Saving money is one of the most important steps anyone can take toward securing their finances. And yet, the average person isn’t saving nearly enough. One way to be sure you’re on the right track is to establish healthy saving habits from an early age. And these days, there are various tools and options available that make saving money easier than ever.
Hence, we want to look at how young people can start saving money. I polled the experts to ask them for their best ideas on how people in their 20s can start saving now. Here’s what they had to say.
Build a Cash Reserve
Having a cash reserve is important because it means you will have money set aside if you ever experience a job loss or have an unexpected expense. Having cash means you won’t have to turn to credit cards or personal loans, which could lead to interest charges. Faron Daugs, wealth advisor at Harrison Wallace Financial Group, recommends saving up six to nine months of expenses. Start building your cash reserve as soon as possible because you never know when the need will arise.
Perhaps the most basic piece of advice when it comes to saving money is to set goals. Not just any goals, though — the idea is to set clearly-defined goals with specific steps that will help you achieve them. “We need to be mindful of why we are saving and set targets to help keep us on the right path,” said JP Scott, personal wealth advisor at BIP Wealth.
Scott recommends saving whatever you can now, even if it’s less than your ultimate goal. “Whatever your goals may be and even if your ability to save is less than that 20 – 30%, start saving something no matter the amount and make sure to save something every month!” he said.
Use Your Tax Refund
If you receive a refund come tax season, you might be tempted to run out and spend it. However, that money could be an easy way to beef up your savings, so why not set some money aside instead? Depending on the size of your refund, you could add a lot to your savings account and still spend some.
“Having your tax refund direct deposited into your savings account can help you accelerate your savings or create an emergency fund,” said Annette Harris, founder at Harris Financial Coaching. “It’s money that you didn’t have throughout the year, and you didn’t budget for it.”
Harris said that if you didn’t need the money before, you probably don’t need it now. “So, if you could manage your income and expenses before receiving your tax refund, then depositing it into savings is a key opportunity for wealth management.”
Don’t Wait To Pay Off Student Loans
Paying off student loans can take up a significant percentage of your budget. Plus, with the idea of wide-scale student loan forgiveness constantly being floated, some people may want to put it off. But waiting would be a mistake, Daugs said. “It can end up costing you much more in the long run, depending on the type of loan, current interest rate and late payment fees,” Daugs said.
And that isn’t the only downside — delaying student loan payments could also hurt your credit score and your ability to secure financing for a home or a car, Daugs said. “Make sure you understand the exact terms of your student loan and if you have more than one, consider doing a consolidated student loan.”
Build Credit Today
Building your credit can be tough, especially if you don’t already have a long-standing credit history. And you may not realize it, but having good credit can save you thousands of dollars in the long run, so it’s important to start building your credit today.
Lauren Robson, senior growth manager at Pave, said lenders are more willing to lend to those with high credit scores (and will reward them with lower interest rates). “To demonstrate your ability to pay on time and in full each month in the future, consider getting a credit card, taking out a small form of credit or even simply setting up a direct debit payment today.”
Robson also recommends downloading a credit-builder app to help you track your progress and quickly boost your credit score.
Use a Forced Method of Savings
One of the best ways to make sure you are on the right track with your savings is to have a “forced” method of savings. You may have heard homes described this way because you build equity as you make payments on your mortgage. However, you can also create forced savings by transferring money into a savings account automatically every month.
“By setting up an auto draft, you can have the money come out of your bank account every month so there’s no need for you to click around the computer or your phone to move money around,” said Ron Tallou, founder and owner at Tallou Financial Services. “This is one reason why employer sponsored plans, like 401(k)s, work so well because the money is taken out and invested before it hits your direct deposit.”
Open a Roth IRA
Roth IRA accounts are one of the best ways to contribute to your retirement savings and are a great complement to your employer-sponsored retirement plan. “Again, ROTH savings don’t give us any tax deductions today, but grow TAX FREE!” JP Scott said. “We should try to maximize whatever amount that we can put into this vehicle and starting early in your 20’s gives your money that much more time to accumulate Tax Free growth.”
Increase Your Savings Annually
If you want to increase the total amount of money you have saved, one of the best ways to do that is to increase the amount you save every year. If you are working your way up the corporate ladder, this will be easier to do as you get promotions and raises.
Ashvin Chheda, president at Opes One Advisors, recommends an annual increase in savings. “Commit to saving at least 10% MORE per pay-check than last year; initially consider sweeping this money from your regular bank account to another account so you won’t spend it.”
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