater financial trouble. Practicing these strategies can help you retain more financial security while saving for future goals.

Create a budget

Budgeting your money is a simple way to maintain greater awareness of your spending and saving habits.

There are several tactics for budgeting. One popular approach is the 50/30/20 rule, which allocates 50 percent of income to necessities, 30 percent to spending on things you want and 20 percent to savings.

Many 20-somethings may not realistically be able to put away 20 percent of their income for savings, especially when they’re living paycheck to paycheck, but it’s still important to save what you can.

“In my experience the best approach is to try to cap expenses from going up, build income up, then use the surplus to create an emergency fund and pay down high-interest debt,” says Zach Teutsch, a financial advisor and founder of Values Added Financial based in Washington

Take some time at the beginning of each month to outline a savings plan. It may be helpful to stash some savings away at the beginning of the month to ensure that it doesn’t get spent. There are a number of budgeting apps that can do some of the tedious budget calculations for you. Even on a tight budget, you may be able to find some room for cutting expenses and saving a bit more.

Establish money saving habits

Once a budget is created, try adopting certain saving habits to make sure you’re saving as much as possible and you’ve got enough to cover unexpected expenses. Some useful savings practices include:

  1. Automate savings. Something as simple as having a portion of a paycheck redirected into a savings account can help prioritize savings goals and ensure that you’re continually building savings. Some apps, such as Chime, come with automatic saving features.
  2. Open a high-yield savings account. Earning a high yield on savings helps your money grow over time. Most high-yield savings accounts are online, which may make it easier to set up automatic transfers to savings. Plus, online accounts tend to have lower or no fees.
  3. Build an emergency fund. Recognizing the importance of an emergency fund can incentivize you to meet small savings goals. You can keep this fund in a savings account, and only use it when an emergency expense comes up, such as a medical bill or if you face an unexpected loss of income.
  4. Limit utility costs. Costs for utilities like heat and electricity can dig deeply into available funds. Reducing these costs can amount to significant savings over the course of a year. For example, the U.S. Department of Energy says households can save up to 10 percent on heating by turning the thermostat down 7 to 10 Fahrenheit  for eight hours a day in the fall and winter months. Some other ways cited by the U.S. Department of Energy to make utilities more efficient include consolidating multiple refrigerators, keeping air conditioner filters clean and switching to LED lighting.
  5. Condense entertainment expenses. If you use cable, consider switching to a more affordable streaming service. Additionally, many streaming services offer bundle deals for a group of friends or family that share an account. If you use Netflix, for example, a basic, individual plan costs $9.99. But a bundle plan that allows four screens to be watched at once costs $19.99, which, split between four people, would cost half of what the basic plan costs for an individual.

Get out of debt

The sooner you get out of debt, the more you’ll be able to save. Paying off debt can take up a significant portion of expenses, meaning there is less money you have to spend and to save. It’s important to pay off credit card debt and other types of consumer debt to limit the amount of interest accrued, even if you can only pay off a little bit at a time.

Paying down student loans

Of all different types of debt, student loan debt is perhaps the largest roadblock for younger consumers. Recent statistics reported by Bankrate show that student loan debt outpaced inflation, having grown 56 percent over a 15-year period.

Though paying back student loans can seem daunting, there are ways to make repayment more manageable. Some loans may allow borrowers to enroll in an income-driven repayment plan, so that you can pay less when you’re living on a tighter income and more as your income increases.

If you’re overwhelmed by monthly loan payments, speak up. Andrea Woroch, a consumer saving expert who runs a blog for saving tips, recommends calling your student loan provider and asking whether you qualify for financial hardship deferment or a different repayment plan.

“Don’t simply ignore the deb,” Woroch says. “This can be devastating to credit scores and cause future issues when trying to obtain a personal loan for business or mortgage.”

Bankrate’s student loan calculator can help you determine how quickly you can pay off college debt.

Use debt wisely

Work with providers to negotiate a manageable repayment plan or to consolidate loans. Then, you can worry less about meeting the monthly payment minimum while also building up credit.

By paying off debt and establishing a good payment history, borrowers can greatly improve their credit score. Having a higher credit score means you’ll have a more secure financial life overall. Credit scores can affect everything from the interest rate charged on debt to whether you’re approved for an apartment. Plus, by keeping up a good credit score, you’ll have a better chance of taking out a mortgage and achieving the dream of home ownership.

Start investing

Investing increases your sources of income and therefore increases how much money is available to save.

Many 20-somethings may be new to investing or can’t afford to incur big losses. Luckily, there are plenty of low-risk investment options, from putting money in a high-yield savings account to buying a government bond.

One helpful way to start investing is using an investing app, which provides a range of features, from virtual investment portfolios to stock-trading assistance. With the extra income, you can build an emergency fund or start saving for retirement.

Begin planning for retirement

By investing in retirement earlier in life, there will be a greater payoff in the long term. Fidelity suggests having at least the amount of your annual salary saved for retirement by age 30.  The amount that should be saved may also vary depending on when you plan to retire, so if you plan to retire earlier than age 67, which Fidelity uses as a standard, then it makes sense to have more saved by 30.

Two common accounts used for retirement savings are an investment retirement account (IRA) and a 401(k). IRAs are self-funded and come in two types: traditional and Roth IRAs. With a traditional IRA, you can deduct contributions made to the account on tax returns, but withdrawals are taxed. There’s also a fee on withdrawals from a traditional IRA that are made before age 59½. On the other hand, withdrawals can be made fee free from Roth IRAs at any time, and you won’t have to pay taxes on withdrawals. However, contributions to Roth IRAs are not tax-deductible.

A 401(k) plan is another alternative for retirement savings, which is offered by employers. Unlike an IRA, contributions to a 401(k) are deducted directly from your paycheck. Companies also frequently match contributions up to a certain percentage of your salary.

Bankrate offers several calculators to help savers plan for retirement, which can show how getting a head start on your retirement helps to build a larger nest egg.

Focus on your career

Developing relevant skills and advancing in a particular occupation are crucial for those in their 20s who are at the beginning of building their career. Now is especially a good time to advocate for yourself in the workplace.

“The labor market is finally tightening which is giving workers more opportunity for advancement and increased compensation than they have had before,” says Teutsch of Value Added Financial.

For those who have reviews at their company, a top tip is to log all your accomplishments and show your supervisor the ways that you’ve helped the company and supported a good culture, Teutsch says. “Then the wins will be fresh on their boss’s mind when it comes time to write the review and decide on a raise.”

By continually working to improve skills and tracking personal achievements, workers in their 20s can make strides towards their career goals and boost their salaries. With a higher salary, you’ll be able to comfortably put more money away for saving.

Bottom line

Between establishing a career, looking toward home ownership and managing the financial strains caused by student loans and rising prices, it’s not easy for 20-somethings to make room for saving. But there are some steps you can take so that even if it’s not 20 percent of your paycheck, you can put some money towards an emergency fund and future goals.

Try creating a budget to motivate yourself to direct money into savings and investments. There are many digital tools and apps that can help you save, too. It can be highly rewarding to see the financial stability and hope for the future that saving may bring.

Written by
René Bennett
Banking writer
René Bennett is a writer for Bankrate, reporting on banking products and personal finance.
Edited by
Wealth editor