Nearly 70% of millennials and over 65% of Gen Z are living paycheck to paycheck, according to the February 2022 LendingClub Paycheck-to-Paycheck Report.
Looking to escape the paycheck-to-paycheck trap? Experts say one of the most important keys is living below your means. Read on to learn the long-lasting benefits of living frugally in your 20s, as shared by financial specialists.
You Can Establish an Emergency Fund
“Establishing an emergency fund to cover unforeseen costs, such as medical bills or auto repairs, is one of the smartest things you can do in your 20s,” said Levon Galstyan, a CPA at Oak View Law Group. “You can avoid taking out a loan by using the money in your emergency fund, which can help you avoid paying interest.”
Consider putting your emergency stash in a high-yield savings account. Experts typically advise saving three to six months’ worth of living expenses. But if that seems too difficult, Galstyan recommends saving everything left after necessary expenses.
“Even saving $20 a week — about $3 daily — over a year results in $1,000, which is an excellent starting point,” he said.
It Can Help You Pay Off Debt Faster
Living below your means gives you freedom to put extra money toward your debt payments. If you have any credit card debt, student loans, or car loans, paying them off early could save you hundreds — if not thousands — of dollars in interest.
“Plus, owing money to a lender may lower your credit score by raising your utilization rate and the proportion of available credit you use,” Galstyan said. “If you have a lot of debt, lenders might view you as a high-risk borrower, making it harder for you to get approved for other financial products.”
No debt yet? Living frugally can help keep it that way, said Taylor Westergard, financial coach and founder of Evolving Money.
“If you start saving, you open the door to a lot of opportunities,” she said. “But if you allow yourself to go into debt in your 20s, you are borrowing from your future.”
You Can Save More Money for the Future
Do you plan on buying a house one day? What about getting married or retiring? Most big life events are expensive, so the sooner you can start saving for them, the better.
“The earlier you start saving for retirement, the more your money can increase due to the compound interest, which is the interest gained on both your initial savings and the gains from reinvested savings,” said Galstyan.
Savings aren’t just for big life events, though. They also give you freedom to switch careers, travel, and purchase expensive items or experiences–all things you usually can’t do while living paycheck to paycheck.
“Living below your means in your 20s can help ensure you have financial freedom and won’t struggle later in life,” said Nathan Liao, a Certified Management Accountant and founder of CMA Exam Academy. “It also allows you to save money for exciting purchases you can look forward to, such as a dream vacation or a new laptop you’ve always wanted.”
You Can Start Building Your Net Worth Now
Liao says living below your means is the best way to build your net worth gradually. (Your net worth is the sum of all your assets–including cash, savings, and belongings — minus your debts.)
One effective way to build your net worth is to purchase a home early on. Living below your means gives you more room to save for a down payment, which can help you avoid private mortgage insurance and get lower interest rates, leading to an overall lower mortgage payment.
“Purchasing a property in your 20s can give you financial stability in the future and help you accumulate wealth,” said Galstyan. “When you are young, you can begin paying off your mortgage and accumulating equity — the portion of your property that you own outright — which helps you accumulate wealth.”
You Learn Successful Money Habits Early On
By implementing smart money management habits now, you’ll reap even bigger dividends later on, especially as your income grows. Experts recommend practicing habits such as:
- Asking yourself if you really need something before buying it
- Making a budget for yourself every month
- Tracking all your expenses
- Automating your regular savings and retirement savings
“More income is not always the solution,” said Westergard. “As a financial coach, I work with individuals and couples making over six figures who are still living paycheck to paycheck. Setting a budget and prioritizing savings has to happen to some degree no matter your income level.”
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