It'll take less money in your younger years to build your nest egg than if you wait until later.
According to 2018 data from the National Institute on Retirement Security (NIRS), two-thirds of millennials had nothing saved for retirement. And no, it's not because we spent too much on lattes or avocado toast. It's because we (and Gen Z) are burdened with loads of student debt and wages that aren't really keeping up with inflation. Oh, and those piddly little expenses necessary to our survival — like rent, food, gas, and other bills — that keep going up.
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The undeniable squeeze with being young and wanting to save is that after all your living expenses, debt, and other money obligations are tended to, you might not have that much spare change to play around with.
At the same time, when you're young, you have the most finite resource of them all on your side: time. If you can afford to start socking even just a little cash away for your retirement and other long-term goals now, you can tap into the magic of compound interest.
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What’s compound interest, you ask? In short, it’s when the money you put into a retirement plan or investment account earns interest. And over time, you earn money on not just what you initially put in, but on the interest you earned too. As years go by, that chunk of money in your investments can grow big time.
You can think of it as a Katamari ball of sorts. As you push the ball along, it collects more objects along the way, and gets larger and larger. So how exactly can you save for Future You when money is tight?
For some pointers, I spoke to Faron Daugs, a certified financial planner and founder and CEO of the Harrison Wallace Financial Group, on how to start saving up for long-term goals like investing for retirement when you’re in your 20s. Here's what he had to say:
1. First, it’s important to know what you’re getting into. So before you start, do some research on investing and get familiar with how things work.
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“Know what you are really investing in,” Daugs says. “Buy the things [stocks] that you use; buy the things that you see other people using and where there is high demand.” And luckily, there are tons of great books, podcasts, and websites that can help you get your head around investing.
I like sites and resources by
Amanda Holden,
The College Investor, and podcasts like Investing Insights from Morningstar, and Money for the Rest of Us. You can also check out our roundup of podcasts, books, and online courses we love to help you understand how the stock market works.
2. You’ll want to start small, and save early and consistently. A tax-advantaged retirement account — think a 401(k), a 403(b), or an IRA — can be a great place to start.
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As the term implies, you can reap some tax breaks by contributing to these accounts. Since you have nothing but time on your side, start squirreling some money away every month into a 401(k) or IRA, even if you can only spare $10. If you’re self-employed, you can also look into anSEP IRA or a Solo 401(k).
“Once you have that money invested in a new asset, and you’re not to see it in your checking account, you won’t miss it,” says Daugs. “You’ll be paying yourself first.” Along with saving small, aim to be consistent. “As the cash flow increases, increase your retirement funding as well,” says Daugs.
If you're already diligently socking away small amounts of money into a retirement plan, see if you can go about saving in a methodical fashion into a separate investment account, says Daugs. If you can swing it, ideally have those contributions come straight out of your checking or savings accounts on the regular.
3. When you’re saving for Future You, it’s important to understand the connection between risk and reward. When you invest in high-risk assets like stocks, you usually have a greater potential for gains.
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To know if you can stomach that risk, you’ll want to gauge your comfort level with the possibility that you could lose a significant chunk of your money. However, over time historically your money will most likely grow. And as mentioned before, you have gobs of time on your side.
“Understand the investment risks,” says Daugs. “But ideally, since you have a long-time horizon for your retirement plan, consider a higher percentage in stock investments to achieve potentially higher returns."
Why's that? Well, if you're young, you'll have more time to weather the ups and downs of the stock market (there will inevitably be awesome periods and not-so-awesome periods). In turn, you'll be able to recover from any crummy periods, and possibly earn more money from investing.
Plus, as Daugs points out: The power of compounding is impressive, and it will take less money in your younger years to build your nest egg than if you wait until later.
4. If you’re pretty new to investing, Daugs recommends a diversified portfolio to start.
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In other words, instead of picking individual stocks, which can be quite risky, check out ETFs or mutual funds. “This allows you to have access to many different stocks, bonds, and securities with one investment,” says Daugs. “And it helps diversify your overall risk.”
If you’re not sure what to choose, you can also look into target date funds. In general, these types of investments help you manage risk. Let’s say you want to retire in 40 years. A target-date fund will have higher-risk, higher-gain investments (i.e., stocks) when you’re younger. Then, as you near your retirement age or target date, it gets more conservative (i.e., more bonds) and reduces your risk.
5. And as your investment funds grow over time, you might want to carve out a small portion of your portfolio to invest in specific sections, says Daugs.
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Or maybe you can handpick a few individual stocks you have strong feelings about and where you have more time to invest in.If you won’t need this money for at least five years, consider more stock-focused investments, recommends Daugs.
“That said, always maintain a solid [aka larger percentage] of core investments that you plan to hold onto for a prolonged period of time,” says Daugs. “This strategy allows you to participate in some of the new and upcoming industries, while still participating in the overall movement of the market.”
6. This might go without saying, but don't ignore your student debt.
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Missing payments will ding your credit score, which in turn can affect your future opportunities when it comes time to finance, say, a car or home, or to tap into financing for some other need. "Make sure you understand the exact terms of your student loan, and if you have more than one, consider doing a consolidated student loan," says Daugs.
This can certainly be easier said than done. But aim to keep your student debt top of mind, and know your options with both federal and private student loan debt. Federal loans have more repayment options and protections than ones through private lenders.
Just an FYI: Federal student loan payments will restart in February 2022, so if your loans have been paused, this is a good time to plan how you'll start making payments again when the time comes.
7. At least once a year, do an annual check-in and assess your entire financial picture.
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We’re talking checking on your savings, how much you have in retirement, all of your debt (i.e., student loans, car loans, credit card balances), as well as your monthly budget and income. Go through your accounts carefully, and make sure nothing gets left off.
Next, it’s vision board time. Think about what you’d like to achieve in the next few years. How much money would you need to get there? And by when?
“Even if you are just starting out, it’s good to have a goal or plan in place for your savings and protection needs,” says Daugs. This means reviewing your employer benefits to be sure you are maximizing all that is being offered. “You’ll also want to monitor your savings and investments,” says Daugs. “That way, you understand what you own in your investments, and that it aligns with your goals and risk tolerance.”
8. To make sure you’re on the right path, consider working with a professional, such as a financial coach or counselor.
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Your workplace might also offer free money coaching sessions through its employee assistance program (EAP).
Or you can also work with a financial advisor. If you do, make sure they’re fee-only and a fiduciary. A fiduciary means that they always make recommendations based on your best interests. Check out the XY Planning Network, and do a search for someone who might be a good fit for your needs that you vibe with.
9. Last, you’ll want to have a cash reserve set aside for both emergencies and opportunities. The golden rule is to aim for three to six months of your living expenses.
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What does this have to do with investing? Well, having a cash reserve will protect all the amazing headway you’ve worked so hard on making. Without a financial cushion, your investments and other savings could feel like a fragile house of cards.
“Starting a ‘rainy day’ fund or ‘cash reserve,’ as I call it, is essential to prevent the need to incur potential credit card or loan debt in the event of an emergency or loss of job,” says Daugs.
Finally, Daugs says, "Don’t wait to save too late — it’s more difficult to catch up in later years if you did not start your savings plan early."
“By starting early in an IRA and taking advantage of matching contributions [with an employer-sponsored plan], you allow for the power of compounding to help you build and grow your savings.”
