How Much Money Should You Save in Your 20s? Here’s What To Know

When I got my first job in my 20s, I didn't know a whole lot about budgeting or saving money. Fortunately, the people I worked with gave me some good advice. They encouraged me to sign up for my 401(k) so I wouldn't leave "free money" on the table, since the company offered matching contributions.

Thanks to their suggestion, I started my retirement savings early, and that money has been growing for decades and turned into a nice little nest egg already. Unfortunately, though, no one told me about saving an emergency fund, and I ended up scrambling when my car broke down and needed some expensive repairs.

My situation shows how complicated money matters can be when you're just getting started. There are so many new obligations to take care of, and it's really hard to figure out how much you should save in your 20s.

This guide will help you figure out what you should be saving for, how to set goals, and where your money should go.

Why save now?

Starting to save in your 20s is really important for a few big reasons.

First and foremost, you have time on your side. The earlier you start saving, the more compound growth can work for you. Once you invest money, that money will produce returns. The returns are reinvested, so your balance grows without you having to put more money in. Over time, you earn returns on the bigger balance and it grows even more.

If you start saving when you're 20, you have many more years for compound growth to help your money grow. This makes a huge impact on your financial security. To illustrate how significant compound growth can be, here’s how much you can expect to get out of a $1,000 initial investment, assuming a 10% average annual return on two different timelines:

Investment	Return by 65 years old
$1,000 at age 20	$72,890.48
$1,000 at age 40	$10,834.71

Clearly, that $1,000 goes a lot further the earlier you put it away. It's also a good idea to consider investing in your 20s so you can establish it as a habit before you make a bunch of other financial commitments that make it harder to save. And, you can start saving for important things, to set yourself up for a secure future.

Emergency fund

According to a Pew Trusts survey, 60% of households experienced an emergency over the past year. If something unexpected happens, like a layoff, surprise car repairs, or some other costly surprise, it could be really hard to come up with the money to pay for it. You don't want to go into debt if you can avoid it, because that would mean paying interest and eating up future income.

Having an emergency fund allows you to cover these surprise costs without any stress or financial worry. You should ideally have 3 to 6 months of living expenses saved, as that could help protect you from serious problems, like losing your apartment or car if you're out of work for a while.

Retirement

Retirement may seem like it's a lifetime away when you're in your 20s, but as a senior, it only gets harder to save enough to have security, especially if you start late. If you begin saving early, it will be a lot easier to build the nest egg you need thanks to the compound growth mentioned above.

There are lots of accounts that make it easier to save for retirement, because the government, and potentially your employer, offer help. Here are a few you should know about:

• 401(k): Your job may offer a 401(k) that you could sign up for by talking to HR. Your employer will often match your contributions, and you invest with pre-tax money, so you save on your IRS bill for every dollar you put into your account.
• IRA: You could also open an IRA with a brokerage firm yourself and claim a tax deduction for the amount you invest in it.
• Roth IRA or 401(k): Your employer may offer a Roth 401(k), or you could open a Roth IRA with a brokerage firm. Roth IRAs don't come with an upfront tax benefit, but you get to make tax-free withdrawals in retirement. If you think your tax rate may be higher when you're a senior than it is now, you should invest in a Roth. This could be a good option when you're young, not earning much, and paying a low tax rate.

Ideally, you should try to get into the habit of saving 10% to 15% of your income for retirement starting in your 20s, as this will help you ensure you have enough saved to leave work at a reasonable age.

Home down payment

Not everyone wants to buy a house. But, if you do, Zillow reports that a home buyer earning the national median income would take 12 years to save up for a down payment, assuming a 10% savings rate and interest. So, it's a good idea to get started.

Saving up a 20% down payment will make buying a home much easier and more affordable. You will avoid the added expense of private mortgage insurance (PMI), which lenders require for loans with small down payments, to protect them in case they must foreclose. You'll also borrow less and will likely be offered a lower interest rate. So, it's worth trying to save.

How to determine your savings goals

When you start saving in your 20s, you should have some specific goals in mind so you'll know where your money should go and so you can make sure you're on track.

Everyone has different goals, so think about what you want your life to look like. Consider:

• Short-term goals: Do you want to travel? Save up for a new car?
• Medium-term goals: Consider your 5-year plan. Do you hope to buy a house or have a family?
• Long-term goals: Obviously, you'll need to retire — but do you want to try to retire early?

