20 Things You Should Know About Saving Money in Your 20s

Being a millennial is no cakewalk. The money struggles today’s 20-somethings face are bigger and scarier than those of past generations: crippling student debt, an overly competitive job market and an economy still recovering from a recession.

On the other hand, these tough fiscal and economic circumstances have taught Generation Y valuable money lessons the hard way, giving millennials a greater inclination to save and a more frugal approach to money management.

This focus on savings can be a huge leg up for millennials. A well-padded savings account will enable you to achieve your most important goals and dreams, and keep you free of financial nightmares like debt, bankruptcy, back taxes and bad credit — if you do it right.

Here are 20 things you should know about saving money in your 20s to help you establish a strong foundation for financial success now and decades to follow.

20 Things Every Millennial Needs to Know About Saving Money

1. Saving money is a habit you have to practice

Even if you start with saving just $1 more a week, it’s important to establish a savings habit while you’re young. Start saving small, painless amounts and watch your savings account balance grow. You’ll be building your discipline to save money — and it’ll motivate you to find more money to sock away.

Heard the financial advice “pay yourself first”? Well that means putting a bit of each paycheck into your savings account before bills and expenses even get close to your money. Save as little or as much as you can — as long as you are saving.

2. You have to live below your means to save money

Simply put, make sure you have more money coming in than going out. Overspending is the biggest financial problem for many, which can be addressed by creating a budget, living a lifestyle that’s realistic for your income and working toward healthy spending habits. For others, low income might be the problem; if you’re in this boat, get proactive and look for professional opportunities, like promotions, networking, vocational training or more education.

3. Saving money is key to having the life you want

You probably have many plans, dreams and goals for your life, from traveling to earning a degree, buying a home or getting married. Whatever you envision for your life, more often than not you’ll need money to make it happen. But money to cover those expenses doesn’t just materialize — you have to save it up. Turn your dreams into realistic and concrete goals to start working toward your ideal life.

4. An emergency fund is a must

Saving an emergency fund will protect you and help you keep your finances on track. Even when life hits you with unexpected or big expenses, you’ll have the emergency fund to act as a buffer for unexpected expenses — instead of having to use money saved for other goals, or worse, go into debt.

5. Start with an emergency fund of at least $1,000

But how much should you save for an emergency fund? Personal finance expert Dave Ramsey advises start out with a $1,000 emergency fund, while other personal finance experts suggest saving a month’s worth of expenses. Once you have that baseline started, work your way up to having three to six months’ worth of expenses saved to cover bigger financial troubles, like unemployment or emergency medical bills.

6. Successful savers set short- and long-term savings goals

Those who have the savings habit down know how to set goals and follow them. They set goals, like paying for a trip or buying a home five years from now, and break those into smaller steps. Savers know how much they have to save each month to achieve long- and short-term savings goals, from this year all the way to retirement, and they use those goals as motivation to stay on track and avoid unnecessary expenses.

7. They also have a system to track and manage funds for different goals

Setting a savings goal is an exercise in futility if you don’t figure out a system for saving money that works for you. Stay organized, be able to quickly and easily track your progress, and make adjustments as needed. Some people track savings for different goals using a spreadsheet, while others might actually create different savings accounts or sub-savings accounts to easily keep track of funds slated for different purposes.

8. Shoot to save 10 percent of your income.

While personal experts will have varying opinions on the appropriate amount to save, the advice to save 10 percent of income is a good starting point. Other guidelines suggest saving as much as 20 percent of your income, like the 50-30-20 rule that says 50 percent of income should cover needs (like rent, groceries and transportation), 30 percent should cover wants (dining out, vacations or donations), and 20 percent should go to savings or debts. Ultimately, what you can or should save will be decided by your income, expenses, debts, goals and overall financial situation.

9. Savings have to be balanced with other financial goals.

While saving money will always be an important part of your financial health, it’s not the answer to every money question. At times, your financial situation might call for you to put more of your funds toward other goals, like paying down debt, covering education or medical costs, investing or even covering day-to-day expenses when money gets tight. Once you have an emergency fund saved up, funds might be better allocated to other goals.

10. Start saving for retirement now.

Start saving for retirement now and you’ll have to put away less every month. Money you save in your 20s will be worth more in retirement than money you’ll save in your 30s or 40s.

For instance, a LearnVest study found that a saver who starts putting away $600 a year in a retirement fund at age 25 will have $72,000 by age 65 — while a 45-year-old who starts savings $1,200 a year will have only slightly more than half that amount by the time he retires. Plus, the saver who started in his 20s would have to save just $50 a month, as opposed to $100.

