If you’re in your 20s, you’re probably no stranger to bootstrapping stories about how your parents and their contemporaries worked in the summer and did odd jobs to save for their first car, put themselves through college or even buy a house.
Heed the lessons, but consider the context.
“Older people need to remember that life isn’t as affordable as it used to be when they were young,” said Donny Gamble, CEO of the financial literacy website Retirement Investments. “College degrees are required for almost all jobs with decent pay, yet a college education is not affordable for the average person just graduating high school. Additionally, real estate prices have skyrocketed, forcing people to rent their homes instead of paying off a mortgage. Despite the misconception that young people don’t have much money saved up because they spend it on coffee and avocado toast, the reality is that the cost of living does not allow most young people to save a significant amount of their income.”
Saving might not be as easy as it was back then, but it’s still just as necessary. If you’re a saver or aspiring saver in your 20s, consider the following.
Remember That You’re Saving for a More Expensive Future
The generational cost increases that make it harder for young people to save today also require them to save more for tomorrow.
“While $1 million was a good goal for retirement, financial professionals are estimating that Gen Z could need as much as $3 million to retire comfortably,” said Laura Sterling of Georgia’s Own Credit Union. “The older you are, the more money you should have in savings.”
So the first takeaway is to start now with whatever you have. The power of compounding takes time to reach its full potential, and when it comes to saving, years are more valuable than money.
You Should Be Approaching $90,000 by 30 — You’ve Got That, Right?
Sterling and many other experts recommend following the 50/30/20 rule, which dedicates 50% of your income to needs like housing and utilities, 30% to wants and 20% to savings.
According to the Bureau of Labor Statistics, the median weekly earnings for the most recent financial quarter for 20 to 24-year-olds is $737. For 25 to 34-year-olds, it’s $1,016. The average of the two is $877, 20% of which is $175.
Presuming two unpaid weeks off per year, the math says you should be saving $8,750 annually. If you’re about to turn 23 and you don’t have $26,250 in the bank — or $87,500 just before your 30th birthday — don’t panic.
According to Synchrony Bank, most full-time workers hit their peak earning years in their 40s and 50s. Although life tends to get more expensive as you age, saving is always harder for low-wage earners at the entry level, which is the typical 20-something professional experience.
That’s because lower wage earners of any age spend a greater percentage of their income on basic needs.
“The most important thing is to recognize that you are getting started on your journey toward saving and making progress over time,” said Megan Moore, vice president of Fidelity Bloom Customer Acquisition and Loyalty. “In other words, it’s more helpful to stay focused on the journey than your financial end goal.”
As for 50/30/20, it’s a good standard to aspire to, but one that’s simply not possible with the bottom-rung wages that so many Gen Zers and young millennials bring home. Don’t let it get you down.
“Many industry rules of thumb can feel intimidating and overwhelming for those just getting started with saving and can ultimately demotivate them from making progress,” said Moore. “A lot of young consumers feel the only way to save is through painful, dramatic lifestyle changes that ultimately are not sustainable.”
If your pay doesn’t yet match your talent and ambition, focus on forming good habits, avoiding credit card debt, reducing spending where you can and establishing a pattern of setting aside some portion of every check.
There’s a lot of evidence that today’s young adults already know that.
“While Gen Z and millennials have lower incomes than the older generations, which can contribute to their lower account balances, this doesn’t mean that they don’t have financial acumen,” said Lilah Raynor of Logica Research, which specializes in market data for the financial and fintech industries.
“Our Future of Money Study shows that Gen Z and millennials are savvy with their money and willing to use a variety of financial products, including different methods of payment, such as cash and peer-to-peer payments apps. Gen Z and millennials are planning to save more over the next 12 months than Gen X and boomers. They are also more likely to say they are going to invest more, which could suggest they are looking for ways to grow money outside of traditional savings accounts,” she said.
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