Make a list of these short-term, medium-term, and long-term objectives, and estimate both your timeline (when do you want to accomplish them) and how much money you'd need. This will enable you to set a big goal, which you could break down into smaller monthly goals.

For example, if you want to take a $5,000 vacation next year, you'd need to save $416 a month to have enough in 12 months. And, if you want to retire at 62 with $1 million, the calculators at Investor.gov can tell you how much to save each month to do that, based on your specific age and projected rate of return.

How to meet your savings goals

After you've set some specific monthly goals, you can take steps to achieve them. The best way to do that is to:

• Open a dedicated savings account for each goal so you can track your progress
• Automate your contributions, or set up an automatic transfer to your accounts for the right amount

If you make the process automatic, you'll never miss a contribution, and if you start this in your 20s, you'll never miss the money you're putting into savings, since you'll never get used to having it.

Open a high-yield savings account

A high-yield savings account is typically the best place to put the portion of your income that you’d like to set aside for general savings, because these accounts provide a higher rate of return than most.

Savings accounts express the rate of return as your APY (annual percentage yield). APY is the percentage of interest earned each year after taking compounding into account (remember, compounding is what happens when the interest you earn is added to your principal).

There are many high-yield accounts that don’t require a minimum balance and that pay a generous APY, so research your options. You can look online to compare the rates offered by banks, fintechs, and credit unions, to find the financial institution offering the best rate. Some of the best options include:

• SoFi® Checking and Savings¹
• Barclays Tiered Savings Account
• High Yield Savings Account from Customers Bank

Be sure to check what the rules are to earn the highest APY, and check for fees and minimum balance requirements with any savings account you open.

Contribute to a retirement fund

You should be using a retirement account to save for your later years, since these accounts have tax advantages. As mentioned above, you could use a 401(k) or IRA — or both — to invest for retirement.

You should always contribute to a 401(k) first if your employer matches contributions. Matching contributions means they put some money into your account when you do.

Some employers match 100% of contributions up to a certain amount of your salary, while others might contribute 50%. You can ask HR what their rules are. If your employer contributes 50%, for example, when you invest $1,000, they'll give you another $500.

The tax savings for contributing to a 401(k) or IRA could also be very beneficial. If you contribute $1,000 and are in the 22% tax bracket, you could save as much as $220 on your taxes thanks to that investment.

Invest

When you put money into a retirement account, you have to decide what assets to invest it in. You have many different choices including:

• Individual stocks. You could buy shares of companies and will see your investment grow if the business performs well.
• Exchange-traded funds (ETFs) or mutual funds: These allow you to buy into many different companies at once. You could buy into ETFs or mutual funds that track the performance of different financial indexes. You should usually avoid actively managed funds, which are funds where a fund manager picks specific investments. These cost more, and usually don't perform as well as the cheaper, passive funds that track indexes, like the S&P 500.
• Bonds: Bonds allow you to loan money to the government or businesses and earn interest. They pay a lower rate than stocks or ETFs but you take less risk.

One good thing about investing when you're young is you can feel better about putting money into some riskier investments with the potential for higher returns, since you have lots of time to recover if things go wrong. Of course, you'll always want to be careful and research investment fees and the investment's past performance to make an informed choice.

Avoid high-interest debt

If you want to save in your 20s, it's really important to avoid high-interest debt like credit card debt. Debt steals your ability to build wealth since you have to pay interest to creditors, which makes every purchase more expensive. If you know you’ve got debt you’d like to pay off before you start saving, there are a number of steps you could take to get it under control, like opening a balance transfer credit card to get a lower interest rate on outstanding balances.

Maintain a budget

It's also a good idea to get into the habit of living on a budget. This will allow you to use your money wisely and prioritize where your funds are going — including into savings.

You could budget using a simple spreadsheet, or you could use apps like YNAB or Rocket Money. Try out a few apps to see what works for you. You'll probably need to adjust your budget many times over your life, but the important thing is to have a spending plan, so you can make conscious choices about where your money is used best.

FAQs

Bottom line

When you're in your 20s, you’ve got time on your hands and the golden opportunity to start saving to set yourself up for a financially secure future. Set your savings goals, open a retirement account and high-yield savings account, and start working on accomplishing your financial objectives. Your future self will thank you.