8 Small Steps To Save for Retirement in Your 20s — Even If You Aren’t Making a Lot of Money

If you’re in your 20s, you’re likely just starting out in your career and might not yet be earning or saving much. This isn’t usually a time when people are excited about planning for their retirement, which can seem like a lifetime away. But the truth is that the earlier you start, the easier it will be to build a significant retirement nest egg thanks to the power of compound interest.

If you can earn a 10% return on your savings, for example, your money will double in value just about every seven years. At age 25, that means that the investments you make now could double in value five times by the time you reach age 60. In other words, compound interest could transform every $1,000 you invest today into about $32,000 by age 60. Even if you start small, you could very well grow your nest egg into seven figures by the time you retire.

Here are some small steps you can take in your 20s to save and invest even if you aren’t yet earning a lot of money.

There are so many financial planning apps available now that you likely have heard of many of them. Some of the best to use are those that round up your purchases and invest the extra money.

For example, if you buy a cup of coffee for $2.65, the app will round up your purchase to $3 even and invest the $0.35 on your behalf. Since you won’t likely notice the difference between spending $2.65 and $3, this is a simple way to get these small amounts invested. By itself, $0.35 obviously isn’t going to get you very far when it comes to retirement savings. But if you make five purchases per day, suddenly you’re looking at more than $50 per month invested. Over time, amounts like that can certainly add up.

Are you a fan of free money? The matching contributions your employer makes to your 401(k) plan are about the closest you will ever get.

Most companies with 401(k) plans match a certain percentage of employee contributions, such as 50% of the first 10% of your salary that you kick in. While you might not yet be in the position to contribute 10% of your salary to your 401(k), put in as much as you can to maximize your employer match. 

No matter how small of a salary you are earning, you can likely eke out at least $100 in savings per month.

Think about the discretionary purchases you make that you really don’t need, like paying $3 for bottled water when you can simply bring your own reusable water bottle from home. With enough digging, you’re likely to find at least $100 in your budget that you can divert to your savings.

Thanks to the power of compound interest, even small amounts like $100 can make a huge difference. If you earned a 10% return on your $100 monthly contributions, after 35 years you could have a nest egg of over $375,000, even if you didn’t increase your contributions over the course of your working career. 

Even though you can end up with a nice-sized retirement account by starting small, increasing your contributions as you earn more money will get you there faster. One trick to painlessly increase your savings is to increase your contribution percentage by 1% per quarter.

For example, if you start by contributing just 1% of your earnings to your 401(k) plan or other retirement account, bump that up to 2% the following quarter. After a few years, you’ll be socking away 15% or more of your income towards your retirement, but you likely won’t even notice the incremental increases in your contributions. If you’re feeling more ambitious, you can even bump up your contribution percentage monthly, instead of quarterly.

While it’s easy to say that you should give up all of your discretionary purchases so you can maximize your retirement savings, that’s not very realistic. Life is meant to be enjoyed, and living too frugally can make investing a chore. But if you can just make one different choice per week, such as eating at home instead of going out or just saying no to that new outfit, you’ll free up modest amounts of money that you can save and invest instead. This type of balance allows you to start building up your retirement account while still enjoying yourself. 

Investing is not something that’s inherently easy. Especially when you’re not earning that much money, it can seem like groceries, gasoline, rent and other bills can eat up your whole check before you even think of investing. That’s one of the reasons why automating your investments is a good strategy.

When your paycheck comes in, a portion will immediately go to your savings before you even have the chance to touch it. That way, you’ll know that you are always saving, without you having to remember to contribute. It also takes emotion out of the equation and prevents you from spending your entire paycheck every month. 

Windfalls are chunks of money that fall into your lap that you weren’t expecting or that isn’t a part of your normal earnings cycle. Examples range from gifts or inheritances to lottery winnings or tax refunds. Rather than blowing through this money, the prudent choice is to invest it. This can give a significant boost to your retirement savings without you having to take a single dollar out of your earnings.

The same concept applies when you get a raise. Although you’re certainly entitled to increasing the quality of your life or enjoying yourself a bit, don’t let “lifestyle creep” eat up the entire amount. Rather, direct a good percentage of your raise towards your retirement account. 

The brokerage industry has become much more investor-friendly over the past few decades. Previously, trades had to be placed through expensive brokers, and they were the only ones who could access information about investments. Nowadays, you can learn nearly anything you want about specific stocks or investing in general just by watching the financial news or searching the internet.

Many brokers now also offer commission-free trading of stocks and exchange-traded funds, and some also allow you to buy fractional shares of stock. Instead of having to pay over $800 just to own a single share of Tesla, for example, you can buy 0.10 shares for just $80. This is a great way to dip your toe into the stock market without having to blow your whole savings on a single share of stock. 

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