Ah, the roaring 20’s. In this case, we are not talking about the decade but rather the age between 20 and 29 when people feel so young and free. They are no longer under their parents’ wing and they are still young enough to take advantage of all life has to offer.
Getting out there and living life to the fullest can be quite enjoyable, but it also takes a good amount of money. And while most people in their 20’s are not yet encumbered with families and like to live footloose and fancy free; they should be aware that this is also a great time to be saving money.
Here are some reasons why people in their 20’s may want to plan their decade of fun to make sure they have a bit leftover for their golden years.
Saving for Retirement
When you are in your 20’s, retirement seems very far away, but experts say this is the best time to be saving for those twilight years. This is because when you’re in your twenties, it’s likely you are not paying a mortgage and you don’t have a family to take care of. This makes it easy for you to stash some money away.
What’s more, time is on your side. Therefore, if you stash away just a little bit of money regularly, by the time you are ready for retirement, it will have accumulated significantly.
However, most people in their 20’s are inexperienced when it comes to investing money. That’s why it’s a good idea to enlist the help of a financial expert. A financial expert will consider several factors including your age, your current and projected income and expenses, your retirement plans, your current savings and your health history to come up with a plan that’s right for you.
Another reason it’s a good idea to start saving early is compound interest. Compound interest is the process by which a sum of money grows due to interest building over time.
For example, you may start by investing $1000 which gets 3% interest. In one year, you will have made $30. However, the next year, your $1030 will get 3% interest so the next year you will make $33. The amount of money you make will continue to increase as years go by and when you consider that you have a lot of years between now and retirement, by the time you’re ready to cash in, you should be in good shape.
There are several options when it comes to saving for retirement. In some cases, your employer may have a retirement savings plan for you, also known as a 401(k). With these plans, employers will automatically deduct an amount from your payroll and set it aside for you. You may barely even notice the money is missing but, before you know it, you will have saved a considerable amount.
Stocks are another option.
Investing in stocks is a risky proposition but it can get a big return. If you are considering investing in stocks, make sure you can handle the risk. It’s also a good idea to do some research before investing in the stock market to determine which investments are best for you.
IRA’s are another option. Traditional individual retirement accounts are recommended because your taxable income is reduced by the amount you pay in and it will grow tax free until you retire.
However, when you withdraw the money, you will have to pay taxes on what you’re taking out. If you take all the money out at once, you could be facing a sizable tax bill.
You will also have to deal with something called the required minimum distribution (RMD). This means that once you hit the age 72, you will have to withdraw a certain amount each year and you will have to pay taxes on that amount.
The Roth IRA is another type of investment possibility that may be preferable to some. With this type of IRA, you won’t get deductions on your contributions, but you also won’t have to pay taxes on the money you withdraw.
You can also borrow the contributions, not the earnings, if you need to before you reach retirement.
Other Savings Goals
Of course, retirement isn’t the only thing you’ll want to save for in your 20’s. Emergency funds are another goal to consider.
Emergency funds are used to cover unexpected expenses like sickness, damage to your property, an accident or unexpected travel. Ideally, they should be enough to cover 3 to 6 months worth of expenses if income falls through.
The amount you save will depend upon the amount you make but for the most part, people should consider devoting about 2% of their income to an emergency fund.
When thinking of a means of investing for emergency funds, savings accounts are recommended. This is because the money is easily accessible so you can withdraw from funds at any time.
A down payment on a home is another savings goal. Down payments are rather expensive so the sooner you start saving the better.
Although some may have families and want to actually buy a home in their 20’s, doing so at such a young age may not be the best choice. Jobs and locations can change and if you have to move quickly, you may not get a good ROI for your purchase. It is for this reason that most will want to hold off on purchasing a house until they are in their 30’s and have a better idea of what the future will hold.
Money Saving Tips
No matter what you are saving for, your 20’s is a great time to start stashing it away. Here are some tips for making sure your savings grow.
Control Your Spending: It’s a good idea to create a budget to control your spending. The 50/30/20 rule is recommended. This means 50% of your income will be spent on necessities, 30% on things you want and 20% should be allocated to savings.
Track your purchases to make sure you are sticking to this budget and think of cutting down on expenses to make sure you stay within this ratio. Think of impulse buys for at least 72 hours in advance before making a decision.
Save Regularly: Make sure you are putting money away regularly to devote to your long-term goals and emergency funds. To ensure you are stashing a bit, you can ask your employer to deposit part of your paycheck directly into a separate savings account. You can also set up automatic transfers through your bank to make sure a set amount of money gets stashed.
Build Credit: Good credit can help you get approved for loans and it will keep interest rates low on future purchases. Make sure your credit is in good shape by spending within your means and keeping debts as low as possible.
If you don’t have a credit history, you can build your credit by opening a secured credit card or a credit-builder loan.
When you’re in your 20’s, it can feel like you have your whole life ahead of you. However, this is even more reason to start saving early on. That way you will have a great nest egg to fall back on in your senior years.
What tips to you recommend for building savings early in life?