11. Employer matching for retirement savings is free money.

If your employer offers a contribution-matching 401(k) or similar retirement savings plan, you should absolutely take advantage of this benefit. While it will make your paychecks a tiny bit smaller, claiming that contribution will also mean you’re automatically upping your yearly compensation. Skipping out on these 401(k) contributions, however, means you’re walking away from free money — possible thousands of dollars a year. It’s an easy and nearly painless way to start saving for retirement now that will pay off big later.

12. There are a lot of savings products out there, beyond just savings accounts.

If you’re just stashing cash in whatever account your bank handed you, you could be missing out on better savings vehicles. Here are the most common savings accounts banks offer:

• Traditional savings accounts typically offer lower interest rates than money market accounts but might carry fewer fees and be more suited to lower balances.
• Money market accounts have traditionally offered better rates (though with today’s low average deposit rate, that’s not as true) in exchange for higher balance requirements and a few more restrictions.
• Certificates of deposit (CD accounts) keep funds locked up for a set amount of time — usually from a month up to 10 years — and offer better rates than savings or money market accounts.

There are also various other savings accounts built for specific goals, like holiday savings accounts, health savings accounts, retirement accounts like 401(k)s and IRAs, 529 college savings accounts, and even vacation savings accounts.

13. Some savings vehicles are liquid, or easy to turn into cash, while others aren’t

A liquid account keeps money readily accessible and easy to transfer into cash — like a checking account. A savings account is slightly less liquid, as these are federally required to limit withdrawals to six per month, with each withdrawal above that carrying a fee. Some of the least-liquid savings vehicles are CDs, which incur an interest penalty for early withdrawal of funds, or retirement accounts like 401(k)s and IRAs, which will also penalize early withdrawals.

Liquid savings accounts are great for emergency savings and short-term goals, while use of less liquid accounts makes more sense for long-term or retirement savings.

14. Compound interest will grow your money faster than simple interest

Rumor has it Albert Einstein named compound interest as the most powerful force in the universe, and he may have a point. There are two main types of interest: simple interest and compounding interest. Simple interest, sometimes called nominal interest, pays you only on your balance and not on the interest earned. When interest is compounded, however, the interest earned is added to your balance, and future interest is calculated on the balance just boosted by the added interest.

Nearly all modern savings accounts offer compound interest, though some will compound daily while others compound only semi-annually. That’s the magical force that makes it so advantageous to start saving early, as it will give your money a longer time to earn interest — and then earn interest on that interest.

15. The annual percentage yield (APY) makes it simple to compare savings rates

Despite different savings account rates and compounding policies, comparing rates between banks is easy when you look at the annual percentage yield offered on an account. The APY takes the rate and how it will be compounded, simplifying it into a neat figure of the interest that would be earned on money deposited in the account for a year. All it takes is a glance at two APYs to see which account would grow your money faster.

16. The average savings account rate is 0.08% APY

GOBankingRates found that the average savings account rate offered by banks was 0.08% APY in September 2014. The FDIC’s most recent report puts the average even lower at 0.06% APY, with money market accounts earning slightly more at 0.08% APY.

17. But you could (and should) find a much higher savings account rate

However, GOBankingRates’ survey of savings account rates also revealed much better rates exist at both credit unions and online banks. The average savings account was almost double at credit unions, 0.14% APY, while online banks offered APYs that were eight times higher on average (0.55% APY) than those offered by brick-and-mortar institutions.

18. Saving is even easier when you automate it

While saving money is a habit you can cultivate, you can also set up your financial system to work toward your goals for you. Most banks provide an automatic transfer option that can be set up to send an amount set by you to your bank account at a predetermined time — say $250 to your savings account on the first of every month. Alternately, you can also set up direct deposit through your employer to automatically funnel a portion of each paycheck into your savings account.

19. Saving money: There’s an app for that

Whatever aspect of your finances you struggle with, there’s probably an app to help you with that. If you need to create a budget that matches your financial reality, try You Need a Budget (YNAB). For tracking daily spending and savings goals progress, try Mint. More and more banks are even offering their own version of spending and budget trackers. If you have a hard time finding the extra funds in your budget for saving, try money-saving app Digit, which tracks your finances and adjust savings accordingly, funneling money into your savings account in such a way that you never miss it.

20. There’s also a tax break for that: the saver’s credit

The IRS offers a tax credit that rewards lower-income taxpayers for saving for retirement, called the retirement savings contributions credit — or simply saver’s credit. You can take advantage of this credit if you have an adjusted gross income of $30,000 or less in 2014, or $30,500 or less in 2015 (the income limits are greater for heads of households and married couples filing jointly). The saver’s credit helps cover the cost of the first $2,000 contributed to a requirement plan, with the maximum credit set at $1,000 — which would count directly against your tax liability.

Photo credit: COD Newsroom

This article originally appeared on GOBankingRates.com.

This article first appeared on GoBankingRates.com and was distributed by the Personal Finance Syndication Network.