In your 20s, you establish habits that will follow you throughout your life.
This is the life stage when you might establish your career, get married, or even prepare to start a family, which makes it even more important to set goals for yourself and start saving. In short, if you adopt good financial habits in your 20s, you will be in a much better place financially in the future.
There are five savings goals in particular that you should strive for in your 20s.
Build an Emergency Fund
One of the most important financial tasks you can accomplish in your 20s is opening an emergency fund, which is a pool of money that you earmark for unplanned expenses.
When unexpected life events occur, the fund acts as an insurance policy for your finances. For example, if you have a medical emergency, sudden job loss, or appliance breakdown, you can pay for it using money in your emergency fund. That way, you don't have to dip into your savings or go into debt.
The amount you save in your 20s will be determined by the stability of your job, your income, any debts you may have, and whether you are a single- or double-income household. Your ultimate goal should be to save an emergency fund amounting to three to six months worth of living expenses. But when you first start budgeting, establish a conservative savings goal to allot at least 2% of every paycheck to your emergency fund for six months. Then, to build your emergency fund over time, increase that amount by 1% to 2% every six months to one year.
Remember, your emergency fund should be fairly easy to access, so keep it in a liquid, low-risk investment vehicle, such as a savings account.
Some experts recommend saving an emergency fund of three to six months of take-home pay rather than expenses. If you have the ability to save aggressively, this strategy can provide an even more bullet-proof financial safety net in times of need.
Make Your Down Payment a Savings Goal
Another financial objective you should work toward is setting aside money for a down payment on your first home. The down payment is a portion of the purchase price that you pay up front on a home at the time of closing.
A down payment isn't an insignificant sum—it usually amounts to at least 20% of the purchase price. But the larger the down payment, the lower your mortgage payments can be, likely bringing you one step closer to affording the home of your dreams. Putting down a reasonable down payment can also avoid the need for private mortgage insurance, which you usually pay for in the form of a monthly premium that gets tacked on to your mortgage payment.
For all these reasons, it's useful to start saving for a down payment even if you don't plan to purchase your first home until your 30s or beyond. Depending on your job stability and whether or not you want to stay in the city where you are currently working, your 20s might not be the best time to purchase a home.
No matter how far in the future a house purchase might seem, if you start saving early, you will be in a better position to buy a house when you are ready.
Contribute to Your Retirement
The key to having enough money to retire is to start putting aside money in a retirement account early in life, and continue to do so regularly until you retire. Ideally, you should start saving for retirement as soon as you get your first job. In this case, compounding interest is your friend—the more you save in a savings or investment account when you’re young, the more that money will grow and the more you will have to enjoy in retirement.
You may start by contributing up to your employer’s match until you are out of debt. Then, shoot for annually contributing 15% of your income to a retirement account like a 401(k), traditional IRA, or Roth IRA every year.
For 2021, the annual limit on your own contributions is $19,500.
To keep yourself on track with your retirement goals, reference retirement savings benchmarks. For example, a common retirement benchmark based on your age and income stipulates that you should have the equivalent of a years' worth of salary in retirement at age 30.
Get Out of Debt
Although you may not be able to pay off your entire student loan balance by the time you are 30, you should take the steps needed to work toward that goal. You should also work toward paying off any credit card debt you have.
When you manage your debt well and pay it off, doors can open for the other steps in your life, like owning a home or purchasing a new car. Take the time now to set up a debt payment plan so that you can get out of debt, or consider a debt reduction software program to help you become debt-free even faster.
If you have large student loan payments, look into the various repayment plans available that can help you save money on your monthly payment, or even have some or all of your student loans forgiven.
If you want to build wealth outside of your retirement accounts, consider investing some money you would have otherwise put into a low-interest savings or money market account. As is the case for saving for retirement, compounding interest will help grow your invested money more quickly, and the sooner you start, the better off you’ll be.
You can choose to invest with the help of a financial adviser, who can recommend investment types and help you build an investment portfolio. If you understand the basics of the stock market, you may opt to open a taxable brokerage account with a reputable online brokerage firm and invest in stocks, bonds, mutual funds, or other securities.
The key to successful investing is to diversify your portfolio. You can do this by holding a mix of assets (stocks, bonds, and cash, for example), spreading your money across different investments in various industries. While the nature of investing is such that you should only invest money you're willing to lose, asset allocation and diversification can, together, minimize your risk and limit your potential losses.
To implement these strategies, it's important to evaluate the risks associated with each type of investment. For example, stocks are generally the riskiest in the short term, so you might also want to move to more conservative investments like bonds or cash as you get older.
Focus on Your Career
Your 20s are a great time to establish a solid career. While you are deciding what career path to take, take the time to create a solid professional network and consider all of the options that are available to you. Never be afraid to pivot, too. Just because you majored in business, for example, does not mean you can't pursue a career in communications.
When applying for roles in your industry, look beyond just the salary offer that's on the table. Consider the company's opportunities to invest in retirement, health care benefits, and general culture, too.
Establish the Habit of Saving Money
Another important goal to adopt in your 20s is spending less money every day. You don't necessarily have to deprive yourself to do so, either. You might set up a budget, start to shop at more affordable grocery and clothing stores, take advantage of coupons, and wait for items (or even gasoline at the local pump) to go on sale, for example.
You can also look for ways to reduce larger recurring expenses so that you have more money in your pocket to put toward your savings and investing goals. For example, once you create a budget, you can cut or eliminate spending on budget-busters such as dining out or a seldom-used gym membership if you start to cook more at home or exercise outdoors.
Embracing frugality will allow you to spend more on the things that are the most important to you now, and will establish responsible financial behaviors that will serve you well beyond your 20s.