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Money doesn’t grow on trees. As annoying as it was to hear that constantly as a kid, you really do come to appreciate this fact as you get older. Money is a topic that’s often top of mind whether you’re just starting out or getting settled into your career. You’re paying rent, staring at your student debt and hopefully, trying to save what you can each month. It’s a tough balancing act, especially when there aren’t any money trees around to shake down.
As you navigate life’s twists and turns in your young career, there are things you can do to help build a healthy financial foundation for the years ahead. Read on to learn about some of the savings priorities that you can tackle in your 20s that can help give you some financial peace of mind for the years ahead.
1. Make a budget. Yes, this still comes first. How else are you going to know how much you have to play with each month? A budget helps you see where your money goes month-to-month. For example, how much is going toward necessary expenses like rent and utilities and how much is being spent on feel-good items or experiences? Here’s looking at you, $7 morning lattes.
Having a breakdown of your expenses can shine a spotlight on where you can afford to allocate more to savings. You don’t have to do all the math yourself. There are plenty of budgeting apps out there that can help you track those expenses. And assuming you have some money left in the pot after all your expenses are accounted for, you can decide how to put that money to work. Don’t know how to get started on that budget? No shame, we got you.
2. Build that emergency fund. When you were younger, you could probably count on your parents for some cash to fix that broken bike or glitchy computer. But now that you’re on your own, unexpected expenses come in a different variety. For adults, emergency expenses can take the form of sudden illnesses, car repairs or last-minute travel plans.
This is when having a financial safety net can give you some breathing room. Ideally, your emergency fund should be big enough to cover three to six months of your living expenses. But this is a general target. Depending on your personal situation, you may need more. Get the details in our guide on emergency funds.
3. Contribute to a retirement account. If you haven’t been able to open and contribute to a retirement account, there’s no time like the present. According to a 2019 Bankrate.com survey, 27% of Americans regret not starting their retirement savings early enough. If your employer offers a 401(k), there’s really no excuse not to participate! And the sooner you start the better, thanks to the power of compound interest. Does your job offer matching contributions? Even better.
Retirement accounts are good places to park your savings thanks to some of their tax benefits. Contributions to a 401(k) may help to reduce your tax bill in April. And in certain cases, depending on the type of retirement account you have, you won’t be taxed on the money until you’re ready to withdraw it. If you don’t have access to a 401(k) plan through your employer, or work for yourself, you might want to explore different types of retirement plans, such as an IRA.
4. Make savings automatic. If you know how much you can put toward your emergency fund, retirement, or general savings account on a regular basis, you may want to sign up for direct deposits. This way, you can save money on auto-pilot.
Take for example that emergency fund you’re building. You can open up a high-yield online savings account and set up recurring deposits through a linked account. The same can be done with your retirement savings. Decide what percentage of your pay you can afford to put aside and let your employer automatically deduct it from your paycheck. Remember, with direct deposits, you just say when and how much. Savings can be easy when you don’t have to think about it every month.
5. Assess and manage your debt. Whether you have student loans or credit card debts to pay off, some experts recommend you tackle the loans with the highest interest rates first because interest payments in these loans can really add up. And who wants to spend their money paying interest when you can put that money to work for you instead? The quicker you can pay off your debts, the sooner you can free up more money in your budget and put that extra cash toward something else like a no-penalty certificate of deposit account.
Trying to decide whether you should prioritize saving or paying off debt can be challenging, especially if you have limited disposable income each month. But here are some helpful articles on how to prioritize and how to make a debt payment plan to get you on your way.
6. Get educated on your investing and savings options. Of course, one way to get more money is to make money. But while you’re at work, your money doesn’t have to sit idly in a basic savings account earning crumbs of interest. There are many other savings and investing options that can help your money grow faster.
As you work toward your financial goals as a young professional, take the time to study up on some important financial topics. For example, do you know the difference between saving and investing? Or the potpourri of investment options that are out there, including stocks, bonds and ETFs? Or what about the different types of retirement plans? As you get older, you will be presented with many saving and investment choices. Financial literacy is the key to successfully navigating them.
When it comes to savings goals, you might be tempted to just throw your hands up and say, “YOLO!” But can you truly enjoy your YOLO moments if thoughts about your future financial well-being are creeping around in the back of your mind?
Making smart financial decisions doesn’t mean you have to give up living your life altogether. Beefing up your emergency fund, savings and investments require discipline. But if you can make and stick to a budget, you can definitely squeeze in some fun every now and then.
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.